Tax inequity puts unfair burden on city businesses

The empty storefronts are everywhere. The proliferation of big yellow “For Rent” or “For Sale” signs on Wall Street, North Front Street and down Broadway are a testament to something seriously askew in a city that otherwise wins kudos for its quality of life, character and amenities.

That something, many Kingstonians would argue, is Kingston’s high property taxes, taxes which hurt everyone but put businesses at a particular disadvantage. That’s because, due to the homestead/non-homestead system of property taxation, commercial property owners are levied at a rate nearly double the amount on residential property owners. Bottom line: businesses are choosing to locate elsewhere, and the erosion of the commercial tax base is causing a frightening devaluing of commercial property that means, ultimately, residents will be forced to pay more and more of the tax bill.

The taxes make it difficult for the city’s business districts to gain the critical mass they need to flourish. The frequent turnover of stores and restaurants is alarming, say local business owners. Larry Zalinsky, co-owner at Mezzanine Antiques Center, on lower Broadway, noted that recently an antique store located across the street moved out because of the high rent. The owner of a bike rental business interested in opening a store in the Rondout instead chose Saugerties — for the same reason, said Zalinsky.

Local real estate brokers said the high taxes are one reason for the proliferation of commercial buildings on the market. Real estate broker Victoria Holt said the experience she had the other day with a potential buyer is unfortunately all too typical. “I showed a historic building in Uptown Kingston to a buyer from Manhattan, and he loved the building. He wanted to buy it until he found out the taxes were $17,000, and he walked away. It made no sense and he’s right. The commercial taxes are out of sight.”

Kingston’s unbalanced tax structure is “forcing commercial investment out of the city and driving up taxes for businesses and residents,” noted Kevin Quilty, owner of Smith Printing and president of the Kingston Uptown Business Association. Quilty said he owns rental property in Kingston that’s “half rented. I can’t find the tenants, because the rates are too high.” He added that though “it’s a struggle, I have no intention of leaving. What I love about Kingston it’s a city small enough to have community. My job is to improve the quality of life.”

Twice as much

In 2010, the non-homestead rate, which is levied on commercial properties, including multi-families with four units or more and vacant land, is $12.26 per $1,000 of assessed value, compared to the homestead rate of $6.13. The disparity between the rates means that commercial property owners pay a far greater proportionate share of the city tax bill than residents. In 2009, commercial properties accounted for 35 percent of the total assessed valuations, but paid 49 percent of the total taxes, according to figures compiled by the Ulster County Real Property Tax Service and distributed by Paul Hakim, vice president of Wilber National Bank and chair of the Balanced Growth Committee of Ulster County Development Corp. (Hakim also noted that 16 percent of the city’s total assessed valuation, valued at $401,756,850 — a total of 365 parcels — are wholly exempt from property taxes.)

In comparison, commercial taxpayers in the Town of Ulster represented 51 percent of the total assessed valuations and paid 57 percent of the total taxes in 2009, according to the Ulster County Real Property Tax Service. That translates into much higher costs per square foot in Kingston compared to the Town of Ulster, putting Kingston at a severe competitive disadvantage.

For example, the price per square foot for the taxes of the former Friendly’s restaurant on Washington Avenue (abandoned now for almost a year) are $10.73, compared to $3.65 per square foot for the Friendly’s on Route 9W in the Town of Ulster, according to Thomas Collins, president of Commercial Associates Realty, located on Washington Avenue. “Typically, Kingston’s price per square foot is 40 to 100 percent higher” than the Town of Ulster’s, he said. When rents are going for $15 per square foot, the $27,621 tax bill for the Kingston Friendly’s makes no sense to a prospective buyer, he noted.

Collins added that as a city, Kingston is at a natural disadvantage tax-wise compared to the towns in Ulster County. Though it gets a greater share of the county sales tax, much of which derives from the Town of Ulster, “it’s still not enough to operate the city.” He noted towns provide fewer services and hence have lower budgets, as well as “fewer properties off the tax rolls and not as many nonprofits. They don’t have the expenses of the city government.”

Putting a disproportionate share of the tax burden on businesses didn’t start out as a misguided notion. In 1988, Kingston was one of 14 cities that adopted legislation passed by the New York State legislature in the mid-1980s allowing for the non-homestead/homestead split assessment. “The intent was a good one — to stop the fleeing of residential taxpayers to the suburbs and have them stay in the cities and use the infrastructure that already exists,” said Joe Deegan, part owner at Deegan Sanglyn Commercial Real Estate. (Another source said the motivation was political as well: unlike business owners, residents vote.) But since Kingston lost its economic base with the departure of IBM in the early 1990s, the split assessment has outlived its usefulness and proven devastating to commercial property owners.

In the fall of 2008, the Common Council voted to adjust the rate as a first step to equalize the rate between non-homestead and homestead properties, raising the residential rate by 5 percent and decreasing the commercial rate by 5 percent. (The rates are governed by the State Office of Real Property, which allows municipalities with a dual system to make a stepped adjustment.) A month later it reversed itself. Alderman Charles Landi (D-Ward 3) said shifting more of the tax burden onto residents would have made a bad situation worse. “The impact would be astronomical to home owners. If we all of a sudden changed this thing, there would be an exodus,” he said.

Both Landi and Tom Hoffay (D-Ward 2) noted that businesses have an advantage over residents in that they can deduct certain expenses, such as garbage pick-up and water, against the income of the building. “Commercial property owners can influence their revenue stream where residents cannot,” said Hoffay (who said he nonetheless was a supporter of adjusting the rates).

However, businesses are at a disadvantage because they must pay for their own garbage collection, according to Collins. The city “only picks up two cans per address. We have to pay $100 a month. We’re not only subsidizing residents in the regular tax rate, we’re also subsidizing the garbage collection. We’re not competitive on any level.”

A steady devaluation

As it is, property taxes decreased 5 percent for the commercial sector in 2010, with the overall share paid by commercial property owners declining to 47 percent. “It’s self-adjusting because the valuation went down,” said Hoffay, adding the trend, while providing slight relief to commercial taxpayers, is “a negative,” reflecting the steady devaluation of the city’s commercial real estate.

“The tax burden reduces the values of the properties because every dollar spent in tax can’t be spent in rent. It still comes off the net,” explained Collins. “Commercial properties are valued based on the amount of income, and they’ve steadily decreased in value, which over time defeats the purpose of the non-homestead rate.” Since 1990, on average adjusted for inflation, commercial real estate in Kingston has lost 30 percent of its value, he said.

Deegan and others in the business community said it’s critical to the city’s future that the tax rate be equalized over time. “I’m not suggesting we flip a switch and equalize our tax distribution,” he said. “It would crush every homeowner in the city. But we need to draw a line in the sand as to how these assessments are dealt with. The reality is, this is going to happen in a political or economic process. It’s coming either way. If we make the change now, in 10 years you’ll have a commercial tax base to do something with.”

Collins, who has been in the real estate business in Kingston since 1987, said Kingston’s commercial base has suffered enormously in the past 20 years. “We’ve lost almost everything. There are very few businesses left in retail. The pharmacy or the jewelry store can’t keep raising their prices.” Equalizing the tax rate is essential to taking the pressure off commercial property owners somewhat, but it won’t fix the underlying problem, which is the skyrocketing increases in the cost of pensions and benefits for unionized city and school employees, Collins said. (See last week’s article in the Kingston Times, “The Bill that Kills,” for more information about this issue.) “The solution is probably to leave the state,” he said. “That’s the only way to break the union contracts.” He added that filing for bankruptcy might be “the only way to renegotiate the union contracts, because you’ll never get the unions to voluntarily renegotiate.”

Deegan said other solutions are possible. “We need to get innovative,” he said. Developing pilot programs with the Industrial Development Authority, merging with the Town of Ulster, and sharing municipal services are options that should be considered. “I realize what I’m talking about is not simple,” he said. “But the road we’re on is not working.”