NYC in Legal Hot Water
New York City’s pied-à-terre tax, or tax on nonresidents’ second homes, has gotten plenty of negative attention. Not only is the tax itself wrongheaded, the Big Apple has also gotten itself in hot legal water: partly by publicly releasing a list of 900,000 homes that are “related to” the tax—likely more than 80 times the number of homes that will ultimately be liable—and partly because it has placed the burden of proof on taxpayers to prove that they do not owe the tax.
Administrative issues aside, there’s plenty of reason to think that this type of taxation may not even be constitutional. And, while New York City’s second-home tax has sucked up all the air in the room, Rhode Island actually beat them to the party with its goofily-named “Taylor Swift tax—and has been slapped with its own lawsuit for its trouble.
DC Jumps In
But, while this should read as a cautionary tale, members of DC’s council have viewed it more as a blueprint. Proposals introduced by Chairman Phil Mendelson and Councilmember Matthew Frumin would copy New York City and Rhode Island.
Both taxes would increase property taxes on residential homes valued at over $2.558 million whose owners do not claim a homestead deduction—in other words, nonresidents. Exemptions would apply under both drafts for long-term rentals, homes owned by members of Congress, and homes listed for rent or sale at market rates for up to six months (Frumin’s draft exempts homes listed for sale or rent for up to nine months).
Other minor differences surrounding exemptions separate the two proposals. But, in terms of scope, Frumin’s proposal would be far more punishing, particularly for homes near the $2.558 million cutoff.
DC Pied-a-Terre Proposal Would Punish Homes Near Cutoff
Tax Rate on a Non-Homestead Property Valued over $2.558 Million under Current Law vs. Draft Proposals
Valuation Bracket | Current Law | Mendelson Draft | Frumin Draft |
$0-2.558 million | 0.85% | 0.85% | 2.5% |
>$2.558 million | 1.00% | 2.00% | 2.5% |
By applying the higher 2.5% rate to the entire value of the home, the Frumin draft would create a massive tax cliff for homes at or near the $2.558 million valuation cutoff. Assuming no other credits or deductions, a home valued at $2.557 million would face around a $21,700 annual DC property tax bill, while a home valued at $2.558 million would see its annual tax bill jump to $63,950.
Consequently, owners of second residences in DC would be very likely to cut ties to the District altogether. DC is even easier for nonresidents to escape than New York City or Rhode Island—parts of both Virginia and Maryland are a 15-minute drive from downtown DC, and DC is prohibited from applying income tax obligations on nonresidents. A DC pied-à-terre tax wouldn’t help DC, but it would be a nice boon for Virginia and Maryland real estate agents.
Here it’s worth dispelling one of the oddest arguments underpinning these pied-a-terres: the idea that they are the logical extension of vacant or blighted property tax surtaxes. For one thing, if there’s something to accuse multi-million dollar homes of, it’s certainly not blight—dilapidated, run-down homes are generally not worth $2.5 million.
But the broader point is that second homes are a boon, not a burden, for city or state finances. DC’s largest budget categories by far are public welfare (not generally something multi-millionaires qualify for) and education (as nonresidents, their children are probably educated in another state). Other services, such as police and health care, are things people are unlikely to need when they are physically in another state. Yet owners of second homes pay the same property taxes, without homestead deductions, as full-time residents.
Why DC would think pushing those golden geese a few miles across the border into Arlington would help its budget situation is a bit of an open question. But between this and other proposed new taxes on high-earners, the message is becoming increasingly clear: the wealthiest taxpayers who fund DC’s government are no longer welcome.