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Watchdog Asks Hochul to Veto Real Estate Tax Break Until It’s Clear If It Works

The Citizens Budget Commission wants the governor to halt a just-passed extension of the Industrial and Commercial Abatement Program so a study of the controversial subsidy can be completed.

Julia Rock · August 13, 2024

The MetLife Building in Manhattan received $6.1 million in tax subsidies in 2024 under the city’s Industrial and Commercial Abatement Program, which the state legislature renewed in June. | Following NYC

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Update: Governor Kathy Hochul signed the ICAP renewal bill into law on September 20.

In the final hours of the legislative session in June, lawmakers voted, after no debate, to renew New York City’s largest commercial real estate subsidy, which provides more than $500 million a year in tax breaks for new construction and renovation projects.

The renewal came as a surprise to the city’s Independent Budget Office, which has been preparing a study assessing whether the Industrial and Commercial Abatement Program is actually inducing development and supporting other city objectives. ICAP was set to sunset in 2025, but the legislature just extended it by an additional four years at the request of New York City Mayor Eric Adams.

“There was not any outreach to our office regarding the renewal of ICAP,” said Alaina Turnquist, a budget and policy analyst with the IBO, which is still planning to release its study. “Our evaluation was timed with the 2025 expiration. … We did not expect the program to be renewed a year earlier.”

Turnquist added, “It is best practice to evaluate a tax expenditure or a tax break before you renew the program.”

Now, the Citizens Budget Commission, a fiscally conservative good government group, is calling on Governor Kathy Hochul to veto the legislation or negotiate a chapter amendment to limit its extension to only one year so a study of the program can be completed first.

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“The rushed, under-the-radar ICAP extension continues the State’s poor practice of preserving economic development tax incentive programs without proof they work — or in some cases, despite evidence they are ineffective,” wrote Andrew Rein, the Citizens Budget Commission president, in a letter today to the governor and legislature.

As of press time, Hochul’s office had not yet responded to the Citizens Budget Commission letter.

Only one lawmaker in either chamber, Senator James Skoufis, voted no on the legislation. Skoufis did not respond to a request for comment.

The Real Estate Board of New York, which has historically been a supporter of the ICAP abatement, lobbied top state and city officials on the legislation this year, as did the real estate developer Tishman Speyer, which owns a building in Long Island City that is the largest single beneficiary of the program.

The ICAP program grants hundreds of millions of dollars of tax breaks each year to new or substantially renovated commercial properties in New York City. Some of the largest recipients of ICAP abatements in fiscal year 2024 were Tishman Speyer’s 2 Gotham Center office building and parking garage in Long Island City, the Citigroup global headquarters at 388 Greenwich Street in Manhattan, the office building at Five Manhattan West, and the MetLife Building.

ICAP is the successor to a similar commercial real estate tax break, the Industrial and Commercial Incentive Program. Those two programs combined cost New York City $877.6 million in tax revenue last year. (Though ICIP sunsetted in 2008, some properties approved before then still receive continuing abatements under the program.)

That made ICAP and its predecessor the biggest commercial real estate subsidy in the city in fiscal year 2024, and the second largest corporate tax subsidy program after 421-a, the tax exemption for residential properties, according to the New York City Department of Finance. (421-a expired in 2022, though Hochul replaced it this year with a similar tax break called 485-x; abatements granted by the original program are still in effect.)

Like other economic development programs, ICAP is supposed to spur construction by offering developers a break from property taxes for a period of time. Developers receiving the ICAP break get a full abatement for up to 12 years on additional taxes that result from improvements they make to properties, with the abatements gradually phasing out over the next 13 years. In order to qualify, the new construction or renovation must cost at least 30 percent of the current assessed value of the property.

The abatement has been criticized for costing the city hundreds of millions of dollars a year, much of it for development projects that might have been built regardless. During his first campaign for mayor, Bill de Blasio said he would end ICAP, asserting that it had “notoriously weak payoffs.” Once in office, he instead commissioned the city’s Economic Development Corporation to study the program. (EDC did not immediately reply to emailed questions about whether the study was ever completed.)

In 2016, City Councilmember Julissa Ferreras-Copeland convened a Task Force on Economic Development Tax Expenditures to study city tax breaks for real estate. As part of its analysis, the task force found that in most cases the ICAP subsidy was not the determining factor in whether developers undertook new construction or renovation. According to the task force’s final report, only 3.6 percent of projects receiving the ICAP abatement relied on it to make the project feasible.

“Spending $500 million per year without first determining that it is an effective use of public funds does not serve the public’s interest well.”

—Citizens Budget Commission letter to Governor Kathy Hochul

When asked about the low rate, the bill’s Assembly sponsor, Democrat Landon Dais from the Bronx, said he was “not familiar with that report,” and asked, “What is considered a good inducement rate?”

The IBO and economic development experts generally consider a “good inducement rate” to be one at which a subsidy is at least revenue neutral. In other words, a subsidy is worthwhile if it spurs activity that generates more future tax revenue than the revenue forgone by the subsidy. For example, in the case of the statewide Excelsior Jobs Program, the state calculated last year that at least 36 percent of projects that received the subsidy would have to be directly attributable to the tax break for it to be at least revenue neutral in terms of direct tax revenue.

ICAP is known as an “as-of-right” program, meaning that subsidies are automatically available to all properties that meet certain criteria. As a result, the program has ballooned in recent years.

In fiscal year 2017, when the city council evaluated ICAP, the program cost the city $81.4 million. In the fiscal year that ended in June, the total cost in city tax expenditures was $506.3 million.

In response to the task force’s findings, the City Council passed a bill in 2017 requiring the Independent Budget Office to conduct regular evaluations of the city’s economic development programs.

The IBO is currently working on its evaluation of the ICAP program and will publish its report this fall, agency staff told New York Focus. Under the 2017 law, the IBO must evaluate whether properties receiving the abatement would have gone forward without the tax break, as well as whether the program is aligned with city development priorities.

“The IBO’s report is essential, and we’ll take it seriously,” the bill’s Senate sponsor, Luis Sepúlveda, told New York Focus in an email. But, the Bronx Democrat said, “waiting until the last minute to renew a program like this creates unnecessary risk and uncertainty, which can disrupt fiscal planning and investment. By renewing ICAP early, we’re ensuring businesses have the confidence to continue investing in our city.”

When the legislature renewed ICAP on the final day of session, it did so, according to the bill’s sponsor memo, at the request of the mayor’s office.

Assemblymember Dais said that one reason he supported the renewal is that he believes ICAP will help the city meet its climate goals.

“What I do realize, as someone who has a construction and development background, [is] that doing development in New York City is not easy at all,” said Dais, who worked as a project manager and engineer at a major construction company before becoming a lawyer. “The city felt that extending the tax credit to ensure that we could meet our renewable energy goals was absolutely essential.”

Dais said that ICAP could help developers that have to make retrofits on buildings to comply with Local Law 97, the city’s building decarbonization law. (Developers are required to make those retrofits under the city ordinance, so it’s not clear how such renovations would meet the test of being induced by ICAP.) The ICAP abatement does not specifically provide tax credits for clean retrofits, but if a building were undertaking retrofits that cost at least 30 percent of the property’s value, it could technically qualify for the tax break if it met the abatement’s other criteria.

Dais and the sponsor memo gave an additional energy-related reason for the renewal: While utilities generally can’t receive the abatement, “peaker” power plants — some of New York’s most polluting power plants that provide energy on high-demand days — are specifically eligible, even though no peakers currently receive the abatement.

According to the sponsor memo, federal energy regulators take into account potential property tax rates on power plants when setting New York’s electricity prices, meaning removing ICAP, whether power plants take advantage of it or not, could result in higher electric bills. “The precise increase in electric rates as a result of eliminating this property tax abatement cannot be determined at this time,” the memo said.

Governor Kathy Hochul sits in a chair at a breakfast meeting and looks up.

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“Whether or not peaker plants decide to use it, just having it available helps us manage electricity costs and supports the City’s goals of reducing emissions and moving towards a cleaner energy system,” said Sepúlveda. “It’s about ensuring we have everything to keep energy affordable and reliable.”

Mayor Adams’s office did not respond to requests for comment about why it requested the renewal, nor about ICAP’s impact on electricity prices.

Environmental advocates say the logic behind this argument for ICAP’s renewal is skewed. “Peaker plants create a really significant and environmental, health, and financial burden for the most vulnerable New Yorkers,” said Megan Carr, an attorney with New York Lawyers for the Public Interest, which is part of the PEAK Coalition that is working to shut down the city’s peakers.

New York City’s peaker plants are disproportionately located in poor, Black, and immigrant neighborhoods, the coalition has emphasized.

“The plant owners are given these astronomical capacity payments, which is money they receive just to remain available and ready to run,” Carr said. “That results in peak electricity in New York City [that] costs up to 1,300 percent higher than the average cost of electricity in New York state. The energy affordability crisis in New York won’t be solved by granting tax abatements to peaker plants when so much of the crisis is caused by these same plants. It will be solved by shutting them down and replacing them with renewable energy and storage solutions.”

For the Citizens Budget Commission, these are issues that deserve further study.

“Spending $500 million per year without first determining that it is an effective use of public funds does not serve the public’s interest well,” the group’s letter to the governor says. “The cost and breadth of the incentive and prior research should give you and other stakeholders pause on a five-year extension.”

Iris Yahi contributed reporting.