New York City's Pied-à-Terre Tax: Mamdani's Heavy Foot on High-End Second Homes

If you own a multimillion-dollar apartment in New York City but don't live there full-time, prepare to pay for the "privilege." New York City's (NYC) new pied-à-terre tax imposes an additional tax on certain expensive residential properties that aren't their owners' primary homes. A recent appeals ruling has allowed the city to proceed with implementing the tax while the legal battle ensues. The targets may be wealthy enough to make the policy politically appealing, especially in this political climate of "eat the rich." But none of this answer the more important question: Is taxing pied-à-terres actually a good idea? 

At first glance, the pied-à-terre looks like just another property tax, except on high-end real estate. In the case of pied-à-terre, it asks the question of what is the primary residency of the property. A $10 million apartment in NYC, therefore, receives very different tax treatment based on whether the owner lives in NYC or another state. 

That distinction matters because it creates an incentive that doesn't exist with a regular property tax: change the property's status and you may change the tax bill. And this isn't a trivial surcharge. The NYC Comptroller's analysis estimates that the tax could increase the property tax burden on a $10-15 million home by 89 percent, and on a $25 million home by 261 percent. 

The NYC Comptroller shows how consequential the behavioral changes can also be. Once accounting for a behavioral change due to this incentive, the estimated revenue drops from $500 million per annum to as much as $340 million, or 34 percent. 

That should be a warning sign for those who thinks the pied-à-terre tax is a gold mine. The more a property tax depends on how taxpayers use, classify, or structure their property, the more opportunities it creates for behavior to change in response. 

France is a fine case study showing what happens when you do that. Since 2015, French municipalities in areas with housing shortages have been permitted to impose a purchase on the housing tax for second homes. A recent study in the Journal of Urban Economics found something interesting. While the French tax did raise revenue, there was also a substantial decline in properties categorized as second homes. 

This matters because the government incurred the administrative burden of distinguishing between the primary and secondary residences without necessarily getting the behavior it wanted in return. If the property de facto remains a second home, the tax has produced compliance costs and distorted the owner's decisions without putting another home the market. 

Even better, NYC has been down a similar path before. NYC eliminated a property-tax abatement for non primary residence in 2013, especially those worth more than $5 million. As a Tax Foundation study shows, nonresident ownership fell by 0.6 percent for every 1 percent increase in tax liability. The effect was half as large for properties worth less than 1 million than it was for properties worth more than $5 million. 

The average New Yorker might ask why they should care about rich people getting their second homes taxes. The answer is that the city does not merely tax these people. It benefits from having them here. Second-home owners pay taxes but consumer fewer public services than full-time residents. Their income and spending in New York can generate additional tax revenue, while their presence effectively spreads the cost of government across a larger tax base. This is why the Tax Foundation warns that the tax could backfire if it causes enough wealthy nonresidents to give up their second property altogether. 

The pied-à-terre tax is not simply about the rich. France and New York have already shown that taxpayers respond when government changes the incentives surrounding property ownership. Those responses aren't costless. Money spent restructuring ownership, changing how a property is classified, or making different investment decisions is money and resources diverted from other uses. 

Economists have long recognized that these avoidance, compliance, and substitution costs as real costs of taxation, not merely transfers from taxpayers to government. The average New Yorker may never see those costs on a tax bill, but they are still costs borne by the economy in which New Yorkers live.  

Mamdani has decided that distorting the housing market is an acceptable price for taxing people who are politically convenient to tax. But "Eat the Rich" is not a substitute for sound economic policy. New Yorkers deserve better.