Rent freezes and wealth taxes: a high-stakes mayoral race in NYC

We talk a lot about the thorny issue of taxing the rich. Governments in France, the UK and others continue to wrestle with how much revenue to extract from high earners versus a general public that remains strongly opposed to broad-based tax increases.

UK Chancellor Rachel Reeves's angst over the November budget draws most of our attention, but a fascinating test case is underway in New York City, where in a little over a month city residents will elect a new mayor. Zohran Mamdani, the charismatic state assembly member, is polling well ahead of his main rival on a platform focused primarily on affordability, wealth redistribution and stronger protections for renters. His most notable proposals include a 2% city income tax on New Yorkers earning more than $1 million a year and a four-year rent freeze for the city's roughly 1 million rent-stabilized apartments.

In general, people love it. Mamdani himself is popular among city residents – in part due to the ire he draws from the president – but even his personal popularity lags that of his policies. It's easy to see why; like many global cities, NYC has a serious affordability problem. About 70% of NYC households are renters and median rents account for about 55% of household income.

The key questions are whether the wealth tax will raise more money for the city budget, thereby improving quality of life in the city, and whether a rent freeze improves affordability over the long term.

Serious consequences

Unsurprisingly, many of NYC's wealthiest residents are sceptical, particularly when it comes to wealth taxes: "The ability for New York City to offer services for the poor and needy, let alone the average New Yorker, is entirely dependent on NYC being a business friendly environment and a place where wealthy residents are willing to spend 183 days and assume the associated tax burden," NYC resident and Pershing Square CEO Bill Ackman said, per CNN. "Unfortunately both have already started making arrangements for the exits."

It's hard to know whether Ackman is right – he's likely treating his no doubt substantial network as a mini-focus group – but if he is, the consequences for the city could be serious. Millionaires, both those living in the city and non-residents who pay taxes there, are critical to the tax base; they contributed $34 billion of State and City personal income tax (PIT) revenue in 2022.

New York remains a well-oiled machine for generating wealth, and its millionaire population continues to grow – just not as quickly as in competing states. In fact, New York's share of the nation's millionaires dropped 31% between 2010 and 2022, while the share grew in California, Texas and Florida, according to research published last month by The Citizens Budget Commission (CBC). Had shares of the millionaire population stayed at 2010 levels, the State and City would have collected more than $13 billion in additional PIT revenue in 2022. To put that in context, the entire annual NYPD operating budget that year was about $5.9 billion.

CNN asked Madani whether he was concerned that wealthy residents would leave, and he pointed to research suggesting that, when wealthy New Yorkers do leave the city, they tend to go to high tax states like New Jersey and California. Rather than fiscal policy, Madani reckons leavers are driven by quality of life concerns – something his policies will address. Like Ackman, we can't yet know if he's right, but we probably will soon. 

Mothballing units

But what about rent controls? There is plenty of research on this issue; The Institute of Economic Affairs conducted a study of studies last year, and found that most studies (56 out of 65) find that rent controls do succeed in lowering rents for controlled units, as intended, but the result is higher rents in the uncontrolled sector. Some 12 out of 16 studies found negative effects on housing supply, 11 out of 16 studies found negative impacts on new construction and 15 out of 20 studies found rent controls lead to reduced housing quality and maintenance.

NYC might be an exception, but experts think it's unlikely. Stijn Van Nieuwerburgh, professor of real estate and co-director of the Paul Milstein Center for Real Estate at Columbia Business School, had an interesting column in the FT yesterday. He points out that in 2019, then governor of the state of New York Andrew Cuomo (who Madani is now running against), tightened rent stabilisation, limiting landlords’ ability to recoup maintenance and repair costs. Officials then approved rent increases that fell well short of rising expenses. 

That, plus elevated interest rates, means that nearly a quarter of mortgages on rent-stabilised properties in NYC are delinquent, the highest default rate of any US real estate sector. Landlords are mothballing units rather than locking in losses. 

Van Nieuwerburgh says Madani should shift his focus to increasing supply, even when it means developers predominantly produce luxury homes; "what matters isn’t the rent on each new unit — it’s the total number of homes," he says. "Economists call this process “filtering”: when wealthier tenants move into new buildings, older units become available at lower prices. Every additional apartment helps."

Indeed, a growing body of research suggests that affordability in cities is most effectively improved by building at the top end of the market. A recent study from San Francisco found that while additional supply at any price point helps, high-end development has a disproportionately strong impact on reducing price-to-income ratios across all income groups. See this note for more.

In other news...

Labour can raise £45bn and not break manifesto, says Morgan Stanley (Times).