Principles to Guide an Improved Tax Exemption to Secure New Rental Housing: Fostering Affordability and Equitable Development in New York City

Since its inception in 1971, various forms of the 421-a property tax exemption have played a critical role in incentivizing housing development in New York City. However, the program’s lapse on June 30, 2022 has created uncertainty over the future of multifamily rental housing development. While buildings that began construction before this have a path to completion, the overall outlook for new housing development is unclear. Many observers find the expiration of the program to be especially problematic given New York City’s worsening housing emergency: the 2023 Housing and Vacancy Survey shows that the vacancy rate (the share of apartments vacant and available for rent) is just 1.4 percent, the lowest rate since 1968.

This brief explores how the exemption has affected both the production of multifamily rental apartments and the availability and location of affordable housing in recent years. It then articulates five central principles that can guide discussions about whether the exemption should be renewed and if so, how it should be restructured. Of course, a fundamental requirement is that the exemption actually be necessary to secure housing production. Accordingly, the brief analyzes whether and under what circum- stances the exemption is needed to make housing production financially viable. The brief then explains how a new version of the exemption needs to take into account the tradeoff between serving more, but higher income renters, or fewer, but lower income households, and shows some of the tradeoffs involved in that choice. It also explores the challenges of coordinating the exemption with other land use and housing policies to account for other benefits developers may layer onto the tax exemption, addresses the need for a fairer distribution of new construction across all the city’s neighborhoods, and discusses the imperative of making all the city’s neighborhoods more diverse and inclusive of lower-income renters. Finally, the brief addresses the problem of how to structure an efficient exemption when the city has not one, but multiple, rental markets.