Tax cut for Manhattan small businesses
Council approves long-sought commercial rent reform
With a hoped-for aim of making Manhattan’s retail landscape more hospitable to small businesses, the City Council last week passed legislation reducing the number of enterprises obligated to pay the city’s commercial rent tax.
Manhattan businesses below 96th Street are the only ones still taxed under the policy, which applied to commercial tenants citywide when it was implemented in 1963. The outer boroughs and Upper Manhattan were gradually granted exemptions; by 1996, the taxed area had been whittled down to its current footprint, which includes some of the city’s most important commercial districts. Further changes exempted some smaller businesses with lower rents from the tax — since 2001, commercial tenants with annualized rents below $250,000 haven’t been required to pay.
But since then, commercial rents have skyrocketed throughout Manhattan — increasing 431 percent in SoHo, 264 percent along Fifth Avenue in the Flatiron district, and nearly tripling along Broadway on the Upper West Side, according to Council Member Dan Garodnick, the bill’s sponsor. As rents rose, owners of more and more businesses once exempted from the tax found themselves paying upwards of $250,000 in rent each year — and thus subject to the commercial rent tax, imposed at an effective rate of 3.9 percent of base rent.
“Every year of inaction by the city has basically been a tax hike on small businesses that were never meant to be affected by this tax in the first place,” Garodnick said.
The legislation passed by the Council Nov. 30 doubles the exemption threshold to $500,000 in yearly rent. As a result, roughly 1,800 Manhattan businesses will no longer pay the commercial rent tax. The full exemption applies to businesses that pay less than $500,000 per year in rent and report less than $5 million in annual income.
“The income limits will ensure that we are giving relief to small businesses, not banks and chain stores,” Garodnick said.
Another 900 businesses with rents and earnings that fall slightly above the exemption thresholds will gain partial relief in the form of a tax credit. On average, business owners affected by the bill will receive between $11,300 and $13,000 in annual tax relief.
“Not having to pay this annual tax means that each year I can consider making needed updates in my store, upgrades to my website, and pay increases for my staff,” said Natasha Amott, the owner of Whisk, a kitchen supply shop with a location in the Flatiron district.
Council Member Helen Rosenthal recently commissioned a study of storefronts in her Upper West Side district, which found that independently owned small businesses account for roughly 67 percent of businesses on the neighborhood’s main commercial corridors. “We have treated for far too long the tax collected from these businesses as an ATM for the rest of the city,” Rosenthal said.
The city will lose an estimated $36.8 million in tax revenue in the next fiscal year as a result of the measure, according to estimates from the city’s Finance Department.
Manhattan Borough President Gale Brewer called the bill a “responsible, amazing first step” in helping the borough’s small businesses. “It is not going to blow a big hole in the budget,” she said.
Howard and Mindy Partman, the owners of San Francisco Clothing on the Upper East Side, said that over the 45 years they’ve done business from their storefront, on Lexington Avenue near 71st Street, their rent has increased considerably — bringing with it a corresponding increase in their commercial rent tax bill. “We pay a tremendous amount of rent, plus other real estate taxes in addition to the commercial rent tax,” Mindy Partman said. “There’s a high cost of doing business in the city.”
While relief from the commercial rent tax will help reduce their costs, she said, it was also meaningful in a symbolic sense to see the Council take steps aimed specifically at small shops like theirs. “It’s an unfair tax, and we were heard,” she said. “They did something for us.”
“Consumers should support the neighborhood stores. It really does create the character of the neighborhood,” Partman added, echoing the sentiment of Mayor Bill de Blasio, who implored New Yorkers to shop locally in his remarks. “If you love a store, patronize it,” he said.
Earlier this year, de Blasio, citing the potential impact of the federal budget and other legislation on New York City, suggested the time was not right to consider changing the commercial rent tax. Still, he was supportive of the Council’s action. “Anyone with eyes to see understands there is a crisis in our mom-and-pop stores,” he said in Nov. 30 remarks hailing the Council’s passage of the legislation.
Howard Partman said that while the rent tax reform is significant, the Council, along with the state government officials, need to do more to help neighborhood businesses. “With all the businesses failing, I think they need to do more for us as small retailers,” he said, citing commercial rent stabilization as one potential step.
For Garodnick, who at the end of this month will be term-limited out of the District 4 seat he has held for the last 12 years, the bill’s passage marks the achievement of a long-sought-after goal. “It is not a cure-all and it should represent just the first step in solving our retail crisis and helping New York City’s mom-and-pops,” Garodnick said.
Garodnick has said that he would like to see the commercial rent tax repealed in full eventually, while Brewer has pushed a bill that would exempt certain grocery stores from the commercial rent tax.
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