In New York, a push to end the “most unfair tax” that’s killing grocery stores

For those who don’t know, the commercial rent tax, or CRT, is levied on business owners who’ve set up shop somewhere between 96th Street in upper Manhattan and Chambers Street near the southern tip of the island—a swath that also happens to be the country’s priciest commercial real estate market. On this island, the issue is density. There’s just not enough land to go around, which forces the smallest shopkeepers to go head-to-head with billion-dollar corporations in the space race. The tax applies to the thousands of businesses here that pay over $250,000 in annual rent. Typically, they hand over another 3.9 percent of that to the city. And that’s all before a separate real estate tax, which the city levies on all commercial landlords (who hand that over to tenants).

That can make running a business here a high-stakes nightmare. Dan Garodnick, a city council member who introduced a bill earlier this year to raise the threshold to $500,000, said expenses like the CRT are the reason why banks and chain drugstores now dominate city storefronts, as The Real Deal, a publication with a focus on Gotham real estate, reported in March.

There’s an argument to be made that a commercial rent tax is useful in places that might be facing budget shortfalls. In Florida, for example, the state levies a 6-percent sales tax on commercial leases—but then, Florida is one of the few states that doesn’t collect income tax.

Like a lot of New York City’s regulatory policy, the commercial rent tax was originally intended to solve a different problem. In 1963, as the city was facing a budget shortfall, it decided to impose an extra tax on businesses to pay for higher welfare benefits. Back then, of course, $250,000 dollars in rent seemed like an impossible sum of money, and the tax could’ve been seen as something of a redistributive policy.

In the ‘90s, Mayor Rudy Giuliani began repealing the tax, piece by piece across the city, but stopped short of exempting thousands of Manhattan businesses, leaving the tax in place as commercial real estate became increasingly cutthroat, with rents pointing steadily toward the sky.

It’s another story of unintended consequences: Today, council members and business leaders say the tax is unfairly punishing independent businesses in a competitive marketplace.

Enter the grocery store. A survey conducted by the office of Gale Brewer, the Manhattan borough president, found that 132 of them in the city are affected by the CRT. Calling them “essential businesses,” she rallied on Monday behind a City Council bill, first introduced in February by Councilman Corey Johnson, that’s proposing to exempt grocery stores from the tax altogether. (The council’s recent move could be seen as a response to local outcry over a rash of recent closures of affordable neighborhood grocery stores. New Yorkers are a nostalgic tribe. Curbed, a local real estate website, even started tracking the city’s disappearing local grocers last year.)

Brewer was joined by representatives of the National Supermarket Association (NSA), a New York-based coalition that represents 400 independent grocers in cities across the eastern seaboard. NSA believes the tax is hitting its members especially hard. Take a look at the member list, and you’ll see a cornucopia of old-school, low-cost grocers, from Foodtown to, uh, Met Food. It’s hardly the province of specialty stores.

Paul Fernandez operates Ideal Market supermarkets in Brooklyn’s Ditmas Park and Manhattan’s Chelsea neighborhoods, and, until recently, a 5,500-square-foot Met Food in Manhattan’s Nolita neighborhood. Eight years ago, he says, a Whole Foods moved in around the corner, and his monthly rent skyrocketed, a sevenfold increase from $9,000 to $63,000. If that sounds nuts, it is. (New York is, after all, home to “The Rent is Too Damn High” political party.)

Those costs are hard on any business. But especially on supermarkets, which could, in some ways, be considered a public service. Put aside for a moment the rising rent, real estate tax, and the CRT. Fernandez’s Nolita supermarket faced all kinds of operational costs—like $2,000 a month to maintain refrigerators, up to $6,000 a month towards credit card processing fees, and a crazy high power bill to keep the lights bright and the food cold. Those aren’t great conditions for someone looking to make a buck in a notoriously low-margin industry.

When I asked Fernandez why he’s waited until now to call for an end to the CRT, he didn’t cite Amazon’s recent takeover of Whole Foods, or other pressures from online shopping. Instead, he says, it’s the rising cost of labor in New York state, slated to hit a $15 minimum wage in the next five years: “That is very difficult for a small business to absorb. Such thin margins in such a small amount of time.”

On the surface, the bill represents an opportunity for De Blasio to make good on repeated campaign promises of fiscal equality. But the truth is, the bill won’t only be a boost to independent businesses. As it stands, the bill applies to any grocery store that exceeds 3,500 square feet of floor space, as long as it meets certain, yet-to-be-defined “affordability requirements,” and accepts food stamps. That would include, ahem, certain non-independent supermarkets, like the 71,000-square-foot Whole Foods that Fernandez says helped put him out of business.

Possibly, it could just be the beginning of a larger campaign to save the city’s independent grocery stores. Brewer’s office is considering creating zoning incentives to put more of them into the city’s myriad new glass towers and mega-developments, inspired by similar measures to address food insecurity in underserved neighborhoods.

Think of it as a cousin of De Blasio’s crusade for more affordable housing. Affordable retail, perhaps?