The election of Zohran Mamdani as the mayor of New York City (NYC) is unlikely to affect the financial value of most businesses across the U.S. However, if you own or operate a business in the Big Apple, the effect could be significant.
Mr. Mamdani's campaign centered on several key proposals:
- Increasing taxes
- Freezing rents
- Offering free bus transportation
- Establishing city-owned and operated grocery stores
When determining the value of a business, a key factor is the cash flow generated. If taxes increase, the amount of cash flow a business keeps decreasing, which, in turn, decreases the business’s overall value.
NYC already imposes some of the highest combined corporate tax rates. Currently, businesses are subject to multiple layers of taxation, including:
- Federal Tax Rate: 21%
- New York State Tax Rate: 7.1%
- New York City Tax Rate: 7.25% (for businesses earning over $5 million in revenue)
Mr. Mamdani has proposed significantly increasing the NYC corporate income tax rate to 11.2%. Additionally, he has proposed a 2% surtax on individuals earning more than $1 million annually. These combined proposals would directly reduce how much money businesses have available, which increase costs and limit growth, resulting in suppressed valuations.
Mr. Mamdani proposes a rent freeze on rent-stabilized units. This rent control scheme is not a new concept. Rent control creates a disincentive for people to own residential housing. When owners cannot raise rents, they are less motivated to invest in or maintain their properties, especially when costs rise. This, in turn, limits the overall availability of housing.
The combination of the proposed rent freeze and the increase in corporate taxes creates a "double-whammy” for those who own residential real estate. As a result of these measures, property values are expected to decline.
Mr. Mamdani’s vision for city-owned grocery stores is based on the idea that removing the profit motive will allow the stores to offer better wages to employees and lower prices to consumers. However, removing the profit motive also removes the incentive for a business to operate efficiently and effectively. Kansas City recently experienced this issue with a city-owned grocery store called Sun Fresh Market. It opened in 2018 and was recently closed. During this time it required more than $18 million.
It remains to be seen whether Mr. Mamdani will be able to successfully implement any of these major campaign proposals. But the mere fact that these ideas have been proposed creates uncertainty about the future, which in and of itself, increases perceived risk, which in turn, decreases value.
This article was written with the assistance of artificial intelligence