Taxing A Legend Version 1.5.pdf

7/24/2019 Taxing A Legend Version 1.5.pdf

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Real Estate Tax Management

Taxing A Legend

How commercial and industrial development has impacted

tax policy in Massachusetts.

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There have been a variety of recent discussions in Southborough about supportingexpansion of the industrial and commercial tax base as a means to reduce property tax rateincreasesand thereby financially benefit residents.

These discussions bring to mind the Hans Christian Anderson fable of the emperors new

clothes. Most people are familiar with this story, where an emperor cared only about hisclothes and about showing them off. He believed two traveling salesmen when they toldhim that they could make him the finest clothes that were invisible to anyone who waseither stupid or not fit for their position. He had the clothes made, and neither he, his staffnor the towns people would admit that they could not see the clothes and be accused of

being stupid or unfit for their position so they all praised the clothes. Finally, a smallchild said: "But he has nothing on"! And soon everyone in the town was shouting that theemperor had nothing on.

There is truth today in this fablecautioning us against readily accepting commonly held

notions or opinions without question and ignoring obvious contrary information. Thispaper takes the lesson of the fable and shows how it applies to property tax rates andcommercial development.

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The emperors clothing concept appears in many forms, but a good current example is awidely accepted line of reasoning used to manage property tax rates. This reasoning saysthat expansion of the industrial and commercial tax base will help reduce future residentialtax rate increases and therefore financially benefit residents. If this premise is indeed true,it should be supported by measurement and analysis of actual data.


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Notwithstanding this popular wisdom, lets look at available data on the subject to see if

this concept has been as accurate as is apparently widely assumed. There is a long-standing and ongoing test case in place for detailed measurement of this propositionall

based on very reliable data. This test case is called The State of Massachusetts. Detailedproperty tax and related data for all Massachusetts communities is available at the onlineData Bank maintained by the Massachusetts Department of Revenue (the DOR). Thedatabase is very reliable and verifiable. Using this data, a plot of the property tax rateverse the percentage of commercial and industrial property for each municipality can beconstructed. If the aforementioned popular wisdom is true, the plot of the actual datashould show clearly that communities with higher proportions of commercial andindustrial property have lower property tax rates. Graph 1 is this plot. This graphic of the

real estate tax rates across Massachusetts in a single rate format clearly demonstrates thatthe opposite relationship is occurring!! In actuality, communities with higher proportionsof commercial and industrial property have higher property tax rates!

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45,/2,,5'* "*6 7*"$8,5,The trend line in the above graph clearly shows a result contrary to conventional wisdom:municipalities with higher percentages of commercial and industrial property (CIP) aremore likely to have a high property tax rate. Anyone inclined to dismiss the implications

of this graph should consider the following. If plotting of the data points on this graphproduced a trend line starting at the same location on the left side, but unlike the actualresults produced a trend sloping downward as a mirror image of the actual trend, theconclusion would be a proof that higher levels of CIP development can contribute to acommunity by lowering property tax rates. Appendix A is the same data in Graph 1

reformatted to agree with general perception. The actual data does not support a policy ofincreasing commercial and industrial property as a best practice; it is an uncomfortable

proof to the contrary.

The trend line in Graph 1 has had a significant impact on tax policy in Massachusetts. Ifyou dig deeper into the data from the DOR, it becomes evident that approximately 70% ofthe communities with a CIP property proportion above 20% have chosen to implementsplit-rate real estate tax policies. A split-rate tax policy imposes separate tax rates on CIP

property and residential property subject to taxation. A typically higher rate is establishedfor CIP property. This practice is common with about 1/3 of municipalities overall inMassachusetts using a split tax rate policy. Residential tax rates, after the split rateadjustments have been made, is shown below in Graph 2:

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So, it is clear that implementation of a split-tax rate is the key to making the originalpremise of this article a reality. Those advocating to bring the benefits of increased

commercial and industrial development should correctly identify the need of a split-ratetax policy to ensure the desired benefits to residents.

In the upper right hand corner of Graph 2.0 is a data point labeled Westborough. This datapoint is a cautionary indicator of what happens when a community resists implementationof a split-rate tax policy in the presence of significant commercial and industrial propertydevelopment. The addendum B of this paper labeled The Westborough Paradox is adetailed accounting of the result comparing Westborough to a similar community with asplit rate tax policy.

To be accurate, the benefit of lowering residential real estate tax rate with a split ratepolicy is true is only for the residential taxpayer. This policy has some less popular effectsfor the commercial and industrial property owners. Without exception, Local Chambers of

Commerce consider the split-rate real estate tax policy a scourge for industrial andcommercial property owners. The impact of split-rate tax policies on CIP owners is shownin Graph 3:

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Graph 3 vividly portrays the adverse impact increasing proportions of CIP property has onreal estate tax rates. The proliferation of split real estate tax rates in communities above

15% is a severe reversal for the notion tax rates decrease as the proportion of CIP propertyincreases. As communities react to upward trending tax rates in Graph 1, split rate tax

policies amplify the impact for CIP owners as communities attempt to decelerate tax rate

increases in the residential community. Is it ironic that having championed the expansionthe CIP tax base as a means to reduce taxes, what becomes reality is illustrated in Graph 3?It is unlikely the results in Graph 3 are an ironic reversal of a badly executed deception byCIP property owners, but rather a long-standing adherence to an unfounded principle.

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There is another aspect to the impact that higher levels of commercial and industrialproperty has on a municipality in Massachusetts. This impact is shown in graph 4:

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Graph 4 shows the relationship between increasingly higher CIP percentages and loweraverage assessed value of residential property; it thus appears that a higher CIP percentagesuppresses residential property values in a community. While this may not be the solefactor in this relationship (as shown by the wide range of average residential propertyassessments in communities with less than 15% of their tax base as commercial andindustrial property), what this graph does show is the increasing pressure that higher

proportions of commercial and industrial property places on the residential tax base. Thereis certainly strong correlation, and there may well be strong causality between adoption ofsplit-rate tax policies and increasing real estate tax rates in Graph 1. Graph 4 is a


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cautionary indicator of the dire consequences possible if communities with relatively highaverage property values ignore this trend and continue to strive for greater proportion ofcommercial property in their community.

)$',5*;The information presented in this article challenges long held beliefs supporting expansionof commercial and industrial property as a means to mitigate increasing real estate taxrates. As presented in this article, the accumulated effect these beliefs have produced doesnot reinforce continued acceptance expansion of the CIP base will produce positive resultsin the future. It illustrates how the adoption on split rate tax policies in Massachusettsindicates the failure of commercial and industrial development to deliver on the promise oflower tax rates. Commercial and industrial development has many complex impacts on acommunity. For this reason, advocacy for development should be based on merit not on a

traditional conviction tax rate benefits have been, are or will be a routine outcome.

Hopefully this commentary provides background for an improved discussion of the role

commercial and industrial development has in defining real estate tax policy.


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700%*65< 7 = Wouldnt It Be Nice

Wouldnt be nice if ever-increasing commercial and industrial property development didtruly result in a reduction in real estate taxes. To illustrate what this would look like, a

graphic representation of an inverted version of Massachusettss real estate taxdemographics is presented below. This graph simply turns the existing tax rates of Graph1.0 upside down.

?If the above graph did indeed represent the data you would find in the Massachusetts DORData Bank, the impact would have been beneficial to all. For starters there would be no

need for the dreaded split tax policies implemented by many Massachusetts communities.Communities with a large industrial tax base would have some of the lowest tax rates inthe state. Commercial and industrial developers would see the benefit of locating theirenterprise in a community with substantial industrial base and as a result residents in thesecommunities would see falling tax rates. There would not be a rush of business owners to

flee from older established communities with punishing split tax rates. It would be aclassic win/win scenario.

If this all seems too good to be true; well the unfortunate truth is that it is. The trend linein the factious graph above is the mirror image to the real trend line in Graph 1.0. As

pleasing the prospect the factious graph represents, it is mirrored by the detrimental effectsin the reality of Graph 1.0


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Taxing A Legend Version 1.5.pdf