There is no I in Dual Tax Rate

Or rather, there is no isolated I, as selectman candidate Lisa Maselli proposes as her solution to provide property tax relief for residents and local businesses.

The October 5 2017 edition of City & Town, a publication of the MA Department of Revenue’s Division of Local Services, presents the article “Know Your Limits” which offers this compact summary:

Each year, every municipality must determine how much money it needs to operate and how much of that budget will come from real and personal property taxation. Before the tax rate can be set, the select board, town council or city council must also hold a public hearing known as a classification hearing to consider the percentage of the tax levy (which is the amount a community raises through the property tax) that will be paid by the owners of all classes of property: residential, open space, commercial and industrial real estate, and personal property.

All classes of property can be taxed using a single tax rate, which applies the tax burden uniformly to all classes.

As stated, the taxable property classes are Residential (R), Open Space (O), Commercial (C), Industrial (I), and Personal Property (P). Northborough generally holds its tax classification hearing in November and, historically, has maintained a single tax rate across all tax classes as a matter of policy.

Ms. Maselli wants to provide focused property tax relief to residents and local businesses, and to do that, she proposes to move to a dual tax rate structure: one that reduces some of the tax burden on both the Residential and Commercial classes by shifting it onto the Industrial class.

There are several problems with Ms. Maselli’s proposal:

  • No authority under state law to implement the proposed dual tax rate structure
  • Relative proportions of tax classes, plus tax shift constraint, limits intended effect
  • A business might not receive the benefit intended for it
  • Inequitable tax burden for town services used

I’ll start with the first of those, as it ends the debate outright and you can go back to whatever you were doing; or, if you like, continue reading for a little more depth on this topic.

 

No authority under state law to implement the proposed dual tax rate structure.

The City & Town “Know Your Limits” article goes on to say (pay attention to the second bullet):

Massachusetts law allows communities to shift a portion of the tax burden from the residential and open space (RO) classes to the commercial, industrial and personal property (CIP) classes. This results in two different tax rates for the property in those classes (known as a “split tax rate”). Shifting the burden from RO to CIP does not change the total levy to be raised, but rather it changes the share of the total levy to be borne by each class. The maximum shift to the CIP class implemented in any given year is based on a number of conditions. M.G.L. c. 58, § 1A. In general:

  • RO taxpayers must pay at least 65% of their full and fair cash value (FFCV) share of the levy.
  • CIP taxpayers cannot pay more than 150% of their FFCV share of the levy.

 

The referenced MGL Chapter 58 Section 1A contains the dense and cryptic text describing this:

  • A single tax rate for all classes.
  • A dual tax rate, with limited shift from RO to CIP, reducing RO burden and increasing CIP burden.

Those are your two options.

There is no authority or discretion granted to the Selectmen to selectively (arbitrarily, capriciously) cherry-pick which classes they like, which classes they don’t, which classes to favor, which classes to punish.

And so this dual tax rate proposal — Me-Myself-But-Not-I — has stumbled out of the gate, thrown a shoe, is off the track. Ms. Maselli is advocating for a tax relief measure that she cannot deliver.

(That’s it. Your choice to leave now or stay for more.)

 

Relative proportions of tax classes, plus tax shift constraint, limits intended effect.

But suppose it could be implemented? What would it look like?

The current fiscal year (FY20) tax class breakdown of assessed value is:

CLASS ASSESSED VALUE
Value $ Value %
R esidential 2295831540 74.7%
O pen Space 0 0.0%
C ommercial 358803898 11.7%
I ndustrial 316627605 10.3%
P ersonal Property 102343000 3.3%
Total 3073606043 100.0%

and for single tax rate, the FY20 tax levy is apportioned like so:

CLASS SINGLE RATE
Rate Levy $ Levy %
R esidential 17.25 39603094 74.7%
O pen Space 17.25 0 0.0%
C ommercial 17.25 6189367 11.7%
I ndustrial 17.25 5461826 10.3%
P ersonal Property 17.25 1765417 3.3%
Total 53019704 100.0%

And of course, because it’s a single tax rate, the percentage of the levy borne by each class is the same as its percentage of assessed value. Using round numbers: residential is 75%, commercial is 12%, industrial is 10%, and personal property is 3%.

Ms. Maselli’s proposal is to shift some of the tax burden from R and C (and, as it represents only 3%, why not do P a favor, too) onto I.

But look at those percentages and you see the problem: trying to shift enough tax burden from 90% of the tax base onto the remaining 10% to realize a meaningful reduction for the former.

Now recall that second bullet in the City & Town excerpt above: CIP taxpayers cannot pay more than 150% of their FFCV (full and fair cash value); i.e., 150% of their single tax rate amount; in this case, a rate of $17.25 * 1.5 = $25.88.

What does that look like?

CLASS DUAL RATE – 150% of FFCV rate for I
Rate Levy $ Levy % Levy Change
R esidential 16.26 37328968 70.4% -5.7%
O pen Space 16.26 0 0.0% n/a
C ommercial 16.26 5833956 11.0% -5.7%
I ndustrial 25.88 8192739 15.5% 50.0%
P ersonal Property 16.26 1664041 3.1% -5.7%
Total 53019704 100.0%

Since the total levy does not change as a result of the shift, the resulting tax rate for the other classes is $16.26.

The rightmost column is the change in the levy amount relative to single tax rate. A punishing 50% increase to the Industrial class tax levy — the maximum allowed, and not a rational or defensible increase to impose in a single tax year — produces less than a 6% reduction for the others.

Is that really a net benefit?

But this is moot, because Ms. Maselli’s dual tax rate proposal cannot be implemented.

 

The business might not receive the benefit intended for it.

If a tax shift could be implemented to reduce the burden on the Commercial class, who gets the benefit? The property owner / taxpayer.

If you are both the property owner and the business owner — congratulations, you got a benefit.

But many business owners don’t own the property their businesses occupy. They lease it. Whether a business owner, who is a lessee, receives a benefit from Ms. Maselli’s dual tax rate proposal depends on whether their lessor — the property owner and taxpayer — chooses to pass it along to the lessee…or pocket the windfall. The business owner might receive all of it, some of it — or none of it.

The Selectmen cannot compel a property owner and taxpayer to make a specific disposition of the tax benefit; cannot compel the property owner / taxpayer / lessor to pass along the benefit to the business owner / lessee. And so Ms. Maselli’s dual tax rate proposal fails to ensure that assistance is given to the party it purports to assist.

But this is moot, because Ms. Maselli’s dual tax rate proposal cannot be implemented.

 

Inequitable tax burden for town services used.

Commercial and Industrial businesses place very similar demands on the town services they use: public safety (police, fire, medical), public works (plowing of streets), town administration.

And likewise similar in the services they don‘t use: library, senior center, recreation facilities / resources, and — of course — the largest service component of the Town budget, public education.

There is no rational justification for imposing an inordinate burden on one for the benefit of the other.

But this is moot, because Ms. Maselli’s dual tax rate proposal cannot be implemented.

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