Real Estate Tax Management

Taxing A Legend

How commercial and industrial development has impacted
tax policy in Massachusetts.

Version 1.5
February 2016


Carl Guyer
146 Middle Road
Southborough, MA
(carl.guyer@gmail.com)


Table of Contents
Preface..................................................................................................................................................................... 3
Concept.................................................................................................................................................................... 3
Measurement ........................................................................................................................................................ 4
Discussion and Analysis .................................................................................................................................... 5
Impact on Property Values ............................................................................................................................... 8
Closing ..................................................................................................................................................................... 9
Appendix A - Wouldnt It Be Nice..................................................................................................................10
Appendix B - The Westborough Paradox...................................................................................................11
Appendix C - Single and Split Tax Rate Conversion ...............................................................................13
Appendix D - Looking at 10 Years of Assessments ................................................................................14

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It aint what you dont know that gets you into trouble.
Its what you know for sure that just aint so.
- Mark Twain

Preface

There have been a variety of recent discussions in Southborough about supporting
expansion of the industrial and commercial tax base as a means to reduce property tax rate
increasesand 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 his
clothes and about showing them off. He believed two traveling salesmen when they told
him that they could make him the finest clothes that were invisible to anyone who was
either stupid or not fit for their position. He had the clothes made, and neither he, his staff
nor 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 small
child said: "But he has nothing on"! And soon everyone in the town was shouting that the
emperor 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. This
paper takes the lesson of the fable and shows how it applies to property tax rates and
commercial development.

Concept

The emperors clothing concept appears in many forms, but a good current example is a
widely accepted line of reasoning used to manage property tax rates. This reasoning says
that expansion of the industrial and commercial tax base will help reduce future residential
tax 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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Measurement

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 longstanding 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. Detailed
property tax and related data for all Massachusetts communities is available at the online
Data Bank maintained by the Massachusetts Department of Revenue (the DOR). The
database is very reliable and verifiable. Using this data, a plot of the property tax rate
verse the percentage of commercial and industrial property for each municipality can be
constructed. If the aforementioned popular wisdom is true, the plot of the actual data
should show clearly that communities with higher proportions of commercial and
industrial 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 that
the opposite relationship is occurring!! In actuality, communities with higher proportions
of commercial and industrial property have higher property tax rates!

Graph 1 2012 Real Estate Tax Rates For The 351 Communities In Massachusetts.
Data Source Massachusetts Department of Revenue
See Appendix C : Tax Rate Comparison

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Discussion and Analysis

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) are
more 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 graph
produced a trend line starting at the same location on the left side, but unlike the actual
results produced a trend sloping downward as a mirror image of the actual trend, the
conclusion would be a proof that higher levels of CIP development can contribute to a
community 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 of
increasing 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. If
you dig deeper into the data from the DOR, it becomes evident that approximately 70% of
the communities with a CIP property proportion above 20% have chosen to implement
split-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 established
for CIP property. This practice is common with about 1/3 of municipalities overall in
Massachusetts using a split tax rate policy. Residential tax rates, after the split rate
adjustments have been made, is shown below in Graph 2:

Graph 2 - Residential Real Estate Tax Rates For The 351 Communities In
Massachusetts After Split Rate Adjustments Are Applied
Data Source Massachusetts Department of Revenue

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So, it is clear that implementation of a split-tax rate is the key to making the original
premise 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-rate
tax 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 data
point is a cautionary indicator of what happens when a community resists implementation
of a split-rate tax policy in the presence of significant commercial and industrial property
development. The addendum B of this paper labeled The Westborough Paradox is a
detailed accounting of the result comparing Westborough to a similar community with a
split rate tax policy.
To be accurate, the benefit of lowering residential real estate tax rate with a split rate
policy is true is only for the residential taxpayer. This policy has some less popular effects
for the commercial and industrial property owners. Without exception, Local Chambers of
Commerce consider the split-rate real estate tax policy a scourge for industrial and
commercial property owners. The impact of split-rate tax policies on CIP owners is shown
in Graph 3:

Graph 3 Commercial Real Estate Tax Rates For The 351 Communities In
Massachusetts Divided Into Single And Split Rate Communities
Data Source Massachusetts Department Of Revenue

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Graph 3 vividly portrays the adverse impact increasing proportions of CIP property has on
real 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 property
increases. 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 expansion
the 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 by
CIP property owners, but rather a long-standing adherence to an unfounded principle.

The adoption of split rate tax policies is a clear indicator the achievement of reduced
tax rates through expansion of the commercial and industrial tax base is not working.
Communities with a high percentage of commercial development cannot satisfy their
revenue needs using a failed methodology; they abandon the strategy of carefully
measured assessments and impose an arbitrary construct in a random manner. It is
when the benefits of commercial and industrial development should be the greatest
is when communities with significant levels of development abandon the formula
intended to provide greater revenue for the community. Split rate tax structures not
only indicate failure, they have created a patchwork tax structure.

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Impact on Property Values

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

Graph 4 Average Assessed Residential Property Values For The 351 Communities In
Massachusetts.
Data Source Massachusetts Department Of Revenue

Graph 4 shows the relationship between increasingly higher CIP percentages and lower
average assessed value of residential property; it thus appears that a higher CIP percentage
suppresses residential property values in a community. While this may not be the sole
factor in this relationship (as shown by the wide range of average residential property
assessments in communities with less than 15% of their tax base as commercial and
industrial property), what this graph does show is the increasing pressure that higher
proportions of commercial and industrial property places on the residential tax base. There
is certainly strong correlation, and there may well be strong causality between adoption of
split-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 high
average property values ignore this trend and continue to strive for greater proportion of
commercial property in their community.

Closing

The information presented in this article challenges long held beliefs supporting expansion
of commercial and industrial property as a means to mitigate increasing real estate tax
rates. As presented in this article, the accumulated effect these beliefs have produced does
not reinforce continued acceptance expansion of the CIP base will produce positive results
in the future. It illustrates how the adoption on split rate tax policies in Massachusetts
indicates the failure of commercial and industrial development to deliver on the promise of
lower tax rates. Commercial and industrial development has many complex impacts on a
community. 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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Appendix A - Wouldnt It Be Nice

Wouldnt be nice if ever-increasing commercial and industrial property development did
truly 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 tax
demographics is presented below. This graph simply turns the existing tax rates of Graph
1.0 upside down.

.
If the above graph did indeed represent the data you would find in the Massachusetts DOR
Data 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 in
the state. Commercial and industrial developers would see the benefit of locating their
enterprise in a community with substantial industrial base and as a result residents in these
communities 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 a
classic win/win scenario.
If this all seems too good to be true; well the unfortunate truth is that it is. The trend line
in 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 effects
in the reality of Graph 1.0

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Appendix B - The Westborough Paradox

There can be an instant in time when what a person has considered a normal everyday
experience is suddenly transformed by the discovery there are others who are living in
similar circumstances but with entirely different results. This is an example of a paradox.
For the people of Westborough and the real estate taxes they pay every year, there is a
parallel but very different experience in Burlington, MA. The circumstances are similar;
the results are very, very different, as the DOR data will demonstrate. For Westborough
residents this paradoxical experience is not limited to Burlington, because there are 110
other cities and towns in Massachusetts that could be used for a similar comparison.
Burlington just happens to the community that most closely matches Westborough
demographically and best illustrates what could happen for Westborough.
To bring this paradox into focus, 2012 DOR data is used. The key parameter making
Westborough and Burlington a closely matched pair is the nearly identical commercial and
industrial tax base. Westboroughs tax base is 37 % commercial/industrial while
Burlington has a base of 36% commercial/industrial. Compared to most communities, this
is a large percentage of the tax base for commercial/industrialand this is commonly
considered to be a benefit to the community.
For Burlington, the residential tax rate in 2012 was $11.55 per thousand dollars of assessed
property. Burlington, unlike Westborough, has a split-rate tax structure, with the
commercial/industrial rate at $ 30.95. Westborough has a single rate tax structure of
$19.15 for all property in the town. Knowing just the information provided here, the
equivalent single tax rate for Burlington can be calculated; it would be $18.53. With the
single tax rates of $19.15 and $18.53, the two towns again have similar characteristics.
Another common characteristic of the two towns is the average assessed value of the
residential property. Westboroughs average is $405,000 and Burlingtons is $381,0000.
Now, using the average assessed value of a residence in Burlington, if the single rate of
$18.53 per thousand were used to calculate the average annual tax bill in Burlington, it
would create a $2,651 tax increase for the average homeowner in Burlington. Clearly the
residents in Burlington would have no interest in a single-rate tax structure.

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Now reversing the calculation and using Burlington's split rate residential to commercial
tax rate ratio (and not the actual rates), the equivalent tax rates in Westborough would be $
11.82 (residential) and $ 31.56 (commercial/industrial). Applying these rates in
Westborough would yield a savings of $2,968 for the average residential taxpayer. This
would be a $250 per month savings for the average homeowner in Westborough.
So now the paradox is clear. The homeowners in Burlington see an annual savings of
$2,651 in their tax bills from Burlingtons split-rate tax structure while homeowners in
Westborough pay $2,968 more with the same basic demographics Herein lies the
paradoxhomeowners in two different communities with very similar demographics who
are experiencing very different financial outcomes.

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Appendix C - Single and Split Tax Rate Conversion

If all Massachusetts communities adhered to a single real estate tax rate for residential,
industrial and commercial property the analysis and comparison of tax rates between
communities would be a simple process. Because one third of the communities use a split
rate tax policy with ratios between the resident and commercial property tax rates varying
widely, the published tax rates from the Department of Revenue present a distorted view
of the tax burden imposed on their tax base. To accurately compare tax rates across the
state, a calculation of the single tax rate equivalent to the split tax rate used by each
community must be accomplished.
The formula for conversion of split tax rates into their equivalent single rate tax is shown
below:

Ts = ((Tr * Pr)+ (Tc * Pc))/100

Where

Ts
Tr
Pr
Tc
Pc

= equivalent single tax rate

= residential tax rate
= residential % of tax base
= commercial/industrial tax rate
= commercial/industrial % of tax base

It is this formula that was used to produce the rates in Graph 1.

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Appendix D - Looking at 10 Years of Assessments

In Graph 4 is an apparent diminishing of average residential home assessment as the
percentage of commercial and industrial property increases. The following graphs
look at the dynamics leading to this outcome. Each graph presents the typical
change in average home value in Massachusetts between the years 2003 and 2013.
The data is divided into three categories based on the average assessed value of each
community. The three categories are:
1. Average assessed value less than $200K
2. Average assessed value between $200K and $400K
3. Average assessed value between $400K and $600K
The vertical axis on each graph is the typical dollar value increase over the ten year
period for the average residential assessment in a community. The horizontal axis is
the percentage of an industrial and commercial tax base for communities
represented in the column. .
The first category of 152 communities shows no impact to the change in assessed
value over ten years as a result of the presence of a larger commercial and industrial
tax base. For these communities the level of commercial and industrial
development is not relevant to the change in average assessment over the ten year
time frame. The second graph of 138 communities indicates there was a significant
trend with communities with a smaller commercial and industrial tax bases having
larger increases in the average residential tax assessment. The third graph presents a
trend following that in the second with a much smaller population of 30
communities.
The trends in the second and third graphs will undoubtedly produce more upward
stress on tax rates.
The three graphs are shown on the following pages.

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Graph 1- Average assessed value less than $200K

Graph 2- Average assessed value between $200K and $400K

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Graph 3- Average assessed value between $400K and $600K

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