State and Local Property Taxes Target Commercial and Industrial Property

 
 
November 20, 2012

In Fiscal Year 2010, state and local governments collected $441.6 billion in property taxes, comprising 23.5 percent of state and local own-source revenue.[1] The tax exists in all fifty states, and while the property tax has strengths (it is familiar, stable, visible, easy to administer, allows local control, and is somewhat connected to government services received), it remains a politically unpopular tax.[2] In 2009, 55 percent of poll respondents characterized the property tax as “not fair” or “not at all fair”; only 5 percent called it “very fair.”[3] Efforts to restrain property taxes are the most successful of tax limitation efforts.

Why is the property tax so disliked? One cynical answer is that the tax’s visibility and high level of collections by themselves make it reviled.[4] Others point to frequent complaints about administration, such as assessments at odds with market values or tax amounts being unpredictable year-to-year. Political responses to property tax outrage include homestead exemptions, separate property classifications, economic development abatements, circuit breakers, and deferrals.

One result of this outrage has been differing tax rates based on use, often by raising taxes on commercial and industrial property while reducing taxes on residential property. The Minnesota Taxpayers Association and the Lincoln Institute of Land Policy compared property tax treatment of homesteads (residential property) with that of commercial property in representative cities in each state for Fiscal Year 2010 (see Table 1). They found that commercial property faces higher tax rates than residential property in 39 states.[5] Tax collections were equal in 9 states (Connecticut, New Hampshire, New Jersey, North Carolina, Oregon, Washington, and Wyoming), while residential property was actually taxed at a higher rate in four states (Delaware, Maryland, Nevada, and Virginia).[6] Overall, the average commercial property paid a tax 1.724 times what a homestead paid.

Table 1: Commercial Property Disproportionately Taxed In Most States

Ratio of Commercial Property Effective Tax Rate Divided By Homestead Property Effective Tax Rate, FY 2010

State

Representative City

Ratio

Treatment

Rank

Alabama

Birmingham

2.11

Favors Homesteads

37

Alaska

Anchorage

1.07

Favors Homesteads

16

Arizona

Phoenix

2.64

Favors Homesteads

44

Arkansas

Little Rock

1.27

Favors Homesteads

24

California

Los Angeles

1.02

Favors Homesteads

12

Colorado

Denver

3.55

Favors Homesteads

47

Connecticut

Bridgeport

1.00

Equal Treatment

1

Delaware

Wilmington

0.85

Favors Commercial

18

Florida

Jacksonville

1.43

Favors Homesteads

29

Georgia

Atlanta

1.36

Favors Homesteads

27

Hawaii

Honolulu

3.73

Favors Homesteads

49

Idaho

Boise

1.92

Favors Homesteads

35

Illinois

Chicago

1.72

Favors Homesteads

32

Indiana

Indianapolis

2.91

Favors Homesteads

45

Iowa

Des Moines

2.25

Favors Homesteads

40

Kansas

Wichita

2.32

Favors Homesteads

41

Kentucky

Louisville

1.02

Favors Homesteads

11

Louisiana

New Orleans

2.61

Favors Homesteads

42

Maine

Portland

1.05

Favors Homesteads

14

Maryland

Baltimore

0.99

Favors Commercial

8

Massachusetts

Boston

3.55

Favors Homesteads

48

Michigan

Detroit

1.26

Favors Homesteads

23

Minnesota

Minneapolis

2.62

Favors Homesteads

43

Mississippi

Jackson

1.78

Favors Homesteads

33

Missouri

Kansas City

2.03

Favors Homesteads

36

Montana

Billings

1.39

Favors Homesteads

28

Nebraska

Omaha

1.01

Favors Homesteads

10

Nevada

Las Vegas

0.99

Favors Commercial

8

New Hampshire

Manchester

1.00

Equal Treatment

1

New Jersey

Newark

1.00

Equal Treatment

1

New Mexico

Albuquerque

1.19

Favors Homesteads

19

New York

New York City

6.02

Favors Homesteads

50

North Carolina

Charlotte

1.00

Equal Treatment

1

North Dakota

Fargo

1.10

Favors Homesteads

17

Ohio

Columbus

1.29

Favors Homesteads

25

Oklahoma

Oklahoma City

1.06

Favors Homesteads

15

Oregon

Portland

1.00

Equal Treatment

1

Pennsylvania

Philadelphia

1.56

Favors Homesteads

30

Rhode Island

Providence

2.18

Favors Homesteads

38

South Carolina

Columbia

3.02

Favors Homesteads

46

South Dakota

Sioux Falls

1.31

Favors Homesteads

26

Tennessee

Memphis

1.60

Favors Homesteads

31

Texas

Houston

1.22

Favors Homesteads

22

Utah

Salt Lake City

1.83

Favors Homesteads

34

Vermont

Burlington

1.19

Favors Homesteads

20

Virginia

Virginia Beach

0.81

Favors Commercial

21

Washington

Seattle

1.00

Equal Treatment

1

West Virginia

Charleston

2.22

Favors Homesteads

39

Wisconsin

Milwaukee

1.03

Favors Homesteads

13

Wyoming

Cheyenne

1.00

Equal Treatment

1

District of Columbia

Washington

2.45

Favors Homesteads

(42)

United States average

1.72

N/A

N/A

Note: Ranking based on neutrality of treatment of different types of property. Perfectly neutral states rank 1 and states most favoring one property type over another rank 50. D.C. ranking given for informational purposes and does not affect other rankings.
Source: Minnesota Taxpayers Association & Lincoln Institute of Land Policy.

This trend is starkly evident when looking at total tax collections. Nationwide, state and local governments collected 44 percent of property tax revenue from residential property and 56 percent from non-residential property (mostly commercial and industrial). By contrast, the U.S. Census Bureau routinely found that residential property totaled over 60 percent of assessed valuation, with commercial and industrial less than 25 percent.[7] Commercial and industrial property is paying more than its fair share, for the most part.

Table 2, below, shows the share of property taxes paid on commercial and industrial property in each state. The disparities have a number of causes. In the District of Columbia, for instance, commercial and industrial property pays much higher tax rates than residential property, and residential property can take advantage of homestead deductions. In New Jersey, tax rates are equal but there is much more residential property than commercial and industrial property. In Mississippi, commercial property has a greater dollar value than residential property but is also disproportionately taxed.

Table 2: Share of Property Taxes Collected from Commercial/Industrial vs. Residential, FY 2010

State

Commercial & Industrial

Residential & Other

Alabama

70%

30%

Alaska

61%

39%

Arizona

68%

32%

Arkansas

52%

48%

California

56%

44%

Colorado

56%

44%

Connecticut

26%

74%

Delaware

45%

55%

Florida

74%

26%

Georgia

60%

40%

Hawaii

72%

28%

Idaho

61%

39%

Illinois

55%

45%

Indiana

71%

29%

Iowa

67%

33%

Kansas

69%

31%

Kentucky

67%

33%

Louisiana

74%

26%

Maine

72%

28%

Maryland

27%

73%

Massachusetts

49%

51%

Michigan

53%

47%

Minnesota

51%

49%

Mississippi

83%

17%

Missouri

61%

39%

Montana

63%

37%

Nebraska

63%

37%

Nevada

60%

40%

New Hampshire

37%

63%

New Jersey

39%

61%

New Mexico

62%

38%

New York

53%

47%

North Carolina

46%

54%

North Dakota

87%

13%

Ohio

54%

46%

Oklahoma

67%

33%

Oregon

47%

53%

Pennsylvania

56%

44%

Rhode Island

50%

50%

South Carolina

74%

26%

South Dakota

65%

35%

Tennessee

60%

40%

Texas

65%

35%

Utah

70%

30%

Vermont

66%

34%

Virginia

56%

44%

Washington

49%

51%

West Virginia

80%

20%

Wisconsin

47%

53%

Wyoming

81%

19%

District of Columbia

91%

9%

TOTAL, United States

56%

44%

Source: U.S. Census Bureau, State & Local Government Finances; Council on State Taxation, Total State and Local Business Taxes

Residential homeowners are a large majority of the electorate, so it is easy to understand why political officials seek to reduce their taxes while raising taxes on commercial and industrial property owners. However, unless there is a net reduction in tax revenues, the actual effect of this will be to shift the tax burden so that it is less transparent. Because commercial and industrial property owners pass at least some of the costs of doing business on to consumers through higher prices, to workers through lower wages, and to shareholders through lower profits, these shifts may be doing greater damage to long-term economic growth. Shifting a greater property tax burden onto commercial and industrial property could also result in residential property owners not paying the full cost of the public services they are demanding.

Abraham Lincoln once cautioned, “Let not him who is houseless pull down the house of another.” By heavily taxing commercial and industrial property to benefit residential property, state and local governments are doing precisely that. A better approach would be property tax systems that tax all property alike.


[1] See U.S. Census Bureau, State and Local Government Finances FY 2010. Own-source revenue excludes intergovernmental funds (federal transfers to state governments and state transfers to local governments).

[2] See, e.g., David Brunori, Local Tax Policy: A Federalist Perspective 46-54 (2007).

[3] See Matt Moon, How Do Americans Feel About Taxes Today? Tax Foundation’s 2009 Survey of U.S. Attitudes on Taxes, Government Spending, and Wealth Distribution, Tax Foundation Special Report No. 166 (2009), http://taxfoundation.org/article/how-do-americans-feel-about-taxes-today-tax-foundations-2009-survey-us-attitudes-taxes-government.

[4] See, e.g., Brunori, supra note 2 at 56-57.

[5] See Minnesota Taxpayers Association & Lincoln Institute of Land Policy, 50-State Property Tax Comparison Study (2011) at 14, http://www.lincolninst.edu/subcenters/significant-features-property-tax/upload/sources/ContentPages/documents/MTAdoc_NewCover.pdf.

[6] See id.

[7] The U.S. Census Bureau last reported this data in 1987. See, e.g., U.S. Census Bureau, 1987 Census of Governments: Taxable Property Values at 9 (1989), http://www2.census.gov/govs/pubs/cog/1987/1987_vol2_taxpropvalues.pdf.

Follow Us

Tax Policy Blog

The official weblog of the Tax Foundation.

Go

Tax By State

For information on your state, select it from the drop-down menu.

 

Ask a Tax Expert

Contact information for Tax Foundation policy staff Ask