State and Local Property Taxes Target Commercial and Industrial Property

Download Fiscal Fact No. 342: State and Local Property Taxes Target Commercial and Industrial Property

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.

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.

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), https://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.