Property Tax Post: New York, California Wrestle With Who Should Bear Property Tax Burden


 

The difference between residential and commercial assessments in New York City will likely grow as the City Council adopted Mayor Bill de Blasio’s Fiscal Year 2015 budget June 25. Although de Blasio and several council members stated that the budget will not raise taxes, critics are calling that semantics, saying that although tax rates will not increase, taxpayers’ bills will. Because the overall value of city property rose 6 percent from the prior fiscal year, actual tax liability will increase, even if rates do not, notes Capital New York . Commercial properties are expected to be hit much harder than residential properties under the new budget.

The critics have a point—most jurisdictions determine their property tax rates by setting a budget for the upcoming fiscal year, subtracting all revenue sources other than property tax, and then calculating a tax rate that when applied to the assessed value of all property in the jurisdiction will raise the remaining revenue needed from property taxes. Thus, “not raising taxes” would imply that if assessed values go up, millage rates go down correspondingly to achieve the same amount of revenue.

Capital New York reports that tax rates for Fiscal Year 2015 will drop for family residences, all other residential properties, and utilities, but will increase for commercial and industrial properties. In a prior edition of the Property Tax Post, I discussed how New York City had the highest effective tax rate on commercial property compared to homestead property, according to a study by the Minnesota Taxpayers Association.

This means that in New York City, the tax burden is placed heavily on businesses, more so than in any state.  Similarly, the Council On State Taxation notes that for a fair tax system, property tax rates imposed on business and residential properties should not significantly differ. New York received a grade of F in COST’s most recent Property Tax Scorecard . New York City might have received an even worse grade in that department if they were included.

However, the gap in effective tax rates for residential and commercial properties has actually been closing since 2010, according to data from the New York Citizens Budget Commission . For example, the effective tax rate for Class I property, which is comprised of one-, two- and three-family residential homes, increased 28 percent from Fiscal Year 2010 through Fiscal Year 2014. Meanwhile, the effective tax rate for Class IV property, which includes commercial and industrial property, went up less than 0.5 percent during the same period. Thus, the ratio of effective rates between commercial and residential property has actually decreased since 2010. With the city’s new budget and property tax rates, the pendulum will swing back in the opposite direction.

Meanwhile, the California Assembly recently rejected S.B. 1021 , which would have allowed the state to “split” its property tax system to allow separate tax rates for residential and commercial properties. The bill would have allowed higher tax rates on commercial property, but would have limited the differential so that the rate for commercial property could never be more than double that of residential property.

The California Chamber of Commerce, a business advocacy group, opposed the bill as a “job killer” measure that would allow “nonuniform, targeted taxes against unpopular taxpayers.” The Legislature’s ultimate rejection of the bill may boost California’s ranking in the next installment of COST’s scorecard.

As evidenced by New York and California, states seem to be wrestling with determining the fairest way to raise property tax revenue, with some focusing their sights on commercial property more than residential property. And the different opinions seem to follow political ideologies. Bill de Blasio, an “unabashed ‘progressive,’” has put his efforts toward reducing property taxes on homeowners at the expense of commercial property owners. In California, S.B. 1021 failed to make it out of committee in the Assembly by a 3-1 vote, with three Republicans voting no, and one Democrat in favor. In May, the bill was approved by the Senate Floor 21-15, with all 21 in favor being Democrats, and 12 of the 15 opposed Republicans. Thus, don’t expect this issue to go away anytime soon.

Continue the conversation on Bloomberg BNA’s State Tax Group’s LinkedIn page: Should property tax relief be targeted toward residential taxpayers as is being done in New York City? Or do homeowners already receive enough tax breaks? Weigh in with your thoughts in the comments.

Sign up for a free trial of the Bloomberg BNA Premier State Tax Library and see a detailed discussion on state property taxes.

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