State Tax Snapshot: Should Businesses No Longer Foot the Bill for Homeowners’ Property Tax Savings?

Property tax is the most burdensome tax most business have to pay, accounting for 36.5 percent of businesses’ state and local tax burdens, according to Fred Nicely, of the Council On State Taxation (COST). So it should come as no surprise that Penelope Lemov of Governingdubbed the property tax “the most hated” tax among homeowners and businesses alike.

The fact that property taxes are enacted and administered at the local level has created a decentralized system, which often yields unfair results for businesses, COST concluded in a 2011 study. State and local officials often shift property tax burdens from residential taxpayers to business taxpayers because it helps their voters, even though it creates a less equitable tax system, Nicely stated in an interview with Governing. Nicely says this hurts economic development in those states for the simple reason that it costs business more to invest capital there. 

Nicely added that one of the setbacks to achieving uniformity and standardization is simply the decentralized nature of property tax administration today—98% of property taxes are levied at the local level—but added that “it’s not impossible.” In fact, a 2010 report from the Lincoln Institute of Land Policy found that tax disparities between commercial and residential properties had declined for the second-straight year, indicating that homeowners are receiving fewer property tax subsidies.

With that backdrop, COST prepared a “Scorecard” in 2011 ranking the fairness of states’ property tax administrative practices, noting that despite the general unpopularity of the property tax, taxpayers are more willing to comply with a property tax system that seems fair and efficient. COST focused on the following elements of what it would consider a fair property tax system:

·         standardized filing dates and appeal procedures throughout the state;

·         de novo review on appeal;

·         a reasonable burden of proof;

·         no requirement to pay disputed property taxes before seeking review;

·         property tax burden spread evenly among residential and business taxpayers;

·         no tax on intangible assets; and

·         strong state oversight.

Based on these factors, Maryland led the pack, with an A-, while Florida, Georgia, Kentucky, and Oregon all got B-plusses. By contrast, New York was the only flunking state, with an F, while Delaware, the leading state of incorporation, got a D-, and Illinois, Pennsylvania, and Hawaii all got D-minuses.

COST scored each state by looking at how often the state deviated from COST’s model recommendations—thus, a higher score equals a lower grade. For standardized filing dates and appeal procedures, Colorado had no deviations from COST’s recommendations and Maryland had only one. On the other end of the spectrum, New York again pulled up the rear with 20 (scale of 0-20), tied with Delaware. Most states hovered between 7 and 15, in the B to C range.  While COST docked Delaware for not having standard filing and payment dates, with only three counties, this deviation is probably less important for Delaware than it would be for most states.

Dealing more specifically with business property and COST’s recommendation that it be treated the same as residential property, Kentucky, Nebraska, New Hampshire, North Carolina, and Washington led the way with the most similarity to the COST recommendations.  Meanwhile, Alabama, the District of Columbia, Iowa, New York, and South Carolina all brought up the rear, all with either 10 or 11 deviations (on a scale of 0-12). Delaware was in the middle of the pack with a B- grade and 4 deviations. 

Florida, which received an A- for the fairness of its appeal procedures, received only a C for its treatment of business property. COST explained that the state received a point against for putting a 3% yearly limit on valuation increases for residential properties, while keeping a 10% limit on business properties. Both COST and the Lincoln Institute for Land Policy argue that property tax systems that don’t use caps are more equitable, with COST adding that if a state does choose to apply them, it should do so equally across property types.

Meanwhile, the Lincoln Institute’s “50-State Property Tax Comparison Study” focused more on the actual relative property tax burdens among owners of different types of properties in cities throughout the U.S. The survey found that for property taxes on commercial properties, the five cities with the highest tax burden on a property valued at $100,000 were Detroit; Providence, RI; Des Moines, IA; Philadelphia; and New York. On the other hand, the five least burdensome cities for commercial property owners were Cheyenne, WY; Wilmington, DE; Seattle; Virginia Beach, VA; and Honolulu. The burden in Detroit was $4,814 for a $100,000 property, while only $782 in Cheyenne, and $884 in Wilmington.

For industrial property, Detroit came in second-last, just ahead of Columbia, SC, while Wilmington had the lowest burden of any city. When only the 50 largest U.S. cities are included however, the top-five list of cities with high tax burdens moved decidedly to Texas—Detroit remained, but the four smaller cities were now replaced by Fort Worth, Dallas, Arlington, and San Antonio. Columbia’s property tax burden for industrial property worth $100,000 was $6,305, while Wilmington’s was only $884. Thus, the Lincoln study might explain why corporate taxpayers in Wilmington might be willing to live with Delaware’s poor rating for standardized filing dates and appeal procedures, as it nets them the some of the lowest property tax burdens in the country.

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