Split-Tax Rate Research

Recently a Massachusetts REALTOR asked for research on split-tax rates for real property tax. His community had a single tax rate for residential and commercial properties but was thinking of breaking them apart so commercial properties would be taxed at a higher rate. He was worried about the impact on future business development and growth in the community. Our research shows that “split tax rate,” “dual tax rate,” and “classification law” are the most commonly-used terms for this type of tax in Massachusetts. Research on California tax discusses a “split roll” tax so we searched on that too.

Below are results of our search, showing reports/studies, tax rate comparison reports, and news articles on split tax rates. Search for news articles were limited to Massachusetts communities, but there are lots more out there for other states.

Reports/Studies

An Analysis of Split Roll Property Tax Issues and Impacts, (Pepperdine University School of Public Policy, Mar. 2012).

Executive Summary: Despite dramatic increases in state revenues over the past decade, even greater spending increases, coupled with the nation’s recent economic collapse and weak recovery, have left the state of California with a budget deficit estimated at between $10 and $20 billion. Advocates for closing the gap through tax increases have introduced a series of proposals for new ways to increase state revenues. One proposal that has received significant discussion periodically over the past several decades, and is again being discussed, is the elimination of the caps on property tax increases for businesses included in Proposition 13, which is often referred to as the “split roll” proposal. This study was undertaken to review the split roll proposal and to assess the prospective impact on the state economy if a split roll tax regime were adopted…Overall, this study finds that a split roll property tax regime would have a significant and detrimental impact on the state’s economy, especially at a time when the California economy is struggling.

An Introduction to Two-Rate Taxation of Land and Buildings, (Federal Reserve Bank of St. Louis Review, May/Jun. 2005).

Abstract: When taxing real property at the local level in the United States, land and improvements to the land, such as buildings, are generally taxed at the same rate. Two-rate (or split-rate) taxation departs from this practice by taxing land at a higher rate than structures. This paper begins with an elementary discussion of taxation and the economic rationale for two-rate taxation. In theory, moving to a two-rate tax reduces the deadweight losses associated with distortionary taxation and generates additional economic activity. The paper also provides a history of two-rate taxation in the United States and a summary of studies attempting to quantify its economic effects. Discussions of the practical and political challenges of implementing two-rate taxation complete the paper.

Assessing the Distributive Impact of a Revenue-Neutral Shift from a Uniform Property Tax to a Two-Rate Property Tax with a Uniform Credit, (National Tax Journal, Jun. 2005).

Abstract: A number of economists have argued that a property tax with a lower rate applied to improvement values than to land values is superior to a property tax with a uniform tax rate that yields the same total revenue. This paper explores the statutory incidence of shifting to two-rate property taxation from single-rate property taxation. The authors recommend a tax credit provision to mitigate the regressive tendencies of this type of tax reform.

‘Splitting the Roll’ – What are the Implications for Business and Tax Policy, (Real Estate Taxation, Third Quarter 2004).

Abstract: Property taxes exist in all states although exemptions, rates, and the tax base vary from jurisdiction to jurisdiction. On average, 72.3% of local taxes collected are property taxes.1 Thus, the property tax is a crucial tax for local governments. Many states have limitations, and sometimes prohibitions, on local governments assessing income taxes. Thus, local governments often look to the sales tax and property tax when additional revenue is needed. The discussion below will focus on what some states, most notably California, have proposed over the past few years to increase property tax revenues. In particular, it will examine what are often referred to as “split roll” proposals because they propose to tax real property owned by businesses differently from that of homeowners. The property tax is an ad valorem tax based on a percentage of the value of property. Real property is taxed by the jurisdiction in which the property is located (rather than where the owner resides). Jurisdictions often have different categories of real property. Typically, a function of the different categories is to enable different rules to be applied to each category. Such differences may be in tax rates, due dates, assessment procedures, and assessment ratios. Common categories are residential, commercial, and agricultural. Categories may be further broken down into public utility, mineral, and industrial.

 

Split Rate Property Tax Guide, (Instant Advocate, California Transportation and Land Use Coalition via HousingPolicy.org, 2004).

This toolkit provides a thorough examination of how to implement a split-rate property tax system, and includes case studies of cities that have adopted a similar system, economic analyses of the costs of implementation, and links to even more information (source: HousingPolicy.org).

Businesses Shoulder Higher Property Tax Burden Under State’s “Classification” Law, (Massachusetts Taxpayers Foundation, Nov. 19, 1998).

This is a news release with a summary of the MTF report; I was unable to locate the full report. This summary provides a history of the split tax law in Massachusetts, here named the “Classification” law.

Tax Rate Comparisons

Number of Communities with Split Tax Rates, (Mass.gov – Official Website of the Department of Revenue, no date). Scroll to Excel document titled “Number of Communities with Split Tax Rates” near the bottom of the page.

50-State Property Tax Comparison Study, (Minnesota Taxpayers Association and Lincoln Institute of Land Policy, 2011). Compares residential and commercial property tax rankings for all states.

The Fallacy of a Dual Tax Rate: Presentation to Wellesley Board of Selectmen, (Innovation & Information Consultants, Inc., on behalf of Wellesley Chamber of Commerce, Sept. 26, 2011).

Provides background, implications, and equity/fairness issues on dual tax rates, as well as comparisons with tax rates of other Massachusetts communities. Concludes that dual tax rates do not increase tax revenue.

News Articles

Sarah

Manager of the Library & Archives at the National Association of REALTORS

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