What is a Property Tax?
Property tax is a levy on certain types of real and personal property. The tax is usually imposed by local governments and paid by the property owner. The amount of tax due depends on the property’s location and how much it’s worth. The tax revenue collected from property taxes typically funds public education, public safety, maintenance of public spaces and other local services. Generally, a property owner’s tax liability is determined by multiplying the applicable tax rate, which is determined by the taxing authority, by the property’s value. While most homeowners think property tax and real estate taxes are synonymous, they are not the same thing. Property tax is a more inclusive term that can encompass home furnishings, machinery and other physical items, as well as intangibles, such as patents and trademarks.
Split Tax Rates
Many taxing jurisdictions distinguish among the various property types and treat them differently. Common property classifications include: residential, commercial, industrial, and agricultural.
A majority of states, some 60 percent, use some kind of classification, but those classifications vary in scope and effective tax burden (i.e., the actual amount of tax paid after credits, deductions and other changes are taken into account.) Classifications are also operationalized differently among states. Some use a set rate for different types of properties and others use a ratio of assessment and market values.
Some jurisdictions impose different tax rates on the different property types. This practice is known as split rates. This use of split rate is a way for states and localities to more heavily shift the tax burden from one property category to the other. In most cases, the split tax rate imposes a greater burden on the commercial and industrial property taxpayers to alleviate the burden on residential property owners.
There are many variations on how classification is used. For example, in Vermont, classification is prohibited for municipalities, but the state levies a property tax with different tax rates for homesteads and non-homesteads to fund education. In Michigan, there are some classifications but only for a particular type of personal property without a classification that is business specific. New York and Connecticut don’t have statewide classifications but have carveouts for New York City and Hartford (both of which classify).
New Hampshire and Maine are the only New England states without some sort of classification, whereas in Massachusetts and Rhode Island, differing tax rates are determined at the municipal level. Boston has the second highest ratio of effective tax burdens between commercial and residential properties in the country at 4.4; only Honolulu has a more differentiated tax structure. This is a result of split property tax rates, and a generous tax exemption for residential property owners who occupy the property as their primary residence, along with several other available exemptions for those who qualify.
Massachusetts Use of Split Tax Rates and the Need for Balance
In Massachusetts, split tax rates are commonly used by cities and towns. Almost one-third of municipalities in the commonwealth (110 of 351) have adopted a split property tax rate. Many municipalities use this tool to reduce the high cost of housing, long an impediment to home ownership, by alleviating some of the property tax burden.
At the same time, property taxes represent the single largest tax that businesses pay, comprising 38 percent of a business’s overall tax burden according to the Tax Foundation. Massachusetts ranks 46th among the 50 states, meaning its tax burden (the tax rate and tax base) is higher than in all but four other states.
Local governing authorities have historically placed their thumb on the scale in favor of homeowners, figuring that businesses would simply absorb this cost as the price to pay for being close to customers, suppliers and employees. For example, in the City of Boston, commercial and industrial property owners paid 58 percent of all property taxes in FY22, with residential taxpayers paying the remaining 42 percent. Boston residential owners enjoy the lowest residential rate allowed by law at $10.88 per $1,000 of value, and a generous residential exemption. In contrast, commercial and industrial property owners pay $24.98 per $1,000 of value.
Several recent developments, however, may call into question this conventional wisdom. While housing costs continue to be high, the commercial and industrial property sectors are experiencing near record vacancy rates of 18 percent, which puts downward pressure on rents and make ownership of these properties less profitable. Higher tax burdens reduce these profit margins further and may make communities that utilize split tax rates less attractive to commercial and industrial property owners and investors. There is a serious concern that reduced rents and high vacancies, combined with significant debt associated with many commercial properties, may result in owners being compelled to surrender buildings to lenders. High commercial tax rates exacerbate this dynamic. A downward spiral of commercial values, and a corresponding reduction in property taxes derived from commercial property, may require a significant shift in the property tax burden to residential property owners. While it is still too soon after the pandemic to understand if remote work and the resulting high vacancy rates for office space are a temporary shift or a more permanent change, this change bears watching by local officials to determine whether they have struck the appropriate balance in the property tax burden in the current environment.
About the Authors
Eileen McAnneny is a Senior Fellow in Economic Opportunity at Pioneer Institute. She was formerly president of the Massachusetts Taxpayers Foundation, and has experience in government relations, public policy, advocacy, and management in both the public and private sectors. McAnneny holds a bachelor’s degree in political science, cum laude, from Tufts University and earned her juris doctorate in law from Suffolk University Law School.
Aidan Enright is Pioneer’s Economic Research Associate, responsible for analyzing data and developing reports on the state’s business climate and economic opportunity. Aidan earned a Bachelor of Arts in political science and economics with a concentration in U.S. national politics from the College of Wooster.
Property Tax Information – Available Resources
Massachusetts Specific Information:
- Year over year changes by municipality in MA, CIP Tax Shift – Data Analytics and Resources Bureau
- 2021 state report on split tax rates
- Municipal data on property tax exemptions
- Property classifications, G.L. c.59 §§ 2A
- Percentages of local tax levy for property, G.L. c.40 §§ 56
- Limiting principle/law – Prop 2 ½, guide + G.L. c.59 §§ 21C + additional Overview
- Lincoln Institute provides a tool to search by state/region for property tax classification and a 50-State Property Tax Comparison, in conjunction with the MN Center for Fiscal Excellence
- Tax Foundation rankings of property taxes for businesses
- Connecticut Office of Legislative Research provides a comparison of property tax policy in 2020 to MA, NY, and NJ (CT study)