Decrease School Tax Decrease Total Decrease % Change Property A $160,000 $818.14 $1129.02 $1943.16 -26.1 Property B $225,000 $1150.01 $1587.69 $2737.01 -26.1 It is common sense that a single year increase in property taxes for homeowners of about a fifth would be a political non-starter in the City. The implications of a reduction by a quarter in the commercial tax burden are more complex.
Some commercial property owners conduct their own businesses in their buildings; for a potential buyer with this intention, or an owner already in business at a particular location, lower taxes mean a direct decrease in operating costs. Theoretically, this should make the City more attractive as a
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business location. But our statistical analysis shows that tax burden is a relatively minor factor in business location decisions.
Other owners buy with the intent to rent their properties to others, or sell them later for a profit. Before buying, those who are prudent calculate the value of such an investment against other possible uses of their money. One way that the investment value of a property is assessed by a potential buyer is through its “capitalization rate,” which is simply the net operating income (NOI) from the property, divided by the purchase price. A lower capitalization rate means greater return on investment (ROI); it is an inducement to invest.
To the degree that a tax decrease increases the NOI of a property, it increases its value in the market when the property is offered for sale or rent. This works where there is solid demand from potential renters or buyers; that is, so long as the market is not for some reason “oversupplied” with
commercial properties. But Kingston’s has long been an oversupplied market. In a “weak market,” renters or buyers might press for better deals and get them from owners who wish to avoid extended periods of (undesired) continued ownership, or long-term vacancy.
In such a market, tax cuts might still have value, by actually allowing owners to reduce rents or sales prices, thus sharing some of the value of the reductions in order to attract tenants or buyers without a negative impact on their pre-tax-cut net operating income. In fact, even after sharing the value of the cut, owners might even realize a smaller but still significant benefit to NOI. This might be good for the City, too, by making it a less expensive (“more financially attractive”) place in which to do business, relative to other locations in the region.
The actual incidence of the property tax – how much and under what conditions it can be passed along to tenants by owners – is much studied and debated.45 But almost certainly, a single tax system would immediately increase the actual or potential value of commercial properties for those who already own them in the Kingston. In the short term, these owners benefit from a “reverse tax shock.” This may be easily condemned as presumed “richer” (sometimes non-resident) commercial owners gaining at the expense of (often) presumed “less affluent” homeowners.
In the longer term, lower taxes for commercial buildings will theoretically increase their assessed value through capitalization, i.e., increasing the value of this part of the City’s tax base. To the degree that the commercial base grows faster in value than the home owner residential base, the opposite of the historical experience in Kingston, the tax burden will be shifted gradually to these now more valuable commercial properties, and others developed in the new, lower tax environment for business in the City. However, as previously noted, when Colonie opted out of the homestead tax system the total assessed value of their commercial properties decreased by over thirteen percent
45 See, for example, George Zodrow. “Who Pays the Property Tax?” Landlines ( April, 2006) http://www.lincolninst.edu/pubs/1115_Who-Pays-the-Property-Tax-
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and only slightly increased after a significant tax decrease prior to opting out of the homestead property tax system. (See Table 6.) Schenectady’s experience is different than Colonie’s as the assessed full value of their commercial property increased at a rate greater than Kingston’s from 2001, two years after they opted out of the homestead property tax system, to 2012. In addition, elections are held on a two or four year cycle, making it difficult for local governments to make policy decisions that may be better in the long-term but with no guarantee that this will be the case.
Option Three: Fix the Non-Homestead Tax Rate at a Specified Level Above the Homestead Rate in a Single Year
An alternative approach is to set the tax rate for non-residential properties at a specified level above residential rates. Because the homestead/non-homestead categories remain in use, an impact on school taxes is avoided. As noted, this approach reflects the historic reality in many jurisdictions within and outside New York State, whether codified in law or informally achieved through manipulation of assessment, of requiring more tax support from commercial than from residential properties of equivalent value. It reflects the view held by many that it is “fair” to generate more in taxes for the locality from properties that generate income to owners. By partly shifting the policy focus from the levy to rates, this approach also makes the level of taxation on non-homestead properties far more predictable for actual or potential investors, thus responding to one of the major criticisms of the homestead/non-homestead approach.
One example of such an approach would be to require as a matter of policy that the non-homestead tax rate be no more than twenty-five percent higher than the tax rate that would prevail in the City if a single rate were used. Starting from Kingston’s tax levy in 2014, the result for two of our
previously mentioned properties of similar value − one homestead, the other non-homestead − would be to diminish the potential property tax increase in City taxes from the change in policy alone for the former by about two-thirds (from a $396.06 tax increase to a $194.09 increase), and decrease for the later by about half (from a $818.14 decrease to a $400.91 decrease. But the percentage change would still be considerable; up 13.6% for the homestead category, down 15.7% for properties classified as non-homestead. (see Table 7.) There would still be a considerable, and probably politically unacceptable, tax shock and reverse tax shock. Other factors to consider in evaluating this option include: It would reduce non-homestead property taxes which could eventually increase commercial property values and may mitigate over time the increased tax burden borne by homeowners.
It would stop the increase in the disparity between non-homestead properties’ share of Kingston’s total assessed property value and its share of the tax burden.
It would not impact the Kingston school district, but because it collects by far the greatest share of the property tax, and because a disproportionate proportion of commercial properties in the district are in the City of Kingston, if the district continued to use the homestead/non-homestead system a large share of the disproportionate burden on commercial properties in the City would persist.
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It would still allow the non-homestead tax rate to be higher than homestead tax rate. It would be difficult to pass State legislation which would increase homeowners’ property
taxes even with a political consensus within the municipality that requests it.
It would not bind future City leaders to continue its implementation and they may try to repeal it.
It’s interaction with the Property Tax Cap would have to be considered.