Globe misses boat on property taxes

Let’s first state a few facts and definitions.

• Tax levy is the total amount of revenue that a town can collect in property taxes.
• With the exception of new growth and overrides, the maximum a town can increase its levy in a given year is 2.5% more than last year’s tax levy.

Where is the article misleading? So many places. For brevity, I will present “proof” at the end of the article.

The average tax bill for a single-family home will rise to $4,003 in 2007, 5.3 percent more than last year and up 49 percent from the 2000 tax bills, according to a Globe examination of 298 of the state’s 351 cities and towns.

“Average home” is misleading because no one owns the average home. This figure rises more in high-growth towns because the new construction pushes up the value of the average home. Taxes on this mythical home increase, but taxes on existing homes do not increase nearly as much. Median home might be a better gauge but it would still be flawed. Proof below.

Tax bills are rising as home values in many areas are declining; this year’s assessments reflect values as of Jan. 1, 2006, and were calculated based on 2005 activity, when the real estate market was much more active.

This leads the reader to believe that taxes should not rise when home values are declining. That is absolutely false – property value does not determine the amount of tax levy that a town can collect, or the amount of income it needs; it merely determines the proportion of the levy that each property owner will pay. Proof below.

The Globe’s analysis examined the tax bills for single-family homes, which make up the largest portion of property tax bills and are generally use d to gauge tax trends.

This is the most troubling part of the article. The Globe fails to mention the impact of shift in the balance between residential property and other property.

The reason many residential properties are seeing greater than 2.5% increases in their property taxes is that other categories of property are not increasing in value at the same rate. As I stated above, property value does not drive the amount of revenue a town can collect; it only determines the proportion that each property pays. If all properties increase in value by the same percentage, then each property will pay a maximum of 2.5% increase in taxes.

The increase in taxes is a result of residential property that has been increasing much faster than other categories of property. Most towns have a single tax rate, and that results in an uncontrollable shift from business to residential. Proof below.

The statewide increases are also due in part to many communities doing large-scale property reassessments.

This is true, but not the way the quote implies. Reassessment does not increase taxes on its own. Taxes go up because several years of the tax shift between categories builds up, and then property owners are hit at once. In other words, many homeowners were simply paying less than they would have if annual reassessments were done, so they had stable property taxes for a couple of years, but when reassessment was completed, the increase appeared dramatic because several years of pent-up shift from business to residential were released at once.

Additionally, no mention was given to the fact that when property is taken off the tax rolls (open space preservation, non-profit purchases, and a somewhat recent telecom ruling involving Verizon), this just shifts the existing tax levy to the other property owners.

Articles such as these play to the fears of homeowners. Look at how many times substantial increases were quoted:

The state’s highest average bill is in Weston, at $13,739, up 6.8 percent over 2006. The lowest is in Florida, a small town in the Berkshires, where the average tax bill will be $1,014, 2.5 percent more than in 2006.

The average tax bill on a single-family home in Boston will jump 12.3 percent to $3,093 in 2007. That’s on top of a 9.6 percent jump between 2005 and 2006.

Norred, who said the tax bill on her $308,700 home is going up nearly $700 this year, said she has started shopping at Market Basket, a discount chain, instead of her regular grocery store, and now takes back roads to get to her Cambridge office to avoid paying tolls.

  “A great number of people understand that this is just the situation,” said Peter S. Barney, administrative assistant to the board of assessors in New Bedford, where tax bills increased 8.8 percent this year to $2,552.

“It’s not outrageous if you look at what things have been like in past years, but taxpayers tend to have short memories,” said Peter Caron , director of assessing in Lynn, where taxes are going up 8.4 percent, to $2,974.

Quotes like these, based on the myth of the average home, just spook people. Taxes are not “going up 8.4%” in Lynn. Every homeowner in Lynn will not see an 8.4% increase in taxes — some will see more, some will see less, it will depend on the appreciation of their property in relation to all others. And most importantly, Lynn will not see an additional 8.4% increase in tax levy revenue, it will see a 2.5% increase plus new growth — yet people will think that they are getting 8.4% more, when in reality a chunk of their increase will go to lower taxes on businesses.

In my experience 99% of the state is uninformed on property taxes. People believe that cities and towns can extract more money from them just by increasing the rate, and they also feel that the link between property value and taxes is so strong that they immediately should see a decrease in taxes if their property value drops. Articles like this one in the Globe do this state a disservice because they portray government as arbitrary, greedy, and wasteful.

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Average home myth

That metric is misleading because no one owns the “average home”. Let me explain with some numbers. Let’s say that there are two houses in a town, one valued at $100k and the other at $200k. If the tax rate is $10/1000, the first home would pay $1,000 in taxes and the second home would pay $2,000 in taxes. The “average home” would be $150k, and the “average tax bill” would be $1,500, even though no one is paying that. The tax levy for the town would be $3,000.

But let’s say that, via new growth, a new home was built in town for $300k. Let’s see what would happen. The town could increase its tax levy for the existing houses by just 2.5% — meaning $75 — regardless of their increase or decrease in value. It could also get the taxes on the new house. Let’s say that all houses remain the same value, for simplicity.  The town’s tax rate would become (3075[levy]/300[value per 1000]) = $10.25, and it would also collect another $3075 from the new house.

Here’s where it gets weird. Even though the two existing houses in town did not rise in value, with the addition of an expensive house, the “average house” is now $200k, so the “average tax bill” for that town is now $2,050, or an astounding 36% increase! Sensational! However, each existing homeowner sees just a 2.5% increase, and the “increase” is borne entirely by the new homeowner.

Is it any wonder why the “fast-growing suburbs” are the “hardest hit”, in Globe terminology? It’s because they are adding substantial new growth at a value much higher than their “average home” value. The new homes are boosting the value of the “average home”, and that is skewing the average numbers.

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Property value drives taxes myth

If a town has 10 properties, each valued at $100k, with a tax rate of $10/1000, its tax levy would be $10,000. If there is an off-year in the real estate market, and each property declines by 50%, and the town takes its allowed 2.5% increase in levy, the levy would be $10,250, and
the total property value for the town would be $500k. $10,250 / $500 = $20.50/$1000. The tax rate would increase to $20.50, but each property owner would see a 2.5% increase in taxes. Obviously a falling real estate market does not lower a town’s costs, the two things are actually inversely related (low property value allows for more poverty).

Subsequently, if the town’s property all doubles in value, the total property value would br $2000k, the new tax levy would still be $10,250, and the new tax rate would be $10,250 / $2000 = $5.125/$1000. Each homeowner would see a 2.5% increase even though their property value doubled.

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Tax category shift

Since tax distribution, not tax levy, is based on property value, if all property in a town increases at the same rate there every property would see a 2.5% increase. But if one neighborhood doubled in value while another is stagnant, then the increasing neighborhood would see an increase in taxes while the other neighborhood would see a decrease.

Business property does not increase in value at the same rate as residential property during a housing boom. Therefore if there are two properties in town, a house, and a business, and there is a single tax rate, the following effect occurs:

House is valued at $100k, business is valued at $500k. House increases in value by 20%, to $120k, business remains at the same value. Tax rate is $10/1000, so house pays $1,000 in taxes, business pays $5,000 Total tax levy is $6,000. If no 2.5% increase is taken, in the following year the levy is still $6,000, and the tax rate will be $6,000 / $620 = $9.68. The business will pay $4,838 and the house will pay $1,161, or 16% more, even though the town did not increase its levy. The house pays for a tax reduction on the business.

For example, in 2000, residential property owners in Lynn were paying 71.72% of the property taxes. They are now paying 78.96%. There are 852 more residential parcels and 480 more non-residential parcels in 2006 than 2000. Homeowners are paying 37.4% more in taxes-per-parcel in 2006 vs. 2000, other property owners are paying 17% more. There has clearly been a shift from business to residences in Lynn, and I’m sure that this occurred elsewhere too.

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