Tuesday, December 29, 2009

The Business of the Business Tax...

This evening the first of two meetings will take place that could define the city of Springfield’s efforts to rehabilitate, redefine, and rebuilt itself for a new decade. Tonight the City Council Finance Committee will discuss the recommendation from the Board of Assessors and Mayor Domenic Sarno to raise the residential and business tax rates. Tomorrow the full City Council, in quite possibly its last major act as an all at-large body, will make the final decision about the property tax rates for 2010.

Last year, the City Council approved and Finance Control Board accepted tax rates for business and residential properties. Notably, the business tax rate approved then would become the highest business property in the state. Should the 2010 tax rate proposed by Board of Assessors and Mayor Sarno be approved, it would raise the business property tax rate to within less than a dollar of $40.00 per $1,000 of assessed value. Because tax rates across the state have yet to be set, it is not known, whether another community will approve a business tax rate higher than Springfield’s proposed rate.

The rates for 2009 are $17.89 per thousand for residential property and $36.98 per thousand for business and eligible personal property. Personal property is often times property in fact, used in businesses.
Although it is not commonly referred to as such and usually not done so because the rate includes cents, a rate of $39.49 per thousand (the exact rate) essentially equates to 4%. This is important however, because it relates to another tax measure: Proposition 2 ½. Prop 2 ½ is mostly known for its restriction on increasing the overall tax levy on property in a community by more than 2.5%. However, another component of the 1980 ballot initiative was that it essentially limited an overall property tax rate of, yes, 2.5% or $25 per thousand dollars of assessed value. Several years prior to the 2 ½’s approval, a law was passed that permitted communities to have separate business and residential tax rates. Prop 2 ½ did not affect this law, however, it required that the tax rate for all property average out to 2.5%.
Because of this mathematical fun, the assessor and the mayor’s office must compute tax rates that satisfy not only the 2.5% year over year increase (excluding new developments). They must also offer tax rates that average out to 2.5%. This proves especially difficult both mathematically and politically in Springfield.

A look at the 2009 assessments shows that all of the taxed property in the City of Springfield were worth approximately $7.2 billion. Based on those assessments, a report on the city website identifies and a rough calculation by WMassP&I confirms that of that 7.2 billion roughly 5.5 billion is residential property and 1.7 is business and personal property. This means that over three quarters of the city’s taxable property is residential and even at a tax rate nearly double residents, business properties yield less than half the amount of property tax money that residences do.

This disparity is quite revealing. Realistically, the low ratio of business to residences in both real and taxable value is not altogether surprising. Massachusetts in general and Springfield in particular are home to many non-profits many like the hospitals and colleges employ many people. Unlike in Boston, to the knowledge of WMassP&I, only one major non-profit gives Springfield any PILOT’s or Payment in Lieu of Taxes. Under the terms of a deal reached some years back Bay State Medical pays the city somewhere in the vicinity of $100,000 as a PILOT. By comparison, Boston University pays the state capital over a $1 million. BU, however has a hospital the size of Bay State and a massive separate college campus.
However, this disparity is also troubling. The relatively strong residential property tax is a testament to Springfield’s ability to retain a middle class, however smaller than in the past, unlike some industrial cities of its size. However, it also speaks to the massive declines in manufacturing and business in the city as a whole. Despite a series of encouraging developments throughout the city, there exists a dearth of revenue from business properties in Springfield. Many properties, especially former industrial ones, continue to languish or sit underutilized.

Many of the largest developments in the city are simply not as affected by the business tax. The Basketball Hall of Fame sits on land owned by the city, which it rents. The building itself and its retail units are subject to taxes. Other properties have tax incremental financing as in the case of Performance Food Group, which apparently only affected its earlier tax bills. The most notable example may be the city’s office towers. Neither Monarch Place nor Center Square (the TD Bank Building) have a tax bill listed by the city’s Collector-Treasurer’s office. Tower Square, defined most notably by the MassMutual tower, unlike most of the other properties on the Collector’s webpage only goes back two years. MassMutual, the building’s owner is rumored to have secured a “tax treaty” with the city to build then-named Bay State West in the late 60’s and early 70’s. For how long and under what terms, WMassP&I cannot confirm. This does not suggest that the city earns nothing on this properties or even less than what the structures formerly on those sites yielded. It does, however, affect the overall business tax rate. Less eligible property value means higher rate to get the same amount of money.

The politics enters into this when the mayor and city councilors must weigh raising the residential versus the business tax. Because residents and not businesses vote, mayors councilors are reluctant to more heavily tax residents to the benefit of businesses. However, realistically, raising the business tax, especially given how high it is, does little to insulate residents and greatly diminishes the attractiveness of the city to developers. Even in years when the tax rate falls, many resident owners experience an increase because residential properties elsewhere in the city fall. Sadly, the only way to effectively lower residents property taxes is to increase property values elsewhere in the city. That is done by getting better paying jobs in the city: a task more easily accomplished with lower business taxes.

It goes without saying that having among the highest if not the highest business property tax is not advantageous to the city. It is also fair to say that given the economic turmoil and tepid recovery that residents need relief as well. However, the same game has been played for years. Business owners are often here by choice and while somebody will have to pay for the property one way or another, assessment for business work a little bit differently than residents.

Residences even in bad times are bought and sold often. Records from the registry of deeds are the simplest way for the assessors office to determine values. This is how resident assessments are calculated. Some business properties are calculated like this, but many are not. Business properties are not as readily sold and so the city uses two other methods: income and cost. The latter usually refers to special-use properties and considers things like depreciation. Income is what the property makes. Rented properties obviously fits into this category. However if properties do not make much money, either through rent or direct income (for example the Sears at Eastfield is owned by the company and not leased) because prices are too high to pay the tax, there are not jobs either. Likewise, although downtown retail has died for other reasons, the empty retail spots in Towersquare and elsewhere yield no income and therefore the city assessor cannot place any taxable value on them.

It is easy to see then the connection between high tax rates and rents. High business taxes discourage upgrades and expansion. Sadly, since residential rates are also going up, the only other option is bring the axe to the budget. This option is made all the more difficult since further cuts from the state may be unavoidable. Still, should the council make the hard, but right decision and avoid increasing, if not cut, the business tax, spending must be assessed and cuts made. Hopefully some new savings will be realized with single stream recycling reducing waste costs.

Eventually, the axe may fall hardest on social services. Although the need may be greatest in the midst of economic decline, many such services address immediate symptoms and not the long-term causes of that need. The business tax is hardly the sole cause, but making the city financially stable and successful is crucial to reducing that need.

The next five years, if the recovery is forthcoming, may be one of the best opportunities for the city to market itself to new industries and development that will yield revenue. It cannot do that if it is not competitive. The city should not renege on its commitment to the least of its citizens. In the long-term, should the tax base grow, certainly these funds should and must be restored. Additionally, the fact remains that, like the state efforts in this regard, anti-poverty and human service measures must be geared to improve quality of life and not just barely sustain life.

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