PROPERTY TAX CLASSIFICATION IN MASSACHUSETTS Lawrence David Segel (A.B. Oberlin College 1977) Submitted to the Department of Urban Studies and Planning in Partial Fulfillment of the Requirements of the Degree of Master of City Planning at the Massachusetts Institute of Technology May 1983 Copyright Lawrence D. Segel 1983 The author hereby grants to M.I.T. permission to reproduce and to distribute copies of this thesis document in whole or in part. Author: Depqrtment of Urban Studies and Planning /7 Z1, A Certified by: J,1 Thesis Supervisor Accepted by: Head, M.C.P. Committee Archives MASSAHUSETTS INSTITUTE F TECHNOLOGY JUL 211983 L1BRARIES PROPERTY TAX CLASSIFICATION IN MASSACHUSETTS Lawrence David Segel May 1983 Submitted to the Department of Urban Studies and Planning at the Massachusetts Institute of Technology in partial fulfillment of the requirements of the degree of Master of City Planning. Abstract Inequities in property taxation result when property valuations are not kept up to date. The independence and unrestricted taxing powers of local governments in Massachusetts have in the past allowed wide variations to occur in valuation and tax rates within and among jurisdictions. The desire for greater inter jurisdictional comparability led to the passage of the 1978 classification constitutional amendment and implementing legislation. This legislation requires regular valuations and permits shifts in the tax burden between classes of property. Most communities have not taken advantage of the options available under the classification legislation and have allowed tax shifts to occur, usually from business onto residential property owners. Based on interviews with the assessors of 18 communities and a detailed evaluation of revenue data on 211 municipalities, it is clear that a community's decision on whether to adopt different tax rates for different classes of property depends primarily on the attitudes of local officials toward the need to promote economic growth, and ressure from the public with regard to the issue of fairness. The current classification legislation is seriously flawed. It doesn't do enough to prevent the unfair shift of the tax burden caused by revaulation from business to residential property owners. Dramatic improvements could be made by adopting a system of more numerous tax rates, one for each of the five classes of property. Thesis Supervisor: Lawrence Susskind, Professor of Urban Studies and Planning. Thesis Committee Members: Daniel Holland, Sloan School of Management. William Wheaton, Departments of Urban Studies and Planning, and Economics. 2 ACKNOWLEDGMENTS I would like to thank the following people who were especially helpful in the process of bringing this thesis to completion: Larry Susskind, who provided inspiration, guidance, and editorial comments. Edward Collins, Deputy Commissioner of Revenue, for permission to use the tax revenue data. Rosemarie Cody, Dept. of Revenue Information Office, for providing the data. Lane Klein, The Beacon Companies Management Information Systems Group, for use of computing and wordprocessing equipment. My colleagues on the Impact: 2 112 project and the staff of the MIT Laboratory of Architecture and Planning for assistance, advice, and a good working environment. All of the people who were interviewed, for being so generous with their time and expertise. Any misinterpretations of what they said are my own errors. 3 CONTENTS page ABSTRACT 2 ACKNOWLEDGMENTS 3 I INTRODUCTION 7 The Tax Rate 8 Assessors, Assessment, Property 8 Methods of Valuation 9 Equity Considerations in Property Taxation 1i The Assessment Ratio 11 The Coefficient of Dispersion 13 The Sudbury Decision 15 Inter-Class Disparity 16 Organization of the Thesis 17 II THE GENERAL CONCEPT OF CLASSIFICATION 19 Legal Basis 19 Classification in the U.S. 20 Open Space/Agricultural Classification 22 III THE PATTERN OF VALUATION DISPARITY IN MASSACHUSETTS 24 Geography and Governmental Powers 24 Lack of Tax Rate Restrictions 28 Other Reasons for Disparity 31 IV EXISTING REVALUATION AND CLASSIFICATION IMPLEMENTING LEGISLATION 35 Class Definitions 35 Formulae 38 The Residential Factor 38 The Minimum Residential Factor 40 The Open Space Factor 41 The Residential Exemption 43 Establishing Tax Rates 45 Tax Collection 47 The Revaluation Certification Schedule 48 The Use of Classification So Far 49 History of Legislation 50 Summary 54 4 V WHO SHOULD BEAR THE TAX BURDEN? Problems of Assessment 55 Why Business Should Get the Tax Burden 57 Why Business Shouldn't Get the Tax Burden 61 Legislative Proposals 65 Summary 71 VI ANALYSIS OF THE TAX BURDEN SHIFT 72 Data Sources 72 Assigning Classes and Types to Groups 79 How to Analyze the Local Tax Shift 84 The Status Quo Tax Burden Distribution 85 Various Measures of the Tax Shift 86 The Offset 86 Tax Rate Changes 99 Effects on Tax Bills 104 Utility Tax Shifts 110 Classification and Community Characteristics 111 Geography of Classification 116 Key Findings 119 VII CASE STUDIES 120 Fitchburg 120 Brookline 124 Watertown 125 Fall River 127 Newton 130 Pittsfield 132 Avon 133 West Springfield 135 Clinton 136 Erving 138 Belmont 140 Newburypor t 141 Gloucester 144 Canton 146 Haverhill 147 Hopedale 149 Medford 151 Adams 153 Open Space 153 Residential Exemption 157 Other Problems with Revaluation and Classification 161 The Frequency of Recertification 162 Fair Share Activities 164 Other Communities 166 MTF Study 167 5 VIII SUMMARY OF CASE STUDIES 169 Knowing the Status Quo 169 Power of Assessors 170 Time Since Last Revaluation 171 Growth and Classification 171 Tax Base Diversity 173 The Role of Assessors 173 IX CONCLUSIONS AND RECOMMENDATIONS 177 Improving the Revaluation Process 177 The Success of Classification 178 Providing Greater Flexibility in the Law 182 APPENDIX 186 Notes on Tables 186 Table of Community Characteristics 187 LIST OF PERSONS INTERVIEWED 192 BIBLIOGRAPHY 194 ABOUT THE AUTHOR 199 6 I INTRODUCTION Local governments can generate various kinds of revenue to pay for the services they provide to their residents: property taxes, excise taxes, sales taxes, payroll or income taxes. They can also seek grants- in-aid from the state or federal government, and impose service fees or charges. In Massachusetts the property tax is the primary source of municipal income. The property tax is also seen as especially unfair by many landowners who have to pay it. In the late 1970s, a "taxpayer revolt," triggered by the passage of Proposition 13 in California, swept across the U.S. This taxpayer revolt was directed at limiting or reducing property tax burdens. In Massachusetts, residents passed the most dramatic tax limitation law in the United States, Proposition 2 1/2. Proposition 2 1/2 limits the amount of property tax revenue that can be raised to 2.5% of the total value of the property in a locality. It also limits the annual increases in local spending to 2.5%. The voters of Massachusetts also passed a constitutional amendment that allows local governments to tax different classes of property at different rates. Classification doesn't change the total amount a community can collect through the property tax. It does affect how much is paid by each taxpayer. For the most part, classification divides taxpayers into two groups, homeowners and business owners. The classification law controls how much of the tax burden of one group can be shifted onto the other group. This shift may occur only after a locality has determined the full-and-fair cash valuation of all of its property. This thesis seeks to describe: the experience to date of local 7 governments in Massachusetts of valuing and classifying property, how much of the tax burden has been shifted between business and residential property owners because of revaluation and classification, and what the influences have been on the decisions of local governments in setting their tax rates. We will start out with some basic definitions. The Tax Rate The tax payment on any one property (L) is the product of the property's value (V) and the tax rate (TR). L = V x TR All of the taxable properties in a taxing jurisdiction are collectively referred to as the tax base. The sum of the values of all of the properties in the tax base of a jurisdiction is the total value (TV). The sum of the tax payments made in the jurisdiction is the total revenue, or, as it is called in Massachusetts, the total levy (TL). The tax rate is the ratio of the levy to the value. TR = TL / TV Where the tax rate is fixed by law, the levy is the computed variable. TL = TR x TV The tax rate is usually measured as dollars of tax paid per 1000 dollars of property value. This may also be expressed as mills per dollar of value; the tax rate is then called the millage rate. (A mill is 1/1000 of a dollar or 1/10 of a cent.) S25.00/S1000 = 25 mills/dollar = $2.50/S100 = 2.5 cents/dollar = 2.5% The terms "mill" and "millage" are not generally used in Massachusetts. Assessors, Assessment, Propertv The tricky part of collecting property taxes is determining the value of each property. This process is called valuation or assessment, 8 and is performed by local government officials called assessors, or in the private sector by appraisers. In Massachusetts, assessment is the responsibility of Boards of Assessors that may be elected or appointed in each municipality. Assessors are expected to: have a working knowledge of title examination, surveying, architecture, cost estimating, general accounting, public relations, mapping.... A sound knowledge of computer applications and general statistical techniques is quickly becoming an essential ... yet it is a qualification that is largely unmet at the present time and is most often provided by private contractors (Franklin, Jankowski, and Torto 1983). Methods of Valuation There are different methods for determing the market value of property.