20 Reasons to Not Implement a Dual Tax Rate
The issue of whether or not to have a dual tax rate is extremely complex, and can be deceptive. Unfortunately, the way a business is taxed is integrally different from the way a resident is taxed, which results, in itself, in a great deal of confusion. Many proponents do not have all the data needed to be fully informed concerning the long term (and often negative) effects a dual tax rate could consequently have on our local economy and home real estate values. The perception of immediate tax relief to homeowners often overshadows the true downwardly spiraling “ripple effect” such a move typically has on the local economy over time.
The United Regional Chamber of Commerce ask that you help us in our efforts to educate residents and businesses alike concerning the impact of a dual tax rate by reading the attached, which is a partial listing of the some of the many reasons why a dual tax rate would be a very bad idea in Franklin.
- A dual tax rate raises no additional money for essential Town services. NONE WHATSOEVER. The total tax levy in any city or town in Massachusetts is set by “Proposition 2 ½” regulations and the level of new growth in a town. Again, the total amount of overall tax dollars raised does not change in any way under a dual tax rate system.
- When property valuations increase overall, the dollar tax rate is lowered. Noting an often increasing valuation every three years, residents can become fearful that their overall tax bills will increase dramatically and in proportion to the amount their assessed value has been raised. However, this is not the case. The tax rate is, of necessity, lowered when this happens, as a direct result of the higher valuations, due to a fixed set total tax levy end amount. Indeed, in the last fifteen years in Franklin, the real value of the average single-family home in Town has more than doubled (from $175,000 to 385,000, or about 200%). Yet the tax bill of the average single-family homeowner has only increased by about 50% (from $2,406 to $3,530).
- Of 351 cities and towns in Massachusetts, only about 100 or so, at any given time, have a dual tax rate in effect. There are many reasons why less than 30% of towns and cities in the state opt for a dual tax rate, some of which are detailed here.
- There is a known statistical ratio of number of for profit businesses to number of taxable residential units that should trigger a close look at whether a dual tax rate starts to make sense or not for a certain community, which is 30% business to 70% residential. Only if a town has reached the well-documented 30% level, and has among its major business taxpayers businesses that are difficult to move - such as power plants, or vast shopping malls - only then does it make sense to consider a dual tax rate. Franklin meets neither of these criteria.
- The current tax system is already neither fair nor equitable for businesses, for businesses pay toward such items as the Town’s school system and trash pick-up services, which they do not use. Residents have always received a greater value, dollar for dollar, from their tax payments, and still do so even now. Going to a dual tax classification system would further increase the inequity, would be a great injustice, and additionally continue to skew the ratio of payments made to services and benefits received.
- Under a dual tax rate system, because there is a ratio of approximately 80 homeowners per every 20 businesses in Franklin, homeowners would only see a small decrease in their taxes, whereas businesses would see a raise of some four times that, due to the 4 to 1 ratio.
- Over time, a dual tax rate may well decrease the amount of money available to the municipality for essential Town services, because it is a strong disincentive to local economic development, which is the real backbone of the overall tax base.
- Almost all local professionals and businesses have already suffered greatly from the poor economy nation-wide.
- Businesses and professionals have many costs of doing business that are invisible to the consumers, such as ever-increasing insurances costs (for property, errors and emissions, and health insurance coverage); licensing fees; innumerable additional taxes and fees; etc., on all levels, town, state and federal.
- In fact, Massachusetts is now known as one of the worst states, and many say the worst state, to do business in within the nation.
- If you look around Town, you will see many underutilized buildings and vacancies in our office parks and our Downtown; vacancies that are often of a long-term nature. You do not, however, see many houses vacant for long; houses turn over relatively quickly in Franklin, despite higher home values.
- A split tax rate is a significant sign to new and existing businesses that a Town is not “business-friendly”. It is often one of the first, if not the first, question that new businesses ask when looking to locate in a particular town.
- Conversely, a split tax rate is also an incentive to build more residential homes in a Town, which further increases the demands and burdens on a Town’s resources, such as the schools; whereas business growth adds to the tax base without utilizing a lot of these already limited resources. Overcrowding of schools is only one impact, although one of the most visible, of adding more homes in a town.
- Franklin does not face competition solely from other in-state communities to attract and retain necessary professionals, businesses and retail operations. In fact, many states in the country “court” our existing businesses and offer special incentives for them to relocate there. Furthermore, many businesses are moving entirely to other countries, whose governments are also courting them, such as Mexico, India or many of the Asian nations, where the cost of labor and other normal costs of doing business are so much lower. It is a fallacy to think that companies cannot or will not “jump ship”. They have and will.
- Some 80% of U.S. businesses are considered “small” businesses. Over 85% of United Chamber of Commerce members have five employees or fewer; and many are family run. Yet, because of triple-net leasing, unless a business or professional owns their own building (and most do not) they would most likely not be exempted from paying the burden of an increased dual tax rate under a split tax system. Also, even If they do own their own building, but do not solely occupy it, or do not meet other strict requirements, they might well have to pay the higher tax rate. The often cited “exemption for small business” - sometimes mentioned by proponents of a dual tax structure as a panacea for smaller businesses - goes only to those who meet certain low numbers of employees or low business values.
- Going to a dual tax rate can initiate a viscous cycle. Because business taxes are based differently from residential taxes (which are based on real estate property values), when the value of a business goes down – which it often does because of a higher tax rate – the commercial/industrial property tax base itself erodes, resulting in less and less tax dollars emanating from businesses. It is important to note that due to the nature of the commercial tax structure - which is mandated by law - the real value of the very entity that the commercial taxes are determined by often then decreases, and can continue to decrease, each year under a split tax rate system. As the overall commercial tax base erodes, it is entirely possible that the entire tax base could slowly erode with it, yet the need for critical municipal services, including police, fire and school departments, is still strong. Ultimately, home values can suffer over the long term, as a town becomes known as a less desirable place to live. While a dual tax format may seem as though it is a good way to temporarily “spread the pain” or “soften the blow” of increasing residential taxes, in the long term, it generally is not.
- Families in Franklin utilize local stores, businesses or professionals, who could then be forced to increase their pricing of goods and services to help combat their payment of any extra taxes. Town residents, in turn, would then pay more for these items. Ironically, the cost of these goods or services often has no tax deductibility, whereas property taxes do.
- Many area families are employed by local businesses, and employees suffer when their employer suffers, usually through loss of income and/or benefits.
- The vast number of local companies contribute greatly to our local youth and civic programs currently. Yet, when they are struggling to exist, they often cannot afford to give generously; and, if they are out of business, or have moved out of town, they will not be here to give anything at all.
- Assessed real estate values have escalated only because the true worth of residential property values in Town have escalated sharply. Home equity is a real and viable asset to homeowners, and companies doing business in our Town should not be penalized because of this; the values of their businesses have traditionally not gone up in times of a sluggish national marketplace, but rather down.
Thanks to Jack Lank, President of the United Regional Chamber of Commerce for confirming that while the numbers referenced may have changed since this was first shared here (2007), the arguments are still what he uses in conversation on this topic today.
United Regional web page -> https://unitedregionalchamber.org/
Original post here -> https://www.franklinmatters.org/2007/12/20-reasons-to-not-implement-dual-tax.html
Tax Classification hearing info -> https://www.franklinma.gov/sites/g/files/vyhlif6896/f/uploads/6._tax_classification.pdf
The Franklin Matters view on the tax rate data ->