Growing underassessment leads to steep decline in commercial property taxes

by Kasi Johnston 14 Nov 2019

The city of Detroit (MI) ranked near the top for highest tax rates across the country for homes, apartment buildings, commercial and industrial properties in the U.S., when comparing the largest cities in each state. Cheyenne (WY) sat on the other end of the spectrum, boasting low rates across all property types, according to a report by the Lincoln institute of Land Policy and Minnesota Center for Fiscal Excellence. The 50 State Property Tax Comparison for 2018 looked at the key features of property tax systems in major cities and calculated the effective tax rate by using the tax bill as a percentage of a property’s market value.

Commercial property taxes

In the report, commercial property taxes included rates for office buildings and similar properties worth $1 million. The average across the largest cities in each state was just under 2%.

Detroit’s commercial rates went down by 10%, which made way for Providence (RI) to take top spot with the highest rate at 3.85%. Chicago, Bridgeport (CT), and Aurora (IL) also had rates more than two thirds higher than the average. Cheyenne, Seattle, Virginia Beach (VA), and Fargo (ND) had tax rates lower than half the average.

Charleston saw the largest decrease compared to 2017. Effective tax rates fell 18% due to growing underassessment.

When comparing tax rates for industrial properties, the report specifically looked at manufacturing properties worth $1 million and took into consideration additional value for things like machinery and inventory. The average industrial tax rate was just over 1.4% in the surveyed cities for 2018.

Again, Charleston had the biggest decrease, down 15% due to growing underassessment. Bridgeport also saw a significant decline. The biggest increases in commercial and industrial rates were seen in Wilmington (DE), where both jumped up by 33%.

The average tax rate on apartment buildings worth $600,000 plus fixtures was about 1.7%. Detroit and Aurora both had rates more than double the average for apartments.

Denver, Bridgeport, and Charleston saw noticeable declines of at least 15% compared to 2017, while Chicago saw a 24% increase.

Residential property taxes

Lower tax rates don’t always mean that property owners pay less.

“In general, cities with high home values can raise considerable property tax revenue from a median valued home despite modest tax rates, whereas cities with low home values may have fairly low tax bills even with high tax rates,” the report reads.

Washington (DC), Seattle (WA), and New York (NY) are three cities in particular that had large tax bills despite low tax rates. The opposite was seen in Detroit, Buffalo (NY), and Jackson (MS). Owners paid less, even though the rates were on the higher end.

The rates vary across the country for a few different reasons.

“Cities will tend to have higher property tax rates if they have high property tax reliance, low property values, or high local government expenditures,” according to the report. An additional factor is that in some cities, homes are taxed differently to businesses and other property types.

Aurora, Bridgeport, and Detroit had consistently high tax rates compared to average, in homestead, commercial and apartment properties. Detroit also had one of the highest tax rates for industrial properties. Similarly, Honolulu (HI) and Cheyenne ranked among the lowest for all property types.

Looking at the largest city in each state, the average effective tax rate on a median-valued home was close to 1.5% in 2018. At this rate, a house worth $200,000 would have $2,886 in property taxes.

Homeowners in Aurora, Bridgeport, Detroit, and Newark (NJ) pay at least two times more than the average. At the other end of the scale, tax rates are half the average or less in Honolulu, Charleston (SC), Boston (MA), Denver (CO), and Cheyenne.

The average tax rate across the board went down 3.5% compared to the year before, after a decrease in 30 cities and an increase in 21. The largest decrease was in Charleston, which trimmed more than a quarter of its effective tax rate.

Who comes out on top?

When looking at tax rates across property types, homeowners usually get the best deal. In 40 out of the 53 cities studied, there were statutory preferences that favor homesteads. These included exemptions or credits, differences in how properties are assessed, nominal tax rates or a combination.

On average, business owners faced rates 67% higher than homeowners. Over a quarter of the cities surveyed have commercial rates that were at least two times higher than residential rates. In Boston, the owner of an office space could pay up to 4 times more than the average homeowner.

Even when looking at apartment buildings compared to homesteads, the difference can be vast. On average, apartments faced rates 31% higher than homes.

“It is important to note that while renters do not pay property tax bills directly, they do pay property taxes indirectly since landlords are able to pass through some or all of their property taxes in the form of higher rents,” according to the report. “Since renters have lower incomes than homeowners on average, preferences given to homesteads relative to apartment buildings will tend to make the property tax system more regressive.”

In Charleston, homeowners are heavily subsidized at the expense of renters and businesses. A $1million commercial property and a $600,000 apartment building there both faced effective tax rates on their land and buildings that were over 3 times higher than a median valued home.