Split-Rate Taxation of Property

Description of Technique
This technique consists of taxing residential and commercial properties at different rates in relation to their market values, instead of using a uniform taxation rate against market values for all types of properties. In some cases, owner-occupied single-family residential properties are taxed at a different rate from renter-occupied residential properties as well. This approach contrasts with assessing all types of properties at the same rate in relation to their market values, and then using the same tax rate against those assessed values for all types of properties. Such a “uniform taxation” approach is required by the Constitutions of several states, and used in many others.

There are two types of split-rate taxation: deliberate and accidental. Deliberate split-rate taxa-tion occurs when the taxing body explicitly sets different tax or assessment rates for different types of property. This is rare. Accidental split-rate taxation occurs when the taxing body is limited in its ability to raise taxes on specific properties over time, usually during the period when a property does not change ownership. Then differences in turnover rates can result in differences in the tax rates applied to identical properties, as discussed further below.

Potential Benefits of Technique From General Public Point of View
The chief benefits of this technique when deliberately adopted flow to households who own their own homes, because they bear lower real estate tax burdens than they would if “uniform taxation” prevailed among all types of properties. Hence this technique also benefits politicians trying to win votes from homeowners.

• This practice can in theory be justified by the argument that homeowner households cannot pass the burdens of real estate taxes on their dwellings to other people; whereas owners of commercial and industrial properties and rented dwellings can recoup those techniques from their tenants or customers—at least in the long run. Therefore, by reducing tax rates on homeowners, this technique helps those homeowners who have relatively low incomes avoid economic hardships. This is especially beneficial to retired elderly households. Many of them own their own homes but have relatively low current incomes out of which to pay real estate taxes. In contrast, owners of commercial and industrial properties enjoy continuous income streams from their properties from which they can pay real estate taxes.This Potential Drawbacks of Technique from General Public Point of View The potential drawbacks are as follows:

• The main disadvantage of deliberate split-rate taxation is that it imposes heavier tax burdens—in relation to market values—upon owners of commercial and industrial properties (often including rental apartments) than upon homeowners. In addition, it permits elected officials to raise taxes on commercial and industrial properties but not upon homeowners, or perhaps to a lesser extent upon homeowners. This opens the door to exploiting owners of commercial and industrial properties in order to finance benefits to homeowners, without the latter having to bear much of the burden of paying for those benefits. That would encourage excessive taxation in general because the recipients of the benefits paid for by that taxation do not have to bear its costs.

• Deliberate split-rate taxation reduces the supply of those types of properties subject to the highest tax rates, compared to what that supply would have been if all properties were taxed at the same rate. For example, far fewer rental apartments are built in Cook County, Illinois, than would be the case if such properties were assessed—and therefore taxed— at the same low rate as owner-occupied homes.

• A clear disadvantage of accidental split-rate taxation is that it creates artificial incentives for property owners not to move or sell their properties, because the tax rates on those properties would rise sharply if they have held those properties for a long time.

• Another disadvantage of accidental split-rate taxation is that it generates highly unequal tax rates on nearly-identical properties, depending upon how long the owners of those properties have owned them. Two physically identical homes next to each other in a subdivision may have very unequal tax rates because one was just purchased and the other has been owned by its occupant for 15 years. This seems clearly inequitable, though it has been upheld by the U.S. Supreme Court in the case of California’s Proposition 13.

Practical Lessons from Application of Technique

• In most cases where deliberate split-rate taxation is used, owner-occupied single-family homes are taxed at lower rates in relation to their market values than other types of property, especially commercial and industrial properties. This has the effect of shifting the burden of real estate taxes away from owners of their own homes and onto owners of other types of properties, especially commercial and industrial properties (but often also rental apartments). This shift is politically popular with occupants of their own homes, who constitute a much larger share of the total electorate than owners of other types of properties. Hence elected officials in state legislatures are sometimes tempted to adopt split-rate real estate taxation if they are not prevented from doing so by their own state constitutions.

• In Cook County, Illinois, because rental apartments pay much higher property taxes than owner-occupied single-family dwellings, very few new rental apartment projects are being built. Property taxes have become such a high fraction of total rent revenues that apartment developers prefer to build in other nearby counties where this tax differential is absent.

• In cases where accidental split-rate taxation arises, owners of commercial and industrial properties that do not change ownership may pay lower taxes on such properties than owners of most single-family homes. However, this advantage only lasts until the ownership of the properties concerned changes. This arrangement creates a strong incentive for owners not to move or sell their properties.

Strategic Considerations for NAIOP Members Faced with Technique
Deliberate split-rate taxation has two major drawbacks and almost no redeeming qualities from the viewpoint of NAIOP members. Accidental split-rate taxation might result in a small benefit to some NAIOP members, but is nevertheless not desirable overall to such members.

Advantages from NAIOP’s Perspective
For NAIOP members who hold their properties for long periods of time, accidental split-rate taxation can result in their paying lower property taxes than they would if they turned over their properties frequently. Hence it has the advantage of any other type of time-based limitation on property taxation.

Disadvantages from NAIOP’s Perspective
The major drawback of deliberate split-rate taxation is that owners of commercial and industrial properties have to bear a disproportionately large share of real estate taxes in relation to property market values, while households owning their own homes bear a disproportionately small share of those taxes.

A second drawback is that use of this technique weakens the resistance of state legislatures and local legislatures to raising property taxes generally, and to increasing the size of government, because the vast majority of citizens do not have to bear a proportional share of the costs of both these actions.