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A Cause With No Effect

Development and Taxation


Monday, January 25, 2016

Cause and effect, is the logical coupling of events to explain the


existence of the latter by the occurrence of the prior. This relationship
is a one-way time dependent association, an effect cannot generate a
cause and a given cause without an actual observed effect is simply
ineffective. It is this later condition, a cause without effect, that is the
subject of this article.
Most reading this article have heard the economic reasoning linking
commercial development with the lowering of real estate taxes. A
new commercial development undoubtedly provides a local
government with new revenue as real estate taxes. This new revenue
is then assumed to reduce the tax burden on existing residents and
businesses. This linkage is so widely accepted that communities will
compete with each other to attract new commercial development
intending to improve the economic vitality of the community and
soften the burden of real estate taxes. It is generally accepted new
commercial development, the cause, should result in a lowered tax
rate, the effect.
Indeed you have heard this explanation many times. You are
confident a community with a large commercial tax base must have
an advantage in maintaining a lower resident real estate tax rate. The
previously explained cause and effect relationship explains why this
should be.
In the past validation of this cause and effect relationship would be
difficult. Looking at individual communities was problematic because
real estate tax rates can be influenced by many factors. The premise
commercial development has produced lower taxes was therefore
generally unchallenged. The information age has changed this. The
Massachusetts Department of Revenue (DOR) now has online a wealth
of tax and demographic data for the 351 towns and cities in the state.
Within this data is the information needed to determine the overall
impact commercial and industrial property has on tax rates.
To move quickly to the point, if you look at the correlation between
real estate tax rates and the relative size of the commercial property
within communities, you find a startling result. If the data indicated
that increasing levels of commercial property was ineffective in

changing tax rates, you would see no overall trend, either up or down,
in the real estate tax rates as the level of commercial development
increased or decreased. But this is not the case. The startling result
is tax rates trend higher as the presence of commercial and industrial
property increases. This is in stark contrast to the commonly
anticipated effect. Without saying, there is no indication tax rates are
lower for communities with larger commercial tax bases.

This simple examination of the DOR data disconnects the generally


assumed cause and effect relationship of lower tax rates with
increasing commercial development. The data makes the common
assertion commercial development lowers tax rates a cause without
effect. Impact is less than ineffective, the effect is damaging to the
intended outcome. To be accurate, the actual effect is the exact
opposite to the expected outcome.
The now exposed disconnect between perception and reality provides
insight into one very undesirable result. The result is the
implementation of split real estate tax rates in about one-third of
communities in the state. It may be a surprise to you, but almost all
the communities with split tax rates are also the one-third with the
most commercial property. Rest assured split rates were not
implemented because an abundance of commercial tax revenues
driving down real estate taxes. These are communities faced with
high tax rates in need of a means to regulate them. Deliberately or
not, they looked to the commercial tax base, a contributor to
escalating tax rates, for residential tax rate relief. An ironic twist given
the adherence by many commercial trade organizations to the
proposition their presence is the cause of lower real estate tax rates.
Doubly ironic in the sense they feel victimized by split rate tax
policies.
The bottom line is the relationship between development and tax
rates is far more complex than the simple assumption new revenue
from a commercial development lowers tax rates. The DOR data does
not provide enough detail to explain the workings of this relationship
in detail, but it does provide solid evidence the effect commercial
property has on real estate tax rates.
Hopefully you find this article of interest.

Carl Guyer
Southborough, MA
carl.guyer@gmail.com

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