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A Tax Rate Setting Introduction. Presented to the City Council by City Manager Jay Ash November 19, 2012. Prop 2 ½. Prop 2 ½, the referendum adopted in 1980, caps the growth of property taxes from one year to the next – among other items, it allows for:

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A tax rate setting introduction

A Tax Rate Setting Introduction

Presented to the City Council by

City Manager Jay Ash

November 19, 2012

Prop 2
Prop 2 ½

  • Prop 2 ½, the referendum adopted in 1980, caps the growth of property taxes from one year to the next – among other items, it allows for:

    • Total taxes to go up by no more than 2.5% (unless an override allows for more).

      • Total taxes are the amount the City receives, not individual tax bills – individual tax bills have no limits, but when all bills are added up, they cannot exceed 2.5% of the previous year’s total taxes.

    • “New growth,” which is new property taxes generated by new development or renovations to existing property – new growth is not capped and is added on top of the 2.5% increase to total the new property tax revenues received to fund government.

  • For FY’13 – the total to be raised from property taxes is $41.2m of which $962k is from the 2.5% increase and $1.722m is from new growth.

In general
In general

  • Council action on tax rates is not about whether taxes are raised, but instead about how taxes are to be apportioned.

  • Property taxes are first driven by the amount needed to be raised to fund the budget.

  • Then, (112) communities make value decisions about reducing residential property taxes and, thereby, increasing business property taxes.

  • (13) Communities also make value decisions about favoring owner-occupants of lower valued properties at the expense of investor-occupants and, maybe, some higher valued owner-occupants.

  • Once the decision is made about the value question, tax increases within each class of property are largely driven by economic conditions outside of the City’s direct control – that is, real estate booms and busts, and, more specifically, real estate booms and busts within each class.

  • There are winners and losers no matter what the Council decides to do about the tax rate setting process.

  • No matter what the approach, taxpayers deserve to see their tax dollars spent in productive ways.

Step 1 the annual budget
Step 1: The annual budget

  • When Council adopts the budget in June, it adopts how much the City will spend in the next fiscal year (July 1st).

  • Council adopts an appropriation order. That order, and presumably the Council’s vote, is supported by how much revenue, including property taxes, will be raised in the new fiscal year to offset the spending in the budget.

  • For FY’13 – Council approved a budget of $137.3m for the operating and water and sewer enterprise accounts.

  • Planning for the FY’13 budget comes from the Five Year Financial Forecast – so the first time Council sees the impact on the planned property tax increase of 2.5% is during the annual forecast presentation. That presentation anticipates the 2.5% increase every year for the 5 years of the forecast.

Step 2 backing into the single tax rate
Step 2: Backing into the single tax rate

  • The City forecasts that taxes will increase by 2.5% annually.

  • With the Council vote on the budget, that forecast is confirmed and the assessor knows how much needs to be raised via taxes.

  • The assessor takes the amount to be raised, divides it by the value of all property, and comes up with the tax rate.

  • For FY’13 $41.2m will be raised in property taxes to support the budget:

    • $41.2m divided by $2.113b in value = $19.50 single tax rate.

Step 3 classification splits the tax rate
Step 3: “Classification” splits the tax rate

  • Classification is the separation of properties into classes: residential, open space, commercial, industrial and personal property.

  • Chelsea is one of 112 communities that does not use a single tax rate, but instead uses classification to shift some of the tax burden from residential payers to business payers (as adopted by voters in 1978 – 27 states allow for some type of shift in burden).

  • The law allows for CIP (commercial, industrial, personal property) to be taxed at up to 175% of what they would pay under the single tax rate, but residential (and open space) can be tax at no lower than 50%. (Without any shift, every class of property would pay 100%.)

  • Chelsea historically has adopted the 175% shift (but did not go to a temporary 200% as was once allowed by law last decade).

  • For FY’13, classification takes the single rate of $19.50 and creates two rates: CIP $34.70 and Residential (but not yet impacted by the residential exemption) $12.65.

Step 4 creating the residential exemption
Step 4: Creating the residential exemption

  • Once the split rate, residential rate is determined, a city can decide to offer a further tax benefit to owner-occupants through a “residential exemption.” To do so, the split rate, residential rate is further altered by “exempting” up to 20% of the average assessed value of all residential properties.

  • 13 municipalities offer residential exemptions - 7 offer 20%, 3 (Boston, Cambridge & Somerville) offer 30%, 2 offer 10% and 1 offers 5%. Up to 20% can be done as a local option; 30% must be approved as a home rule petition to the State.

  • The residential exemption has no impact on the commercial tax rate and no impact on what the total taxes are to be raised.

  • Chelsea’s residential exemption has the effect of reducing the tax rate for 99+% of owner-occupants and raising taxes on all other residential property.

  • So, for Chelsea residential property, the single rate of $19.50, is changed to the initial split-rate of $12.65, and then affixed at $14.25 to account for a exemption worth $720.

  • All owner-occupants of properties worth $445,000 or less, derive a benefit from the exemption at the expense of all investor owned properties.

Step 5 council approval
Step 5: Council approval

  • So, Council approves the budget expenditure.

  • Council does not directly approve the 2.5% annual increase, but does affirm that the budget expenditures are offset by sufficient revenues.

  • Council does not approve property values. (Property values are determined annually by the assessor.)

  • What is remaining, therefore, is for Council to approve the shift of the rate, if any.

  • That rate can be either a single rate or the split rate (classification), and, within the residential class, it can be with or without a residential exemption.

  • Failure to take action results in the City being unable to set a tax rate, which means that the increase cannot be spread to the 3rd and 4th quarter bills. If the tax rate is set before the 4th bill, the entire increase would be applied to the 4th quarter. If not action is taken, no new taxes could be raised, thereby requiring budget cuts or supplemental appropriations from reserves.

Winner and losers
Winner and losers

  • City government is neither a winner nor loser in the rate setting process – the City receives the same amount no matter what the Council does on classification and the residential exemption.

  • Approval of classification raises business taxes and lowers residential taxes. If classification was not approved, the average single family homeowner would see a tax increase of approximately $1,495.

  • Approval of the residential exemption benefits almost every owner-occupant at the expense of every investor-owner. If the residential exemption was not approved, the average single family owner-occupants would see their taxes go up about $361.

  • Combined, no action would result in the average single family homeowner seeing their bills rise $1,856.

What about two and three family owners
What about two and three family owners?

  • Yes, the average tax bill will be up 8-9% for two- and three-family owners.

  • Investor-owners of two-families will save an average of $1,286 and three-families will save an average of $1,385 because of classification and the residential exemptions.

  • Owner-occupants of two-families will save an average of $2,006 and three-families will save an average of $2,105 because of classification and the residential exemption.

  • Even with the increase projected for FY’13, taxes on two- and three-families are DOWN approximately 15% since FY’08.

Two and three families case studies
Two and three families: case studies

  • We looked at the average two-family and average three-family homes, based upon median values of $245,000 for the two-family and $263,800 for the three-family.

  • If investor-owned, the FY’13 bill for the two-family is lower than FY’08 – the three-family bill is almost equal to FY’05.

  • If owner-occupied, the FY’13 bill for the two-family is almost equal to FY’06 – the three-family bill is almost equal to FY’04.

  • The above is unadjusted for inflation.

  • One year’s experience can’t determine the fairness of the system – in FY’09 and FY’10, two- and three-family tax bills went down approximately 20% EACH YEAR!

Regarding business taxes
Regarding business taxes

  • Argument for those saying shifting tax burden is appropriate:

    • 111 other communities also shift the burden

    • Chelsea’s FY’12 rate (FY’13 is not available for all communities) is below the average of our neighbors (Boston, Revere and Everett)

    • We are still attracting record business investment

  • Argument for those saying the business tax burden is too high:

    • Business is paying 75% more than they would under the single rate

    • Many small businesses struggle to make ends meet and higher property taxes contribute to that

    • Businesses are creating jobs – the more they pay in taxes the fewer jobs they can create

  • In general, businesses have negative impacts on quality of life (trucking, noise, odors) but consume far less in municipal services (fewer police calls, no demands on education) – conversely, businesses provide jobs, support community events and offer retailing, but require us to maintain higher levels of fire protection and spend more on roadway and utility construction.

Regarding the 30 exemption
Regarding the 30% exemption

  • Going to 30% requires State adoption of a home rule petition, which would take six months or more – thus, it cannot impact the current tax rate setting process.

  • Going to 30% would raise the tax rate by $1 but save the average single-family owner-occupant about $220, the average two-family owner-occupant $197 and the average three-family owner-occupant $180. (The value of the savings goes down as the value of the property increases.)

  • The extra $1 would mean the average single-family investor-owner would pay about $220 more, the average two-family investor-owner $245 more and the average three-family investor-owner $263. (The value of the $1 increase rises as the value of the property rises. The biggest negative impact, therefore, would be on big residential developments, which could see increases of $30,000 or more.)

  • Argument for – anything we can do to reward owner-occupancy we should do.

  • Argument against – owners pass higher taxes onto tenants as higher rents, so individual tenants would pay more. Also, Chelsea already has the lowest municipal charge burden for single-family owner-occupants (tough to calculate for anyone other than single-family users), 1-72% less than our neighbors.

City s commitment to all taxpayers
City’s commitment to all taxpayers

  • In return for the annual 2.5% tax increases (which raise only 1/3 of the City’s budget, one of the lowest percentages in the state), the City pledges:

    • To live within our means – no Prop 2 ½ overrides even though scores of communities propose overrides yearly – we’ve balanced our budgets by reducing expenses and finding new revenue growth outside of Prop 2 ½ - and those new revenues haven’t been “nickel and dime” increases in fees

    • To be as efficient as possible – we’ve reduced headcounts (but not in public safety) and employee overhead (health insurance) while maintaining and expanding services – and we’ve been a leader on regionalism

    • To fix infrastructure – and we continue to improve the dependability of our water and sewer system, undertake major roadway projects, like Washington Ave, Everett Ave and about to do more on Spruce St, and Chelsea has created more parks than all but one other community, among many other infrastructure enhancements

    • To promote revitalization – arguably Chelsea has been among the most successful in the state doing so – which has the impact of protecting and enhancing the value of the investments that property owners have made

Municipal costs affordability index
Municipal Costs Affordability Index

  • The City reviews data from 7 neighboring cities (Boston, Everett, Lynn, Malden, Revere, Somerville and Winthrop) to chart a Municipal Costs Affordability Index. Below, the chart refers to those communities anonymously, but lists out average property tax and water & sewer bills for the average single-family owner occupied unit in each city as of March, 2012.

  • Municipal charges remain less in Chelsea than all other cities.