Municipal “Ratables Chase” Doesn’t Necessarily Pay
- Conventional wisdom among municipal leaders is that the key to keeping property tax rates down is to discourage residential development in favor of commercial (i.e. non-residential) ratables.
- Towns vary in terms of the breakdown between their residential and commercial tax bases. In the median municipality, the commercial share of the property tax base was 21.4 percent in 2006.
- Among the 57 municipalities with the highest concentrations of commercial properties (more than double the statewide median) the median property tax rate in 2006 was 1.58 percent. But among the 80 municipalities with the highest concentrations of residential properties the median tax rate was even lower at 1.43 percent.
- Of the municipalities that increased the commercial share of their property tax base between 1998 and 2006, six percent saw their property tax rates increase. In contrast, tax rates went up in only 2.5 percent of the towns that saw their tax bases become more heavily residential.
Link Between Commercial Development and Lower Property Tax Rates is Inconclusive
The practice commonly referred to as the “ratables chase,” wherein towns chase after high-value taxable, or “ratable,” properties has long been pursued by municipalities as a strategy for keeping down property tax rates. The theory is that residential development often creates more expense for a municipality in the form of school costs than it generates in property tax revenue, while commercial properties generate tax revenue without a high level of demand for services and, most significantly, no demand for public education (kids don’t live in office buildings). As a result, many municipalities use their zoning power to attract big-box stores, office parks and warehouses, while actively discouraging residential uses (with the exception of senior housing, which creates no additional school costs).
But does it play out this way in reality? Do municipalities with the highest concentrations of commercial properties also tend to have the lowest tax rates?
Using data compiled by the New Jersey Legislative District Data Book, New Jersey Future has compared municipalities’ property tax rates with the percentages of their total tax bases that are comprised of commercial property. The results are at best inconclusive, which in itself is newsworthy. Looking at 2006 data, there is no clear indication that a high proportion of commercial property in a municipality’s tax base necessarily corresponds to a lower-than-average property tax rate; in fact, plenty of municipalities illustrate that a low tax rate is possible even with very little commercial property. And the trend over time sheds no further light on the issue: the relatively few municipalities that increased the commercial share of their tax base between 1998 and 2006 did generally see their tax rates go down, but not systematically any faster than their neighbors .
There are numerous reasons why the expected relationship between more commercial property and lower tax rates might have failed to materialize, but whatever the reason, any municipality that thinks the secret to beating its neighbors at the property tax game is to score the next office park or shopping mall should probably take a look at the data first.