The practice commonly referred to as the “ratables chase” — wherein towns chase after high-value taxable, or “ratable,” commercial 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, especially for public education, than it generates in property tax revenue, while commercial (i.e., nonresidential) properties generate revenue without a high level of demand for services: kids don’t live in office buildings.
Accordingly, many municipalities use their zoning power to attract big-box stores, office parks, and warehouses, while actively discouraging residential uses (with the notable exception of senior housing, which creates no additional school costs).
But when things shake out, do municipalities with the highest concentrations of commercial properties really tend to have lower tax rates? A New Jersey Future examination of municipal property tax data yields results that are at best inconclusive, thus challenging the conventional wisdom.
Plenty of towns with low tax rates also have heavily residential tax bases, demonstrating that a tax base skewed toward nonresidential property is not a prerequisite for lower property taxes. There is no clear pattern of municipalities with high proportions of commercial property being consistently blessed with lower-than-average tax rates.
And the trend over time offers no further insight. Between 1998 and 2006, most municipalities in New Jersey saw their property tax rates decline in real terms (that is, evaluating the tax bill as a percent of the actual market value of the property, rather than the assessed value). But over that same time period, municipal property tax rates didn’t systematically decline any faster than average among those relatively few towns that increased the nonresidential proportion of their tax base.
On paper it would seem a canny fiscal strategy for a municipality to pursue high-revenue, low-service-cost retail, office and industrial development while trying to discourage family-friendly housing and the demand for public school expenditures that it generates. In practice, the evidence is at best inconclusive that such a strategy actually works.
Perhaps this is because some of the municipal leaders who are most successful at wooing non-residential development choose to spend the revenue on additional services and amenities rather than passing the savings along to residents in the form of lower taxes. Perhaps in the contest to attract commercial properties, the price of “winning” involves essentially giving away the store via extensive tax breaks, thereby neutralizing the fiscal advantage those properties are theoretically supposed to bestow.
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. The conventional wisdom is simply not supported by the evidence.
Evans is research director of New Jersey Future. See the full write-up of New Jersey Future’s analysis of the ratables chase at http://www.njfuture.org/Media/Docs/ratables%20chase%20july2010.pdf