Businesses and the Property Tax

A new report scores states on how well they administer the unpopular tax.
by | July 20, 2011

Ask constituents about the taxes they pay -- income, sales, property -- and the homeowners among them will let you know the most hated: the property tax. They aren't the only ones who chafe at this levy on real and personal property; so do businesses.

The Council On State Taxation (COST), a nonprofit trade organization representing 600 multistate corporations, recently issued a scorecard on state property tax administrative practices. It rates the states on how well they administer the property tax, and details some of business's gripes with the tax -- the administrative ways in which some states and localities make the tax more onerous for business than it has to be.

I talked to Fred Nicely, COST's tax counsel and co-author of the report, about the findings, and what corporations would like to see states do to make the administration of the tax more fair and efficient. Here are highlights of our conversation:

Why did COST issue a report on the property tax?

This is the first time we have done a property tax administration scorecard. We've done them on state corporate, income, franchise and sales and use taxes. You often hear about corporate income taxes and sales taxes on business inputs, but the property tax is the largest burden most businesses pay in taxes: It comprises 36.5 percent of the state and local tax burden imposed on business. The focus of the scorecard is on state laws and regulations regarding the property tax. When we talk about shifts by some states to put more of the burden of the property tax on the business sector, we're looking at laws that impose greater tax rates or have limitations or caps that are provided residential properties. Our goal is to work with state policymakers to get them to change laws to provide a more fair and equitable tax system.

As we note in the scorecard, the property tax has gradually shifted from a tax generally imposed at the state level (accounting for 43 percent of state revenue in the early 1900s) to today, where 98 percent of the property tax is imposed at the local level. [Property taxes account] for over 70 percent of revenues for local governments, and account for less than 2 percent of state revenues. Because of the potential burdens on businesses caused by this decentralization, it is vital for state governments to oversee the operations of local assessors to ensure property taxes are uniformly and fairly assessed.

What are your main concerns with the tax?

State and local officials want to help their voters, and the burden of the tax can get shifted from residential to business taxpayers. Shifting the property tax burden to business hurts economic development. Businesses look at what the cost is of investing capital in the state, and they could choose not to locate in a state because it's too expensive to make capital investments there.

This study does not address what the corporate property tax rate should be, except indirectly in the sense that we do feel the property tax burden should be balanced between residential and business, and not have higher rates imposed on business. There can be circuit breakers that cause the tax burden to shift from residential to business. Some states will impose caps that are generous to residential property owners that do not apply to business property. In some states, for example, property that has a set market value will be taxed for business at, say, 50 percent of market value, but residential owners will be assessed at 25 percent.

Another concern is disputed tax payments. Some states require the disputed portion to be paid before the dispute is decided. Once paid, that means the refund has to be provided by the government agency that's received it. When we're in trying times, those government agencies have a difficult time making that payment. It would be helpful if the disputed tax did not have to be paid until the dispute is decided, or if there was an escrow mechanism so the government agency relying on the tax doesn't have to refund money that's been spent.

Which administrative practices have you focused on that states could improve to make it easier for businesses to comply with payment of the tax?

Some states have very limited time periods for notifying property taxpayers about a change in property value. Some states -- Louisiana is one -- won't even send a notice unless the increase is over a certain percentage. There should be an actual notice of property value changes, instead of constructive notices, such as announcements in a newspaper or official journal, for example. Then the taxpayer doesn't lose the ability to appeal the value. The other thing that's important is having the same dates within a state when payment must be made. Often, those dates are locally set and many businesses that report personal property have to report at various due dates. Different filing dates for appeal in different cities can cause confusion. Having a fair tax appeal process and ensuring residential and business owners have adequate procedures in place is extremely important.

Your report gives each state a score in several categories. What are you looking at when you score a state?

What is weighted the most heavily is whether there is the use of standardized procedures by the state. Maryland does this well. It has a statewide tax administration system. The state has control over the due dates and types of forms that will be used by taxpayers. The second most heavily weighted is whether there is a fair property tax appeal procedure. We are looking for clear appeal deadlines, actual notice provided a property owner and that the property owner has at least 60 days to make an appeal.

It's extremely helpful when the state revenue department or the equalization board requires localities to have more standardized practices -- especially with personal property valuation tables to determine personal property tax value.

What do you think holds some states back from making these kinds of administrative changes?

A lot of times the difficulty is that the property tax, especially the real property tax, is administered at the local level. Trying to work with all the local assessors can be somewhat difficult for state policymakers. But it's not impossible. In the last two years, Florida has made some changes that make their property tax system much fairer than it was in the past. The state really tried to get a hold of practices at the local level and standardize what local assessors can do in administering property taxes.

The important message is that states need to look at their property tax systems and make sure they are fair.

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