In the previous article we ended with a $13.87 tax rate. “Well, something must be wrong because we received our tax bills and the rate on it is 12.76, why the difference?” “What, mine is $21.78, how can that be; why am I paying more?” “Whats going on; if I divide my total taxes by 4 it is not the same as my January payment?”
The answer to the first two questions is Classification. The Classification legislation allows different groups to be taxed at different rates. On the face of it that seems unfair, so a little history may help explain the logic. Back in the early 1980s, just before Prop 2 1/2 (a primer on Proposition 2 ), assessing property was done much differently. Back then, the assessment on a house was done only when it was either sold or constructed. Therefore, two identical houses sitting next to each other had different assessments. If one neighbor moved in recently and the other has been a long time resident, the values could differ by as much as 60 or 70%. This, unfortunately, was at odds with the States attempt to adjust the values across the State to be more equalized. Why should the state even care? Well, the distribution of state aid is based on these adjusted values. As a result, the amount each town received was affected by different methods and values used by the various towns. To make the states distribution as fair as possible, the State went through this adjustment or equalization process. This was an almost impossible task due to the variability within a town, let alone the variability across the whole state. One town brought the state to court saying that they hadnt received sufficient state aid because the equalized values were completely inaccurate. After doing some statistical analysis the courts agreed and required the state to find a better way. In order to meet the courts edict, the State passed legislation requiring all values be at 100% fair market value. As you can imagine, the possibility of being perfectly accurate with property values is next to impossible. So we are allowed a window of plus or minus 10% and this is to be tested at least every three years. For example, if we assess a house for $200,000, then it should sell between $180,000 (minus 10%) and $220,000 (plus 10%). When we do our testing and find a property that sold for $250,000 and is assessed for $200,000, we have to do a revaluation of the town to bring the value within the plus or minus 10% window. In reality, we would not do this if only one house fell outside the boundaries, so we use statistics to determine trends, samples sizes, confidence levels and other special mathematics.
In the category of no good deed shall go unpunished, the effect of this ruling was higher residential taxes and lower business taxes, sometimes substantially. You will remember from the Tax Rate page that taxes are the result of value times tax rate. Because businesses had been constantly upgrading buildings and assessed to market values more regularly, and because residential values remained unchanged longer (usually at below market prices), residences paid less than their relative share. If something werent done, the courts ruling would have shifted taxes from the business sector to the residential sector until the relative shares were balanced. To alleviate this problem, the legislature created a law that allows towns to tax business at a higher rate than residences. The intent of the legislation was to allow towns to maintain the historical balance (shares) between the portion of the levy paid by business vs. the portion paid by residences. (Even this attempt at balance and fairness has some minor problem and has not always worked out as intended.)
Classification says that a town (or city) can increase the portion of the levy paid by businesses (specifically: commercial, industrial and personal property, known as CIP ) up to 50%. The additional taxes brought in by this extra taxation must be totally returned to the residential taxpayers (specifically: Residential and Open Space known as RO) as a discount to their tax bills. The net of these two activities cannot increase the levy in any way. The impact of this is not self evident so lets look at an example. Suppose the value of the town is $1,000 of which 20% is Business (CIP) and 80% is Residential (RO). The levy just happens to be $100 as well. So with a normal or flat tax, businesses would pay $20 (20% times $100) and the residential group would pay $80 (80% times $100). Using classification we can raise Business taxes from 20% to 30% (50% of 20%=10% added to the original 20%=30%) taxing them $30. If we take the sample levy ($100) and subtract the classified Business tax of $30 we have a remainder of $70 that must be paid by the Residential sector. The Residences would normally have paid $80 but now only have to pay $70. That is only a 12.5% discount ($10 divided by $80). The 50% increase to the business does not become a 50% decrease to the residences. This is because there are so many more residences than businesses (80% vs. 20%). Take what the Residences are paying ($70) divided by what they would have paid ($80) and we get the Residential Factor (which in the example is 0.875). This is also the Minimum Residential Factor because it is using the maximum 50% value. By law a town cannot go lower than the Minimum Residential Factor.
Under certain conditions a town is permitted to go greater than 50% shift. Chapter 200 permits between 50% and 75% as long as the town does not go below the lowest residential percentage in all previous years. Chapter 3, passed 2 years ago year, allows a town go from 75% to 100% under the same conditions as chapter 200. Maynard in not eligible for Chapter 3.
A public hearing (normally the first week of December) was held 05 December 2006 where both business and residences expressed their views on how much to shift to the business community. Balancing the needs of both groups, the Maynard Selectmen chose at their 05 December 2006 hearing to exercise Chapter 200 and exceed the 50% max. Based on calculations by the Assessors, the Town could have used all of the shift potential up to 75%. The Selectmen attempted to balance the burden between the residential and commercial sectors and voted to tax business under the full 75% and used 57.1%. Having decided on this value, we can do some number crunching to establish what the tax rates for the two groups will be. Currently all the Business property (CIP) has a value of $169,522,502 and when divided by the total value ($1,380,611,057) we find the percentage to be 12.2788%. (We have to use many decimal places to be accurate with such large numbers). If we now add to that percentage an additional 57.1% (Selectmens choice this year), we will arrive at 19.2875%. To determine the amount of the tax levy to be paid by business (CIP), we multiply the levy ($19,145,690) by the 19.2875% and get $3,692,928. Subtract this amount from the levy and we will determine the amount to be paid by the Residential sector (total levy of $19,145,690 minus $3,692,928 Business levy equals $15,453,772 for residences (RO levy)). Using the formula we learned in the first article we will now divide the amount of the levy for each group to establish the two classified tax rates. For residential it is the RO levy ($15,453,772) divided by the total value of the Residential (RO) properties ($1,211,088,555) which equals $0.012759560 or rounded equals $12.76 per thousand. For businesses (CIP) using the same formula we get the CIP levy ($3,692,928) divided by the CIP properties in town ($169,522,502) we get $0.021783144 or rounded $21.78 per thousand dollars of value. To check ourselves, the sum of the residential properties ($1,211,088,555) and the Business properties ($169,522,502) should add up to $1,380,611,057 and they do.
We now have to see what the rounding has done to us. When we multiply the tax rates ($12.76 per thousand and $21.78 per thousand) by the property values ($1,211,088,555 and $169,522,502) we get a total amount coming into the town of $19,145,690. This is $45,352 less than the levy limit ($19,191,042) for this year – under the Proposition 2 1/2 limit – and was approved by the state auditors who oversee our work.
This leaves us with the last question in the first paragraph. As you know from the previous article, our fiscal (financial) year runs from 1 July to 30 June instead of a standard calendar year. Unfortunately, by the time we have our town meeting, receive the state aid numbers and select a Residential Factor, we are approaching December. Tax bills go out quarterly, so the first two tax bills for the year did not have enough information available at the time of their postage date to correctly calculate a bill. To avoid leaving the town short of money forcing them to borrow and pay interest, we send out preliminary tax bills, each of which, by law, cannot exceed 1/4 of the previous years taxes plus a 2 percent increase. If there is a change in taxes, then the bills will not be the same for all four quarters. For example, if your FY2007 taxes were $4000 for the year. The preliminary bills (July; & September) cannot exceed 25.625% (25% x 1.025) each of the previous years taxes, so $4000 times .25625 equals $1025 per quarter. Bills July, & Sept in the new year would be $1025 each for a total of $2,050. In December, we established the tax rate and taxes went up 10% for the year and are now $4,400 for the same property. If we subtract what has already been paid ($2,050) from the total due ($4,400), we are left with $2,350 for the last bills of the year in January & April. Therefore July = $1025; Sept. = $1025, Jan = $1175 and April = $1175 rather than four equal bills of $1100 ($4,400 divided by 4). The total years taxes do not change and you dont pay more than the yearly amount even though 4 times the last payment seems higher. Going into the next year (FY2007), we will have the first two tax bills as estimates which will each be lower than this year’s April bill.
To calculate the first two bills of FY2007, take your FY2006 taxes and divide by 4 then multiply by 1.025. In our example that would be $4,400 divided by 4 = $1100 times 1.025 = $1129.
If you have any questions about this or any other part of the taxation process, please let us know by calling 897-1304 or sending us an email.
