An explanation of the size of the Real Estate Tax increase for 2004

Paul Hamburger, for the Lexington Appropriation Committee
12/11/03

In last week’s (December 4, 2003) Minuteman, an article on Lexington real estate taxes incorrectly stated that the average increase for a single-family home this year would be 1.13%. The correct figure is 13.32%, but even this is not relevant to most taxpayers because it includes the taxes on new construction, improvements and additions that do not affect most homeowners. Here we review some of the basics of property taxes to help taxpayers understand their tax bills.

Proposition 2 1/2 limits the increase in tax revenue over the previous year to 2.5% plus the revenue on new buildings, additions, and personal property newly acquired by businesses (e.g., computers, medical equipment), unless an operating or debt exclusion override is passed by a majority vote in a town-wide election. In June 2002, Lexington voters approved debt exclusion overrides for school construction, road paving, and the Lincoln Fields. In February 2003, the Town borrowed funds for some of the approved work (the new Harrington School, a part of the road project, and the Lincoln Fields). Debt payments for this work will result in a further tax increase of 3.4% for the current fiscal year (Fiscal Year 2004 or FY04) over the previous fiscal year.

The average tax increase for all Lexington properties unimproved in the last year is 5.9% (2.5% + 3.4%). Added property value from new construction, etc., in the past year will yield $1.915M in new tax revenue this year or another 2.5%, but these new taxes will only be paid by the owners of the improved properties.

Even this average tax increase doesn’t tell the whole story for the individual property owner. Since the Assessors revalue property yearly, the tax increase on a particular property also depends upon how the assessed value of the property changes relative to other properties.

To understand these changes, one must first appreciate that property is classified as Residential, Commercial, Industrial, or Personal. The tax rate on the latter three categories (referred to collectively as “CIP”) can be and has been set higher than the rate on residential properties, through the use of a “CIP factor.” If the CIP factor were set to 1.0, then there would be one universal rate for both residential and CIP property, and for FY04 it would be $11.89 per $1000. Each December the Selectmen, with information from the Assessors, set the CIP factor and the tax rates. For last year (FY03), the Lexington CIP factor was 1.7. This means the CIP tax rate was 1.7 times what it would have been had the CIP factor been 1.0. It also means the residential rate is less than what it would have been had the CIP factor been 1.0, because the CIP factor cannot affect the total tax to be raised. For FY04, the choice to remain at a CIP factor of 1.7 results in a CIP rate of $20.21 (1.7 times $11.89) per $1000 and a residential rate of $10.65 per $1000.

This year the aggregate assessed value of unimproved CIP properties decreased by 6%, while the aggregate value of unimproved single-family homes increased by 15%. This results in what the assessors term a “natural shift” of the tax burden from CIP to residential properties. The average tax increase on an unimproved single-family home is made up of the 2.5% base increase, the 3.4% increase to pay for the special projects approved by overrides, and a 5.9% increase due to this year’s natural shift. The net effect is that the average tax increase on an unimproved single-family home is 11.8%. The average tax change on an unimproved CIP property is made up of the 2.5% base increase, the 3.4% increase to pay for special projects approved by overrides, and a natural shift of negative 16.2%. The net effect is an average 10.3% tax DECREASE on unimproved CIP properties.

The Selectmen may adjust the CIP factor from year to year to further mitigate the impact of the natural shift on homeowners. Currently, Massachusetts law sets an upper limit of 1.75 for the CIP factor but lawmakers are considering raising this limit to 2.0.

Fall taxes on residences were set based on preliminary estimates at 7.5% above FY03 taxes; the spring taxes will have to make up for the difference between this and the FY04 tax set last week. This will produce an average increase of 16.2% over the FY03 average tax bills for unimproved single-family homes.

Thanks to the Lexington Assessors Department for information used for this article.

Paul Hamburger for the Lexington Appropriation Committee