Brad Bonkowski and Andie Wilson: Commercial vs. residential: Who pays more taxes?
As a commercial real estate broker, I often hear from residents they don’t believe businesses and developers pay their fair share of taxes. On the other hand, developers often complain the fees and taxes they have to pay are burdensome and in some cases, so onerous they would kill a project. Is this true? While there are many different aspects to this topic, and at least a hundred different ways to dissect it, we thought it would be useful, for starters, to examine whether commercial or residential property owners pay more in real property taxes, and how developer fees and taxes impact both.
Cities and municipalities use revenues from real property and consolidated taxes (sales, liquor, fuel, tobacco taxes) to fund the majority of General Fund expenses — from roads, to schools, to salaries for police, fire and city employees. All sales tax revenue obviously comes through businesses (as goods or services are typically not sold out of homes). But theoretically, the percentage of real property tax paid by commercial and residential property owners should be split equally, wouldn’t it?
In Carson City, when comparing just these two property groups (ignoring lands designated for public or government uses, agricultural uses, etc.), only 17 percent of the total number of properties are commercial, yet these properties make up 42 percent of the assessed value of properties, meaning these commercial property owners pay 42 percent of the real property tax burden! This information could be interpreted a couple of ways:
Commercial properties are typically larger parcels than homes, so perhaps it’s fitting they pay a greater share of the tax burden;
Commercial properties generate more traffic than residences, however they require a much lower amount of emergency services, such as fire and police service, so, maybe they should pay a lower rate;
We know commercial growth needs residents for support, so don’t we ultimately have residential properties to thank for commercial expansion?
In paying the lion’s share of the tax burden, on a pro-rata basis, a significant percentage of which goes to schools, how is it fair commercial property owners pay the bulk of this, when all children live in residences?
If you ask municipality officials they tell you they prefer commercial property types because they pay higher taxes but require less services from the municipality.
The reality is the way taxes are calculated is fair. The same formulas are applied, though residences are typically evaluated by using the comparable sales approach, and commercial property values are also determined by analyzing the income and cost approaches. These differences in valuation are seen across the board though, and used similarly by appraisers, and brokers like us. The biggest difference is the tax “cap,” which is implemented by state law. In Nevada, a residence’s taxable amount may increase by up to 3 percent annually, and a commercial property’s taxable amount may increase by up to 8 percent annually. This can result in huge discrepancies between similar properties, but that’s an issue we’ve discussed in the past, and a quagmire we’ll leave for another day.
If commercial property owners make up only 17 percent of Carson City property owners, but pay 42 percent of real property taxes, it’s easy to look at that one bit of information and conclude “that’s not fair.” In practice, as is most often the case, you can’t evaluate information in a silo. The truth is commercial properties take up more than 50 percent of the total acreage in Carson City!
Since business and residential growth is important to Carson City’s bottom line, the developer’s role in bringing desirable new residential subdivisions as well as new, quality shopping centers where businesses thrive to our area is equally important.
A related, but separate topic is how a developer analyzes a potential residential or commercial project, and how the municipality fees or expenses associated with that project may impact its feasibility. Developers typically pay impact fees, residential construction taxes, as well as water, sewer and storm water connection fees. Those fees are ultimately passed onto the new home buyers or commercial tenants. A developer wants to keep costs under control so he doesn’t have to charge too much for a new home, or too much rent for a new shop space (if it’s a commercial development). The overall costs of development is borne by the new occupants, and if there’s an acceptable profit leftover, the developer accepts the risk and moves forward. If projections show impact fees and taxes absorb the profit, or there’s not enough of a return or profit to accept the risk of development, that’s a project you’ll never see come out of the ground.
In summary, the business community is just as important as residents to the financial health of a municipality. It’s important both groups be treated (and taxed) fairly, as ultimately, the health of each property type relies on the other.
Brad Bonkowski and Andie Wilson are Broker/Owners of NAI Alliance Carson City, a commercial real estate brokerage. They may be reached at (775) 721-2980.