Copyright © 2008, The McGraw-Hill Companies, Inc.
The legal language that surrounds these special property tax rates can often involve
some highly specialized terminology, since the methods employed in assessing property
taxes must follow procedures and regulations that are intended to make sure that things
are done properly. Tax assessors are not allowed to cut special deals whenever they see fit!
Naturally the laws and procedures and hence the terminology can vary from one jurisdic-
tion to another.
Special property taxes may be handled by having different rates for different classes of
property. Alternatively, a single tax rate can be used, but adjustments may be made to the
assessed value.Example 9.3.8 The commercial property tax rate in Incentiveburg is $14.99 per
thousand. Globalco International Inc. built a factory there 5 years ago, and as part
of an incentive package was granted a 35% reduction in property tax on this factory
for 20 years. The assessed value of the factory is $10,375,000. What will be the
company’s real estate tax this year?Without the reduction, the company’s tax would have been (10,375 thousands)($14.99)
$155,521.25. After a 35% reduction, the company will pay 100% 35% 65% of this tax.
Therefore the taxes are (65%)($155,521.25) $101,088.81.Note that the same result could have been accomplished by leaving the tax rate just where
it is and lowering Globalco’s assessment.Example 9.3.9 Suppose that the deal between Incentiveburg and Globalco specifi ed
a 35% reduction in assessment instead of a 35% reduction in property tax. What would
the assessment have been? How would this have affected the taxes owed?Globalco’s assessment would thus be reduced to 65% of what it otherwise would have been,
or (65%)(10,375 thousands) 6,743.75 thousands. Applying the usual tax rate to this
assessment would give ($14.99 per thousand)(6,743.75 thousands) $101,088.81. The
actual tax is the same.Another alternative would be to leave the assessment as is, but lower the tax rate by
35%.Example 9.3.10 Suppose that the deal between Incentiveburg instead left the
assessment where it otherwise would have been, but offered a 35% lower tax rate.
What would the new rate have been? How would this have affected the taxes owed?The special tax rate would be (65%)($14.99) $9.74 (assuming we round to two decimal
places).Applying this rate to the assessed value gives ($9.74 per thousand)(10,375 thousands)
$101,052.50. This is trivially less than in the other calculations, and the difference is due
entirely to rounding. If the special tax rate were carried out to more decimal places, this dif-
ference would disappear.Of course, if some taxpayers get a lower rate, naturally that means that more of the tax levy
must come from others. This may seem unfair—and in some ways it is—but the simple
truth is not always truly simple. If Incentiveburg had not made this offer of reduced taxes,
Globalco might not have built the factory at all, in which case the town would not have
received even the reduced taxes, and the community also would not have benefited from
the jobs offered by the factory. On the other hand, Globalco might have built the factory
anyway.
Selling the idea that giving a corporation a more favorable tax rate, though, can be a
difficult sale, especially to taxpayers unhappy about high property taxes. Structuring tax
incentives as an overall reduction, as reduction in assessment, or a reduction in rate is often
a game of structuring a deal to conform to legal requirements and public demand, without
actually changing the end result of the deal itself.
Exercise 25 provides an opportunity to explore how tax rates are affected by these
incentives.9.3 Property Taxes 403