Our fair city’s fair taxes

November 25, 2009 | Cambridge, Local issues, Primer posts, Real estate taxes, Zoning

By:David A. Smith


In Our Fair City of Cambridge, as Click and Clack like to call it, nothing is as fair as our taxes are fair – and that’s fair enough, isn’t it?



Not just a law firm, a motto: the Harvard Square offices of Click and Clack


Roughly a month ago, there was mailed to our house a handy and glossy pamphlet, Understanding Your Taxes (link in .pdf, and highly recommended) that lays out, in English so plain it might as well be soporific, the basic facts about Cambridge’s city budget, and the role that local real estate taxes play in it.  As we’ve seen before, the basic budget algebra of real estate taxes requires the municipality to raise as much in annual revenue as it spends on city services. 


As Understanding Your Taxes puts it:


Basic facts about the real estate tax levy


Three major factors are responsible for calculating a tax bill:


1. The City Budget

2. Commercial-Residential Property Tax Classification

3. Property Values (Assessment)


That order is not happenstance: the city’s budget is built up uses first:



In city budgeting, you eat the pie before you pay for it


Pie charts are great for showing shares, but not for showing absolute magnitude.  We need to delve a little deeper.  Now Cambridge has a population of 106,000:


Roughly 100,000 people live in the flyover below


And Cambridge’s budget is – wait for it – $412,000,000.


City Budget. The adopted FY08 Budget of $412.3 million is 3.75% greater than the FY07 adjusted budget.



Now, if you’re having trouble doing the math, here’s what it works out to: $4,020 per citizen of Cambridge.



Don’t tell me!


Yes, folks, four grand a head.






Stack up four of them, and that’s a Cambridge citizen’s taxes


I don’t know about you, but to me that sounds like a lot of money:



It didn’t cost that much when I lived on Irving Street!


The city helpfully breaks this down by large category:




I’ve previously posted that local taxes create local autonomy and local initiatives, and Cambridge has no shortage of these.  Of course, it says something regarding Cambridge that ‘debt service’ and ‘peace commission’ are considered equivalent in categorization.



We have to protect the treaty of neutrality with Somerville and Arlington


The debt service derives from bonds the city has previously sold, and every year it adds more borrowing for more capital projects:



Another $8.5 million rung up on Cambridge’s tab


Fortunately for homeowners, the city finds other sources to cover a portion of the budget – 40% of it, to be precise.


While the City has many sources of revenue, property taxes support about 60% of the operating budget. For FY08, the City projects that it must collect about $245.1 million in property taxes. This is called the tax levy.


In Cambridge, nearly two-thirds of the aggregate property value is residential:



Homeowners are two-thirds of the assets by value …


Yet despite outnumbering commercial property owners nearly 2 to 1, homeowners pay barely one-third of the total tax bills:



A reversal of percentages


Overall, the property tax classification process has meant that commercial property owners traditionally have paid approximately two-thirds of the total property taxes.


How does that happen?  Tax the commercial property owners much more, although phrase it ever so much more delicately:


Commercial-Residential Property Tax Classification. Municipalities are allowed to tax commercial property (i.e. office, industrial and retail buildings, hotels and personal property) at a higher tax rate than residential property. This process is known as property tax classification.


Euphemisms aside, homeowners pay less per dollar than businesses do – in fact, about one-quarter of the rate.  That’s a bit bald:



That’s a bit bald, sir


So the city reverts to euphemisms:


The State property tax classification law is complex, as are the formulas that determine how much the City may collect in property taxes from both residential and commercial property owners. The State limits how much higher the commercial tax rate may be set above the residential tax rate. Neither the City Council nor the City administration is allowed to increase the proportion of the tax levy paid by commercial owners versus the proportion paid by residential owners of real estate above the current limit under the permanent law.



That better as a euphemism?


When I started looking into real estate taxes, I naively thought there would be a flat rate for all types of property – so many dollars per thousand of value.  I should have known better, as every community I’ve encountered fiddles with its rates for preferred asset classes.  While incumbent businesses are normally taxed more than “their share,” newcomers are often given  tax holidays lasting as long as a decade. 



Fiddlin’ the rates is as old as the hills

Fortunately or otherwise, there’s a limit on how much the tax burden can be skewed to the commercial property owners:


Since FY04, the City of Cambridge has been at the maximum shift of the tax levy from residential owners to commercial owners allowed by the State. Escalating residential values, which outpaced commercial property values, were the primary reason that Cambridge reached the permanent, state imposed limit on its ability to shift the tax burden from residential taxpayers to commercial taxpayers. As a result, not as much of the property tax levy may be shifted to commercial owners.


There is something chilling about the matter-of-fact way in which the city announces, we gave you homeowners as much of a discount as we could, but the state won’t let us soak the businesses any more than this. 



There’s a limit to how much you can soak the rich


Who are the institutions so soaked?  In the main, entities that cannot move:



Universities and businesses that depend on universities


It’s universities, and intellectual/ research companies that depend on universities.  Now, what with universities being generally exempt from taxes (because citizen education is an essential government function), how does MIT top the list?


Harvard is older than Cambridge; MIT isn’t, having moved across the river only in 1916.  In Cambridge, as I believe in most university towns, when the university expands its footprint by acquiring new land, as a courtesy and a matter of good political sense, it negotiates with the town that even though it will be “removing the property from the tax rolls” it will pay an ongoing PILOT (payment in lieu of taxes) on a negotiated basis, usually tied to the property’s pre-transfer value.



Make sure you pay the right pilot


Harvard pays so much less because it’s had its core campus since time immemorial. 



Harvard yard, 1790: all those buildings still stand and are in use


Harvard was a university before America was a nation, so its footprint is grandfathered.


As I advised the Irish some months back, local taxes create local autonomy and local initiatives; if you the central government want to enact ongoing local taxation, you must cede autonomy over local spending, otherwise the locals will rebel.


Whatever happened to that Tea Party idea, anyway?


In Cambridge we certainly have taxation, but we also certainly have representation!


For more information on Our Fair City, email treasurer {at} cambridgema {dot} gov.