Worcester’s split tax rate doesn’t add up
A few weeks before the Worcester City Council goes into its annual exercise of setting the property tax rates, the Worcester Regional Research Bureau released a report in mid-November detailing the pitfalls of the city's split rates for residential and commercial payors, a system first introduced in 1984 as a response to Proposition 2 ½.
The report “Tax Classification: Passing the Buck$” makes a strong case for a single tax rate.
• Commercial and industrial property owners contribute a significantly disproportionate amount of the city's taxes, paying for 39 percent of tax revenues while accounting for only 29 percent of tax value.
• That split rate has made Worcester a less attractive community to operate a business, and more businesses have left and fewer have come into the city (tax-paying commercial and industrial properties decreased from 3,959 in 1992 to 3,421 in 2016), so the tax burden is spread out among fewer entities. Today the average annual tax payment for a commercial property owner is $30,513, the highest among Worcester and its border communities.
• This reduction in the number of businesses to shoulder the tax burden has left residential property owners to cover a larger portion of the tax revenues. The portion of tax revenues coming from them rose from 55 percent in 1984 to 60 percent in 2016, with the peak at 69 percent in 2011.
• Over the last few decades the city's top industries have switched from manufacturing to health care and higher education, which have higher barriers to entry-level positions and lower average annual salaries ($74,642 vs. $53,490).
• Organizations in the higher education and healthcare industries are typically nonprofits, meaning they contribute nothing, or in some cases a small payment in lieu of taxes, to the city coffers. The value of tax-exempt property in Worcester more than doubled in the last 13 years, going from $2 billion in 2003 to over $5 billion in 2016.
The WRRB report notes the political reality that has keep the split tax rate alive - there are more residents voting than there are commercial property owners, making it an easy populist position for city councilors to vote for the lowest residential tax rate. While progress toward a single rate has been made, it has been a hard fought and difficult to sustain.
After four years of narrowing the gap, the council went the other way last year and approved an increase that widened the difference. Today the residential tax rate is $20.61 per $1,000, while commercial and industrial ticked up to $33.98 per $1,000.
The city's business community, led by the Worcester Regional Chamber of Commerce, makes its annual appeal for the narrowing of the two rates. Last year, those arguments went unheeded.
However, something in the air seems to be changing in Worcester. Development is active in the downtown area, and years of investment are paying off in large scale and small scale commercial investments. There seems to be a deeper understanding that if this current boom is to be sustained, it will take a much more welcoming approach to commercial investment. Not every property owner can qualify for tax breaks or other incentives to make their project go. A sustained reduction of the debilitatingly high commercial tax rate needs to become part of that formula for success. True commercial expansion now seems a real possibility, but without that commitment to make the commercial tax rate more fair, the city risks losing the current momentum and limiting the number of investors willing to take a risk in Worcester. We hope last year's vote that widened the tax gap was an aberration, and that the city council will commit to a sustained plan to narrow the gap, and eventually return to a single rate system.
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