Idea #303 – Residential Tax Exemption

Report Status: Fully Reviewed

Researched by: Matthew Gasbarro

Original Idea as Submitted

Set higher tax rate for out-of-town property owners, and even higher for corporate property owners.

Other Ideas Included in this report

  • 355 - Impose higher tax rate on every property that is worth more than $2.5 mil.

Idea intent

The idea is focused on changes to the tax assessment and rate process in current use by the Town of Belmont. The idea advocates for a split commercial/industrial vs residential tax rate as well as a residential exemption for qualifying property owners. Enacting the former can reduce the tax burden for all residential property owners while the latter reduces the tax burden for property owners residing within the Town of Belmont and whose assessment value is below the Break-Even Point, the calculated valuation where a homeowner would pay the same amount regardless of the community’s adoption of the exemption.

Weighted Final Score: 23 (Financial Impact: 0, Operational Impact: 2, Time Scale: 2, Ease of Implementation: 3)

Background Information

Both a state residential exemption (SRE) and a split commercial/industrial vs residential tax rate have been explored annually by the Board of Assessors. Split rates have been determined to be inconsequential since 95% of the properties are residential classification. In addition, the Board of Assessors has stated that increased commercial rates would be a disincentive for bringing new businesses to the Town.

The FY2021 Tax Classification report to the Select Board included data on the effects on tax bills after implementing a residential exemption at 10%, 20% and 35%, the maximum allowed by MA law. The calculated Break-Even Point was determined to be $1,326,300, meaning eligible homes assessed below this amount would have a reduced tax burden while homes assessed above would incur higher taxes as a result of a residential exemption at any rate.

**Split Commercial/Industrial to Residential Rate **

MA law allows a single tax rate for all property types or a split rate between the Residential and Open Space properties (RO) and Commercial, Industrial and Personal properties (CIP). To calculate possible split rates between the two groups, you must first examine the full and fair cash values (FFCF) and the tax levy. The FFCF is the total assessed value of all properties (FY21: $9,488,120,829 of which $9,020,342,800 belong to RO parcels or 95.0699%). The tax levy is the amount of tax revenue to collect after factoring in new growth and a maximum increase of 2.5% (MA Proposition 2.5) from the previous year’s levy (FY21: $109,568,817). Thus, in a single tax rate system, applying the 95.0699% RO ownership to the total tax levy equates to $104,166,916 responsible by the RO taxpayers. The tax rate is calculated by dividing the levy by FFCV and multiplying by 1,000 ($104,166,916 / $ 9,020,342,800 * 1000 = $11.55)

FFCV FFCV% Max Allowable Levy using FFCV% Tax Rate at Max Levy
Residential $ 9,020,342,800 95.0699% $104,166,916 $11.55
CIP $467,778,029 4.9301% $5,401,901 $11.55
Total $ 9,488,120,829 100.0000% $109,568,817

Source: Town of Belmont Fiscal Year 2021 Tax Classification Letter to Select Board

A split rate allows the percentage responsible by the RO taxpayers to be shifted to the CIP taxpayers to reduce the tax burden of residential homeowners. By law Belmont’s maximum CIP shift allowed is 150% of its full and fair cash value (FFCV). This means the 4.9301% responsibility of the CIP taxpayers can be multiplied by a maximum factor of 1.5, which equals 7.3952%, leaving 92.6048% of the tax levy to the RO property owners. Taking these new percentages and applying them to the total tax levy provides the new levy obligations per class.

FFCV% after shift Levy after shift Levy Adjustment% Tax Rate
Residential 92.6048% $101,465,966 97.4071% $11.25
CIP 7.3952% $8,102,851 2.5929% $17.32
Total 100.0000% $109,568,817 100.0000%

Source: MA DLS Gateway https://dlsgateway.dor.state.ma.us/reports/rdPage.aspx?rdReport=TaxRate.CIP_TaxShift

Calculating the percentage difference in levy obligations for RO taxpayers leads to a levy adjustment of 97.4071% ($101,465,966 / $104,166,916). This ratio is called the minimum residential factor (MRF) which is the maximum allowable shift from the initial total tax levy obligation by RO taxpayers.

Based on Belmont’s average single-family assessed value of $1,326,300 and using the tax rates before and after the shift, the average single-family tax bill and difference can be computed. Therefore, in the maximum shift scenario, single-family homeowners save $397 on average, while the tax burden of commercial properties increases by $7,658 on average.

Rate Shift Avg Valuation Tax Bill No Shift

Tax Bill

Max Shift

 Tax Bill Shift Diff Tax Bill Shift %
Residential $0.30 $1,326,300 $ 15,316 $ 14,919 $(397) -2.59%
CIP $ (5.77) $1,326,300 $ 15,316 $ 22,974 $7,658 50.00%

Source: Town of Belmont Fiscal Year 2021 Tax Classification Letter to Select Board

**State Residential Exemption (SRE) **

Residential exemptions are designed to shift the property tax burden from the permanent residential homeowners to the owners of rental properties and vacation homes. It is a net neutral revenue initiative to the municipality but does incur labor costs to verify residency. SREs are typically found in cities with large rental populations such as the immediate Boston metro area or in seasonal/vacation towns like on Cape Cod.

MA municipalities with State Residential Exemption
Boston Metro Cities

Residential Exemption:

Percentage Factor (FY19)
Boston 35%
Brookline 21%
Cambridge 30%
Chelsea 30%
Everett 25%
Malden 30%
Somerville 35%
Waltham 35%
Watertown 23%
Cape Cod/Vacation Towns
Barnstable 20%
Nantucket 25%
Provincetown 25%
Somerset 10%
Tisbury 18%
Truro 20%
Wellfleet 20%

In 2019 the Town of Lexington Select Board commissioned an ad hoc Residential Exemption Policy Study Committee to research implementing a residential exemption. The committee produced an exhaustive 192-page final report with expert testimony from economists and housing policy experts, local real estate agents, and assessors from other communities.

Recommendations of 2019 Lexington Residential Exemption Policy Study Committee:

Local Tax Policy:

  1. Do not adopt the Massachusetts Residential Exemption (SRE).

  2. Develop for community consideration a proposal for a means-tested and/or age-based residential exemption.

  3. Promote awareness of existing programs such as tax deferrals, exemptions, and the Massachusetts Senior Circuit Breaker Tax Credit.

  4. Evaluate increasing eligibility thresholds significantly for the Lexington Property Tax Deferral Program.

State Advocacy:

  1. Advocate for expanded access to tax deferrals for homeowners with existing or future mortgages and home equity loans.

  2. Advocate for expanded access to the state administered Senior Circuit Breaker Tax Credit for surviving spouses and those with homes above the current eligibility thresholds, as well as expanding the level of rebate.

Further Study:

  1. Further study the financial needs and supports necessary for Lexington’s population of older (80+) seniors to age in place.

  2. Further study methods to retain middle-aged residents, who have the highest rate of self-forecasted out-migration among all age-cohorts in our survey.

As mentioned in the second recommendation of the committee, an alternative option to the State Residential Exemption (SRE) at a town’s disposal is to enact a locally devised policy for exemptions targeting seniors known as the Means Tested Residential Exemption (MTRE). Whereas the SRE applies to all owner-occupied residential properties, a MTRE can specifically target seniors upon meeting income, asset, and residency criteria. Five communities have instituted this exemption: Concord, Sudbury, Wayland, Reading and Hopkinton. However, as Lexington discovered, some benefits of MTRE would be offset by reduced State-paid benefits that residents would have otherwise received such as the Massachusetts Senior Circuit Breaker Tax Credit (2016). This rebate applies if a Household’s property taxes exceed 10% of their income but for those close to the 10% threshold, a reduction of property taxes from MTRE would reduce the benefit from the tax credit. Further study of MTRE and its benefit for Belmont seniors is warranted.

Recommendations

  • In keeping with the Town of Belmont’s goals for increased transparency, the Board of Assessors should include in the annual Tax Classification Hearing letter detailed explanations and walk-throughs of the process and calculations leading to the recommendation of adopting a residential factor of 1. The current Letter does not include the Minimum Residential Factor (MRF) calculated by DOR through DLS Gateway (97.4071%) nor the lowest percentage of share of the tax levy paid by RO taxpayers since classification began. Many towns include common assessment terminology and provide layman’s terms of MA tax rate shift regulations. While the Letter does include tables and calculations of the maximum CIP shift of 1.5, the Letter lacks context for the resident’s understanding. See the referenced classification hearing links for examples.

  • As Belmont’s commercial tax base expands, the analysis conducted to support the Select Board’s vote on whether to enact a split commercial vs residential rate should include research into the commercial rate of nearby municipalities. The alternatives that businesses face is Belmont’s commercial rate versus other municipalities’ commercial rate, not Belmont’s commercial rate versus Belmont’s residential rate. So, a split commercial vs residential rate is not inherently a disincentive to businesses, but we should consider our competitiveness within the broader region. This distinction will become more important when Belmont’s commercial tax base is more than 5%.

Next Steps

  • Propose to the Board of Assessors to investigate adopting a Means Tested Residential Exemption or other age-based residential exemption targeting seniors. See Idea #164 for more information about Tax Relief for Seniors.

Further Reading

Tax Classifications Letters/Presentations