Introduction
In Westfield right now there is a large debate over what the city council should set the “CIP shift” to. The CIP shift will affect the amount of property taxes paid by commercial property owners and residential property owners.
So what is the CIP shift and how does it work? What follows is a very brief overview of what the CIP shift is and how it works by way of a simple analogy.
The Restaurant Analogy
Imagine six friends go out to dinner. They all order the same meal and the same number of drinks. At the end of the meal, the waiter delivers a bill of $20 to each diner and the total bill is $120, including the tip. Five of the six diners are blue collar workers and work for hourly wages. The sixth diner is an attorney with a business in town. The attorney tells his other friends that he is willing to pay $2 off each of his friends’ bill so they only have to pay $18 instead of $20. He says it’s not a problem because he can charge his clients a little more money this year to help cover the costs. The wage workers accept the offer and pay $18 each for their meals and the attorney pays $30 total. Everyone is happy except maybe the attorney’s clients who might have to pay a few cents more for law services.
This, in a nutshell, is how the CIP shift works. The total tax levy–the $120 meal bill in our analogy–is shared between all the taxpayers, or all six diners. However, the commercial, industrial and personal (CIP) property owner, represented by the attorney, agrees to pay a larger share of the tax levy to help the residential tax payers out.
What is the CIP Shift?
The CIP shift is nothing more than a multiplier on the value of the CIP property in the city of Westfield. In our analogy above, the CIP shift was 1.5 because the attorney paid 1.5 times more than the amount he would have paid if the bill was split evenly ($30 compared of $20). If the CIP shift for the meal was 1.6, the attorney would have paid $32 and the others would have paid even less for their meal: $17.60. A CIP shift of “1” would mean our attorney and everyone else pays the same amount.
It works the same fro the tax rate. Let’s use some real world figures to illustrate. For FY 2014, if the tax bill were split the same way for both CIP and residential property owners, each owner would have paid $20.76 for each $1000 of the assessed value of their respective properties. However, the CIP shift in Westfield is set to 1.63. So instead of paying the $20.76 rate, CIP property owners actually paid a $33.84 rate. The higher rate paid by the commercial property owners allowed the city to give a discount to residential owners who only paid an $18.18 tax rate. On a house worth $250,000, this adds up to a savings of $516 per year.
And so this is how the CIP shift works. The higher the CIP shift, the more the CIP property owners pay on their property and the less home owners have to pay. Having a different rate for different kinds of property is frequently referred to as a “split tax rate.”
A Slight Correction to Our Analogy
In our analogy, you might mistakenly believe there are five times more residential property owners than CIP property owners. But it’s not the number of property owners or CIP property owners that matters; it’s the ratio of the total residential property value to total CIP property value. Our analogy is accurate, however, in that the total value of all the combined residential property is just about five times as much as the total value of all the CIP property here in the city of Westfield. So even if only one person owned all the CIP property and 40,000 people owned all the residential property, the single CIP property owner’s rate would need to go up five times more than the residential property owners rate went down, just like in our restaurant analogy.
So What Does the CIP Shift Mean in Practical Terms for Residential Property Owners?
As we saw, on a residential property worth $200,000, a discount of $516 was enjoyed with the CIP shift of 1.63. On a $100,000 home, half that amount, or $258, is saved. If the CIP shift were bumped up to 1.64 last year instead of 1.63, tax payers would have a slightly lower tax rate of $18.14, saving them about $2/year if their house was worth $100,000. On a house worth $500,000 per year, the larger CIP shift of 1.64 would result in a savings of $10/year. If the CIP shift jumped from 1.63 and to the maximum allowed by law, 1.75, the tax rate for home owners would have dropped to $17.77 and saved a home owner with a $200,000 home $598 per year, or $82 more over the course of a year compared to a 1.63 CIP shift.
As we can see, small changes in the CIP shift make little difference to the average residential tax payer. Only residents on the tightest budgets are meaningfully impacted by the small year to year changes usually made to the CIP shift. It takes a very large change in the CIP shift to have a large impact on the tax bill of the vast majority of residential property owners. By the same token, small changes in the CIP shift have a larger impact on CIP property owners (about five times as much).
So, at then end of the day, when we look at small changes to the CIP shift of a few hundred points or less, we are basically talking about differences in tax bills that work out to spare change at the end of each month for the average home owner. For CIP property owners small changes in the CIP shift mean a difference in the tax bill from anywhere to a few dollars to a few thousand dollars per month depending on the value of the property. For example, on a $10 million piece of property, just a small increase in the CIP shift from 1.63 to 1.64 last year would have resulted in about a $2076 increase in the annual tax bill for that property. Of course, if you run a business sitting on a $10 million piece of property, that figure probably represents small potatoes to you.
Is the CIP Shift Good Policy?
This is a matter of opinion, of course. Some “free” market advocates argue that there should be a “flat tax” meaning there should be no split tax rate. Others make the point that many home owners are on fixed incomes and that a savings of a few hundred dollars each year is a very big deal to middle class people who have retired and are now living on a fixed income. They also make that point that, like in our analogy, CIP property owners can pass the extra cost onto their customers to raise the extra revenue needed to pay the higher tax bills.
Most people would probably argue that the CIP shift is needed here in Westfield. The larger and more complicated argument is what number should we set the CIP shift to? The answer is going to be different for different cities and towns. A lot of factors may influence decision makers as to what an acceptable CIP shift number is. Some of the major ones are:
What is the ratio of the assessed value of residential property compared to commercial property owners? If the ratio is very high, it probably makes sense to have a lower CIP shift to avoid placing an undo tax burden on the few commercial properties that exist.
What percentage of the population is living on restricted incomes? If a lot of residents are on fixed income, it’s probably a good idea to set the rate higher to help them make ends meet.
How desirable is the location of the city or town for businesses? If businesses can make a lot of profit or save a lot of money by locating in your city or town, you can get away with a higher CIP shift.
How desirable is the city or town’s schools system for families? If the city or town has a very good reputation and is seen a desirable place to live for new families, they will likely be happier to pay higher residential taxes and you can lower the CIP shift.
There is no right or wrong answer as to what the correct CIP shift should be. It all depends on your perspective. At the end of the day, it’s up to Westfield’s City Council to listen to all the voices in the community and consider the best CIP shift that finds a balance between keeping residents and businesses happy in the short term and, over the long term, establishing a healthy tax climate so that the city can grow and thrive.
Steve Dondley
