Rajiv Koya, Senior Professional, Product Management, also contributed to this story
Overview of commercial property taxation
The accurate estimation of the total amount of real property tax in any given area is a challenging task considering the complexity and heterogeneity of property taxation in the United States. Real property taxation includes the land and everything permanently attached to it, inclusive of all interests, benefits and rights inherent in the ownership of real estate. In addition, for all but 12 states commercial properties are subject to tangible personal property tax for any “moveable” property used to generate income such as machinery and equipment, building features, inventory or vehicles.
For tangible personal property taxation, states can be grouped into 3 categories:
According to an August 2019 Tax Foundation publication, tangible personal property tax represents less than 10% of the total property tax collected at the state level. Its effect on property tax is highly dependent on the type of real property, thus tangible personal property is not included in the state comparative calculation in Figure 1. This means site selection and investment decisions can be influenced by commercial property tax rates, which investors should consider when selecting the best economic options for their operating sites.
Figure 1: States Ranked by Median Effective Commercial Property Tax Rate (Percent of Property Market Value). Highlighted states have little or no tangible personal property taxation.
- Tax rate includes RE taxes paid at all levels of government (or just to the state, excluding taxes paid to local jurisdictions)
- Multifamily residential rental properties of 10+ units are included in this study
- Tax rate calculation excludes tangible personal property tax
The total property tax amount can include property taxes paid to multiple agencies with varying formulas, including both fixed and variable components. To provide a meaningful comparison of property tax rates among states, all existing levels of collection need to be considered. In Texas, for example, one might pay taxes to a county, a school district and a Municipal Utility District (MUD); in California, one might only pay county taxes.
CoreLogic’s state-by-state calculations
Using the CoreLogic comprehensive property values and tax rates data at the local level, we have calculated the median overall commercial property tax rates nationally and by state. Our analysis takes into consideration all taxing and collection entities and provides a complete state-level picture of the cost of owning commercial real estate property. The rates reflect the annual cost of owning a set dollar amount of commercial real estate property and providing an accurate comparison of critical components of the operating cost of a business. However, it does not reflect the actual differences in market value for identical assets, so it is not a full comparison of the cost of operation.
The study was enabled by CoreLogic’s ability to identify Commercial Real Estate parcels and properties using the county provided land use codes. Agricultural parcels were not included in the median calculation to avoid a bias in the results. A total of more than 8.8 million parcels nationwide were used to calculate the median tax rates using actual annual tax amounts and County provided market value estimates of the parcels.
While higher median tax rates are seen primarily in the northeastern states and states which do not charge tangible personal property tax, notable exceptions are Kansas (which has a median commercial property tax rate of 3.1 percent) and Indiana (with a median commercial property tax rate of 2.8 percent). Typically, the states with the highest property tax rates, except for Illinois, have multiple levels of tax collection. Conversely, most states with low commercial median tax rates have a single level of tax collection at the county level and most tax tangible personal property. Other than Hawaii, the lowest median property tax rates are primarily in the southern states.
Figure 2: Heat Map of Median Commercial Property Tax Rates
Figure 2 shows the distribution of states by median commercial real property tax rates categories, indicating that:
- 23 states, or 45 percent of the U.S., have a median property tax rate of less than 1.5 percent.
- 8 states, or 16 percent of the U.S., have a median property tax rate of between 1.5 and 2 percent.
- 14 states, or 27 percent of the U.S., have a median property tax rate of more than 2 and 2.5 percent.
- 6 states, or 12 percent of the U.S., have a median property tax rate above 2.5 percent.
Given the many differences and complex rules on exemptions by industry, we recommend consulting with a property tax servicing or consulting firm to review the specifics of a property. We are confident these high-level statistics provide enough of an overview to make a comparison between operating locations. As part of site selection, investors need to select the best economic options for their operating sites. Part of that equation is the commercial property tax rate which is combined with the actual cost of purchasing land and buildings. Land and building will drive investment cost while property tax is part of the ongoing operating cost. CoreLogic provides tax reporting and payment services for residential and commercial properties nationwide. For more information about commercial tax solutions please email [email protected].
Reference: “States should continue to reform taxes on Tangible Personal Property” by Garrett Watson – Tax Foundation Fiscal Act Number 668 – August 2019