Tax Abatements 201: Abatement Impact on Conventional Taxpayers

This is Article #2 in my series about abatements, which focuses on the impact abatements have on conventional taxpayers.  My first post, “Abatement Basics,” is located here

How important are abatements to Jersey City residents?  The answer: extremely important.  Abatement revenues – also known as PILOTs, or “payments in lieu of taxes” – have increased from 3% of the city budget in 1992⁠1 to 21% of the city budget in 2013⁠2, as shown below:

Abatement 201_a PILOT Rev 91 and 13 comparison

In this post I’ll be looking at conventional taxes, which factor into the orange “Non-PILOT Revenue” piece of the pies above.  In my follow-up to this post (due out shortly), I’ll be analyzing PILOTs in more detail.  

Let’s get civic.  We’ll start with the concept of the ratable base.  

The Ratable Base

Most municipalities have a mix of taxable and non-taxable property.

  • Taxable property is also known as “the ratable base.”  It includes homes, businesses, etc. that are subject to conventional property taxes.  Taxable property is typically re-assessed every “x” number of years to ensure the property is in keeping with fair market value; this ensures everyone pays their fair share of taxes.
  • Non-taxable property typically includes charities, churches, hospitals, etc.  It also includes abatements.

The ratable base is a component of the tax rate formula:

    Tax Rate = City Budget / Ratable Base

This formula can be translated as:

  • the City Budget is what it costs to run the city.
  • the Ratable Base is what helps fund the city
  • the Tax Rate is simply a ratio that reflects the relationship between the two.  Thus a high tax rate could reflect either (a) a high city budget or (b) a low ratable base or (c) some combination therein.

Basic Abatement Math – Impact to the Conventional Taxpayer

So how do abatements impact the tax rate?  Do they lower the ratable base?  Do they increase the tax rate?  The answer: it depends.

Take the following example.  It is an extremely simplistic scenario aimed only at showing the impact of an abatement to the tax rate formula.  You can download my spreadsheet here if you want to play around with the numbers.

Example:

BlightTown is in need of redevelopment.  The only factory in town closed down and moved overseas years ago, and the property values have plummeted.  City leaders want to bring BlightTown back.  In Table A, we have three years shown, with the following facts:

  • Year 1: BlightTown has $1,000 of total property, of which $800 is ratable (i.e. taxable), consisting of homes and private business and $200 which is non-ratable (i.e. non-taxable), consisting of a hospital and a church.
  • Year 2: An abated low-rise building with a Starbucks on the ground floor is completed and new residents move in. As a result of inflation and the new building, the city budget increases from $20 to $30.  The new building causes an increase in demand for city services (e.g. fire, police, garbage pick-up, snow removal).  The ratable base ($800) has not changed since the abated building, which is non-taxable, is the town’s only newly invested property this year.  So the tax rate increases from 3% to 4%, a function of the higher city budget ($30) divided by the unchanged ratable base ($800).
  • Year 3: Another abated building opens up – this time it’s a luxury high rise, with the highest density per-square foot in the entire town.  The high rise is the town’s tallest building, and it creates a need for new, specialized fire trucks that reach higher floors. Further, the density of the building results in the town’s population increasing more markedly.  The city budget increases from $30 to $50.  The abated luxury high rise is the only new investment this year, thus the ratable base remains unchanged.  Thus, the tax rate jumps from 4% to 6%, a function of the higher city budget ($50) divided by the unchanged ratable base ($800).
  • From Years 1 to 3: conventional taxpayers see their tax rate increase from 3% to 6%.  But BlightTown is rapidly changing … what will the future hold?
TABLE A: BlightTown Facts Year 1 Year 2 Year 3
A. Budget (cost of services) $20 $30 $50
B. Total Property in Blighted Town, USA $1,000 $1,100 $1,500
C. Taxable Property (ratable base) $800 $800 $800
D. Non-Taxable Property (includes abatements) $200 $300 $700
E. Tax Rate: Budget / Ratable Base (E = A / C) 3% 4% 6%

In general, abatements are a long-term investment, thus must be planned for and analyzed in the long-term.  In general, abatements degrade the ratable base unless, over time, the abatement causes an increase in the ratable base that outweighs the cost of the abatement.  For example, building on the example above, let’s jump to Year 10.  Look at Table B, and consider:

  • Year 10: the cost of city services has gone up from $50 in Year 3 to $80 in Year 10.  Not too bad of an increase…the city government is controlling expenses and managing the city well.  The increase in cost is due to inflation and more residents and businesses moving into town, thus creating more demand for city services.  The two new abated buildings worked!  They spurred new interest in  BlightTown, which is now a hot spot.  Subsequent development in Years 4 through 9 has doubled the total property in BlightTown from $1,500 in Year 3 to $3,000 in Year 10.  Non-taxable property increased from $700 to $800 because a charity moved into town.  But more importantly, BlightTown became an attractive place to live and work, thus the risk of investment went down.  City leaders recognized this and negotiated well with developers…most of the new property is now taxable, thus contributing to the ratable base, increasing it from $800 in Year 3 to $2,200 in Year 10.  The tax rate decreased from 6% to 5%, driven by effective city management (the budget did not spiral out of control) as well as a stronger ratable base (there is proportionally more taxable property in BlightTown which spreads the city budget costs across more ratable property).  The abatement policy worked!   [Note: this is obviously an extremely simplistic, and extremely idealistic scenario.  But it shows the intentionality behind abatements.]
        Abatement Worked
TABLE B Year 1 Year 2 Year 3 …Year 10
A. Budget (cost of services) $20 $30 $50 $80
B. Total Property in Blighted Town, USA $1,000 $1,100 $1,500 $3,000
C. Taxable Property (ratable base) $800 $800 $800 $2,200
D. Non-Taxable Property (includes abatements) $200 $300 $700 $800
E. Tax Rate: Budget / Ratable Base (E = A / C) 3% 4% 6% 4%

But let’s now pivot back to Jersey City, and the issue many see with abatements.  Look at Table C and consider the following.  In Jersey City there is a complaint about “too many abatements.”  The “Year 10” example can be modified to reflect this concern.  Assume all facts from above are the same, except: non-taxable property increased from $700 in Year 4 to $2,100 in year 10, which outpaced the increase of taxable property, which only rose from $800 in Year 4 to $900 in Year 10.  Given these facts, Year 10 did not see the intended benefits of the abatements in Years 2 and 3.  Instead, the city leaders kept granting abatements.  They felt they needed the abatements to attract developers, instead of negotiating harder and forcing developers to take the same risks that homeowners take when purchasing and possibly renovating a home in BlightTown.  The ratable base was degraded, since the city “gave away” its property to non-taxable abatements.  The tax-paying residents now have to shoulder the burden of the increased budget costs.   The tax rate thus increased from 6% to 9%.  

        Abatement DId NOT Work
TABLE C Year 1 Year 2 Year 3 …Year 10
A. Budget (cost of services) $20 $30 $50 $80
B. Total Property in Blighted Town, USA $1,000 $1,100 $1,500 $3,000
C. Taxable Property (ratable base) $800 $800 $800 $900
D. Non-Taxable Property (includes abatements) $200 $300 $700 $2,100
E. Tax Rate: Budget / Ratable Base (E = A / C) 3% 4% 6% 9%

Stay Tuned…

Please stay tuned for next post which take an in-depth look at PILOT payments.  And…please let me know what you’d like to learn more about.  I knew very little about abatements before writing this series but am learning with each post I write, so appreciate any insights, input, or corrections if you feel they are needed.

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Interested in civic data?  Check out Open JC – they are helping “unlock” Jersey City’s public data.  Their city budget project helped me zero in on the 3% to 21% jump that I noted at the top of the post.

1 Bressler, Naomi Mueller, 2009.  All That Glitters Isn’t Gold: Property Tax Abatements in Jersey City. (page 6).

2 The Jersey City Adopted 2013 Budget.  Total PILOT revenues = $109,683,784 (page 31).  Total General Fund revenues = $515,923,451 (page 33). 

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  1. Pingback: Tax Abatements 301: Two Sides of the Same PILOT | Civic Parent

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