By JANE BIRNBAUM
Published: October 21, 2009
When property taxes go up, homeowners can find other homeowners willing to fight for relief. Big businesses, too, can flex their muscles. But small businesses are often left behind, mainly because they are, well, small...
"This is not a business of having your throat cut by one expense," says Kelly Conklin, left, co-owner of Foley-Waite Associates, an architectural woodworking company. "It's a death of a thousand cuts."
"The little guys get hurt more by rate hikes because they have less bargaining power with their local city governments or taxing jurisdictions," said Myron Orfield, a University of Minnesota Law School professor and property tax specialist.
Chris Hoene, director of research and policy for the National League of Cities, an association in Washington said that the property tax problem of some small-business owners was "a story that isn't told often enough, even though it closely approximates the one that we tell about homeowners on fixed incomes who can't afford their property taxes."
With tax revenue down, said Robert J. Cline, director of state and local tax policy economics for the Ernst & Young accounting firm, all businesses face potential property tax rate increases. But property taxes represent a greater portion of the total tax bill for small businesses, Mr. Cline said. "So if property tax rates rise significantly, small businesses may see that this recession has a more severe impact on them in terms of taxes compared to the 2001 recession, when property values held up like a champ," making rate increases unnecessary.
After the 2001 recession, there were "residential property tax revolts" in a number of states, including Florida and Indiana, said Gerald Prante, an economist for the Tax Foundation, a tax policy group in Washington. "In many respects, homeowners got what they wanted, and as a result there was a shift in some municipalities to higher property taxes for businesses."
Grafton Willey IV, a tax accountant who heads the Rhode Island chapter of the National Small Business Association, an advocacy group based in Washington, said that while homeowners carried much of the property tax burden, "they vote, and often push politicians to put more of it on businesses."
Susan M. Wachter, a real estate professor at the Wharton School of the University of Pennsylvania, noted that large retailers could push their rent costs down throughout America's malls. "Large malls will follow through with requesting lowered property tax from municipalities," she wrote in an e-mail message. "Small entrepreneurs and tenants do not have similar information resources to even know whether and how much property tax payments are being lowered for others."
Mr. Orfield said that municipalities with the least property wealth - central cities and older "inner-ring" suburbs where foreclosures had weakened an already fragile tax base - were the most compelled to raise rates.
"In many big metro areas, where hundreds of surrounding cities have competed for property wealth by zoning for the biggest housing and most valuable commercial property, it's a disaster," he said. "Twenty percent got all the good jobs and big homes, which allows them to have lower tax rates. The rest got nothing - and a small-business person there, who probably has one location where he needs to do business, will be hurt when rates go up."
Paul Scully, an organizer for Building One America and the Gamaliel Foundation, community grass-roots groups based in Chicago, said that rising tax rates had been "devastating for owners of one-off small businesses like hardware stores, barbershops and bookstores."
According to the Tax Foundation, using the latest available Census Bureau data, New Jersey collected the nation's highest per-capita combined local and state property tax, $2,485, in 2007. Connecticut, where - as in New Jersey and most other states - local schools depend heavily on local property tax dollars, placed second with $2,312; New York was sixth with $1,963. Alabama collected the least, $455.
Beyond greater state financing for schools, property tax relief generally takes two forms, said Mr. Hoene of the National League of Cities - so-called circuit breakers, which limit increases for homeowners on fixed incomes, and one-size-fits-all caps on rate increases.
Caps - including those under California's trend-setting Proposition 13, approved by voters in 1978 - come off when a property is sold. Mr. Hoene said most of the benefits of caps eventually flow to ventures that change hands infrequently, like apartment buildings, and big businesses that can move property under their corporate umbrella.
Caps can also have unintended consequences, like California's recent increases in state income and sales taxes or reductions in local services that small businesses need. And entrepreneurs operating on narrow profit margins get no circuit breakers, Mr. Hoene said. "We think about relief for homeowners on fixed incomes, but rarely consider those most at risk on the commercial side."
In Bloomfield, N.J., Kelly Conklin and his wife, Kathryn Schackner, own Foley-Waite Associates, a 31-year-old architectural woodworking company that produces interiors for high-end Manhattan residences. The company employs nine full-time workers with benefits and rents space in a former 19th-century knitting mill.
Under his lease, Mr. Conklin pays his landlords' property taxes, which he expects will soon rise $100 to $200 a month. That is not a lot of money, Mr. Conklin said, "But this is not a business of having your throat cut by one expense - it's a death of a thousand cuts."
He added: "All our costs are up. We're now working our way through a backlog of orders, but given the financial meltdown in Manhattan and the attendant decline in real estate values, there's a cliff out there with our name on it."
Mr. Conklin has a unique perspective on property taxes. He sits on the planning board of Glen Ridge, the next town over, where he and his wife live. While unhappy about his tax increase, he is deeply worried that Bloomfield's interest in far greater revenue may lead to his losing his space.
"A developer has bought the adjacent industrial parcel, and I know he has discussed a development scheme for multiunit housing with Bloomfield officials," Mr. Conklin said.
"If he pursues the idea, he may well succeed in getting the parcel rezoned - multiunit housing yields significantly more property tax revenue than an old mill," Mr. Conklin said. "And if that happens, I'm worried that he may then give our landlords an offer for the mill that is too attractive for them to refuse."
He added, "It's hard to run a business with this much uncertainty, on top of everything else."
Polly Cleveland, a land economist who teaches environmental economics at Columbia University's School of International and Public Affairs, said there were "an awful lot of people in Mr. Conklin's position" because local services were overly dependent on local property taxes.
"There is nothing wrong with the property tax," said Ms. Cleveland, herself an entrepreneur who with her husband, Thomas Haines, last paid property taxes of about $190,000 on two small Manhattan apartment buildings they recently sold. "It is actually the most progressive tax that we have when we administer it properly and finance services such as health and education at the state level."