The approach of the annual tax classification hearing represents the most important local policy decision regarding the allocation of the property tax burden. It is essential for municipal leadership to navigate this process with a clear understanding of the law and the profound implications of each available option.
Critically, the classification decision does not change the total amount of money collected by the municipality—known as the tax levy. This total levy is predetermined by the budget and the limits of Proposition 2 1/2. Instead, the classification process merely determines how that fixed levy will be distributed and shared among the various classes of property owners.
The Classification Process: A Mandated Annual Cycle
The legal authority for this annual decision stems from Massachusetts General Law (M.G.L. c. 40, § 56). The classification decision is valid for one year only.
1. Preparation and Certification: The process requires the local Board of Assessors to determine the full and fair cash value (FFCV) of all real property. Assessors classify properties into four major statutory classes: Residential (Class One), Open Space (Class Two), Commercial (Class Three), and Industrial (Class Four), plus Personal Property. Before the tax levy can be distributed, the valuations submitted by the Assessors must receive certification from the Department of Revenue’s (DOR) Bureau of Local Assessment (BLA). The Assessors utilize forms like the LA-4 for class totals and the LA-3 for sales analysis. The DOR provides planning tools, such as the Gateway Option Table, to help Assessors examine the effects of various shifts for presentation purposes.
2. The Public Hearing: Once the values are certified (often in the late fall or early winter), the Select Board, Town Council, or City Council must hold an annual public hearing. This meeting is subject to the Open Meeting Law, and public notice must be posted, providing an opportunity for residents, taxpayers, and business owners to participate and present their views. During the hearing, the Assessors present information outlining the classification options, relevant property values, and the estimated tax impact under different scenarios.
3. The Decision and Final Approval: Following the decision by the legislative body, the Assessors compile the Tax Rate Recapitulation Sheet (”recap”), which integrates the valuations, the chosen tax rates, and all revenue sources. This recapitulation sheet is submitted to the DOR’s Bureau of Accounts for final approval. The Select Board’s decision must be documented, typically using the required LA-5 form.
The Core Policy Choice: Single Rate vs. Split Rate
The fundamental decision is whether to adopt a single tax rate or a split tax rate. This is achieved by setting a residential factor.
• The Single Tax Rate (Residential Factor = 1.000): If a Select Board chooses a factor of 1.000, all classes of property—Residential (RO) and Commercial/Industrial/Personal Property (CIP)—are taxed at the same rate. They each pay a share of the total levy equal to their share of the total assessed valuation.
◦ Context: Many towns, such as Duxbury and Hanson, utilize a single tax rate. Proponents argue this signals a “business-friendly” environment and avoids placing a disproportionate burden on companies, which could prompt them to relocate to neighboring single-rate communities.
• The Split Tax Rate (Residential Factor < 1.000): If the board adopts a factor less than 1.000, they are choosing to shift a portion of the tax levy burden from the residential class to the commercial, industrial, and personal property (CIP) classes.
◦ Context: Towns choose this option to alleviate the tax burden on homeowners, particularly to address affordability concerns, by requiring income-producing assets (CIP) to pay a greater relative share of the total levy. For example, Hanover recently set a split rate of 1.15 for FY2025 (Residential Factor of 0.9725).
◦ Trade-offs: Advocates of the split rate argue that businesses use municipal services (like first responders) at an increasing rate, justifying the shift. However, business owners contend that increasing the split rate hurts smaller enterprises and that larger developers simply pass the increased costs onto their tenants.
◦ Constraints: The ability to shift the burden is capped by the DOR’s Minimum Residential Factor (MRF), which ensures the shift stays within legal bounds. Generally, the CIP class cannot be required to pay more than 150% of what its value dictates, though certain cities may be authorized for up to 175% by the legislature.
Secondary Policy Choices: Targeted Exemptions and Discounts
In addition to the fundamental split decision, Select Boards annually vote on three other local-option policies that adjust the tax burden within property classes.
1. Residential Exemption (RE): (MGL c. 59, s. 5C)
◦ Mechanism: This exemption shifts the tax burden within the residential class, providing a tax reduction of up to 20% of the average residential assessed value (or 35% in some cases). Crucially, this benefit is restricted to owner-occupied principal residences.
◦ Impact: Since the total residential levy amount must still be raised, the residential tax rate is increased for all properties. This transfers the tax burden from eligible owner-occupied homes to:
▪ Non-owner-occupied properties (such as rentals or vacation homes).
▪ Owner-occupied homes whose value is above a specific “breakeven point”.
◦ Considerations: Lexington questioned the effectiveness of the RE, concluding it is “not targeted to those in need”. Furthermore, properties held in trusts may not qualify. For seniors utilizing the state Circuit Breaker tax credit, adopting the RE could cause their tax bill to drop below the minimum threshold required for the state credit, inadvertently jeopardizing that relief. For these reasons, Assessors in Hanover recommended voting no on adopting the RE for FY2025.
2. Small Commercial Exemption (SCE): (MGL c. 59, s. 5I)
◦ Mechanism: This option provides targeted relief by allowing an exemption of up to 10% of the assessed value of Commercial property (Class Three). Eligibility rules generally limit this to businesses with 10 or fewer employees and a total property value of less than $1,000,000.
◦ Impact: The cost of the exemption is shifted onto the remaining commercial and industrial properties, effectively subsidizing smaller local businesses by placing a higher rate burden on larger commercial and industrial taxpayers.
◦ Considerations: The SCE is utilized by only a few communities. Assessors may recommend against it due to perceived administrative difficulty.
3. Open Space Discount:
◦ Mechanism: This option allows the Select Board to grant a discount of up to 25% on the levy assigned to open space property (Class Two).
◦ Impact: Any tax reduction given to Open Space is shifted entirely to the Residential Class.
◦ Considerations: This option is rarely used. Open space is often already classified as Chapter land and taxed at a lower rate.
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The Policy Landscape: A Matter of Fixed Resources
The classification hearing often forces Select Boards to confront challenging economic realities. Currently, post COVID remote work trends are threatening the commercial property market, as demand for office space declines in urban areas. If commercial values fall while residential values rise, the tax burden automatically shifts back toward homeowners unless policy adjustments are made. Communities with high reliance on split rates (about 31% of municipalities) must carefully monitor these commercial market dynamics to ensure the tax base remains sustainable.
To grasp the nature of this perennial financial debate, consider the municipal tax levy as a fixed container of water. The Select Board’s classification vote doesn’t change the amount of water in the container (the total levy). It merely determines the size of the individual pitchers (property classes) used to carry that water. If the residential pitcher is intentionally made smaller via a split rate, the commercial/industrial pitcher must become proportionally larger to ensure all the water is carried. The board’s task is to manage the size of these pitchers annually while keeping the entire system economically balanced and politically palatable.
Sources for this article include: Duxbury, Hanover, and Hanson classification hearings, the Massachusetts Division of Local Services, South Shore News, South Shore Times, the My Southborough Blog, and AI Deep Research tools
