For all the ire directed at state income and sales taxes, companies largely ignore the largest levy they pay—property tax. According to the Council on State Taxation, in Washington, D.C., American companies fork out more in property taxes than in any other type of state or local tax.
In fact, corporate taxes are becoming increasingly localized. At the federal level, both the amount paid by companies and the percentage of total federal government revenue it represents have declined. At the state level, total corporate income tax has more than doubled since 1980, but has fallen dramatically as a percentage of state and local taxes. Taxes on business property, meanwhile, jumped to $153.1 billion, or 38.3 percent of all non-federal taxes companies paid (see “The Biggest Slice” at the end of this article).
Yet because property taxes are generally promulgated by thousands of jurisdictions, companies often do a poor job of coordinating them. Even in corporations with centralized finance and tax functions, property-tax issues often end up on the plate of regional controllers, not tax specialists. The bottom line: one of the largest tax expenses many companies face is also one of the worst managed.
A Fixed Cost?
Of course, the best time for a company to handle property taxes is before it moves to a new location. Yet even when states offer property-tax abatements as relocation or expansion incentives, companies tend to leave money on the table, says Tammy Propst, partner in charge of KPMG LLP’s strategic relocation and expansion services practice. And companies know this. A September survey of tax and real-estate professionals conducted by KPMG found that property-tax reductions ranked number one in importance among local, state, and federal tax incentives and credits. Yet when it came to the incentives actually offered, job-creation tax credits and sales-tax exemptions were used more frequently than property-tax abatements.
It’s bad enough that companies do a poor job of securing the lowest-possible taxes when they move to a new location. But once a company is actually installed somewhere, property taxes tend to be treated like a fixed cost. After all, companies cannot take advantage of the sorts of nexus issues that help them reduce sales or income taxes.
For Mack-Cali Realty Corp., a Cranford, New Jersey-based real-estate investment trust, real-estate taxes and utilities are the two largest operating costs. CFO Barry Lefkowitz says property tax is “not the place where there is a lot of tax planning to be had—and you don’t get to take deductions for losses or depreciation.” Still, he says, there are steps that businesses can take to manage property taxes.
Property tax should not be considered a fixed cost or dismissed as a potential source of savings, agrees Stuart Rosow, an attorney with New York-based Proskauer Rose LLP, who helps corporations deal with tax issues related to mergers and acquisitions. “One of the biggest money-savers for us is a property-tax reduction,” says Rosow, who recently helped a corporate client reduce the state and local property taxes on an acquisition that, he says, had overvalued its real estate, factory buildings, and equipment.