Every state employs some form of property tax relief program for the purpose of reducing the local property tax bill for taxpayers (National Conference of State Legislatures, A Guide to Property Taxes: Property Tax Relief 6 (November 2002)). A property tax relief program modifies the basic property tax model in an attempt to produce a smaller tax bill for at least some taxpayers. A relief program can target specific types of property or specific types of individuals for tax relief, or it may have a broad application.
Although no two states have identical relief systems, there are several common forms of property tax relief programs used by states throughout the nation. The first form is a “homestead exemption.” A homestead exemption program reduces the property tax on qualifying properties, usually a principal residence, by excluding a portion of those properties’ value from taxation.
A second form of relief program is called a “circuit breaker.” Circuit breaker programs target certain types of taxpayers for property tax relief. A circuit breaker contrasts with a traditional homestead exemption in that the amount of relief generally depends on a variable, such as household income, property value, or the property tax bill (e.g., MD Code Ann., Real Prop. §9-104). Generally, circuit breaker programs are “threshold” programs that provide property tax credits to an eligible person whose property tax exceeds a certain percentage of his or her income or overall wealth (e.g., ME Rev. Stat. Ann. tit. 36, §6207 (2007); OK Stat. Ann. tit. 68, §2802(9) (2007); MD Code Ann., Real Prop. §§9-104(g), (i)).
A third common form of property tax relief is a limit placed on the amount that either the tax rate or the assessed value, or both, can increase in a given year.
Finally, a fourth form of tax relief is an expenditure limit. Expenditure limits place a ceiling on the amount of revenue local government can generate and therefore the total amount of expenditures a state can make.
Consequences of Property Tax Relief Measures
All relief programs share the common goal of reducing the property tax by altering the basic tax model. Taxpayers expect a decrease in their property tax upon the implementation of any of these programs based on the mathematical formula.
Whether a tax relief program will in fact reduce the property tax burden may vary from taxpayer to taxpayer and may depend on the mechanics of each specific program, such as how the program is financed and to whom it applies. In fact, depending on the circumstances, many tax relief programs merely shift the tax burden among taxpayers, resulting in a tax decrease to some but a tax increase to others. In addition, tax relief programs may bring about additional negative consequences such as added layers of complication and inequities among taxpayers.
First, some relief programs, such as circuit breakers, intentionally apply only to certain individual taxpayers targeted as deserving relief, such as the elderly, the poor, those earning below a certain amount of income, or any combination of these. Benefits of these programs accrue only to those who qualify for the program. Any individual taxpayer excluded from the class of beneficiaries will by definition not receive a reduction in property tax. Because the amount of relief depends on each taxpayer’s individual circumstances, it is generally not possible to automatically provide the benefits of the program by including them in the property tax bill. Participants must actively apply for benefits. Therefore, for a circuit breaker program to work, the state must make sure taxpayers are informed of its existence through an educational outreach effort. In many cases, a circuit breaker is designed as a tax credit against the state income tax. This presents a problem for many lowincome property owners who do not file an income tax return. These property tax payers must obtain and file substitute forms in order to participate.
Second, a relief program that applies only to certain types of property, such as a homestead exemption, which often applies only to residential property, may reduce the tax burden for some taxpayers but result in a tax increase for those who do not qualify. For example, a homestead exemption will reduce the tax base by excluding a portion of residential property from taxation. Such an exemption would result in a decrease in tax revenue to the local tax authority. If the tax authority decides to increase the tax rate in order to make up for the lost revenue, those taxpayers who did not qualify for the exemption, such as commercial property owners, would bear the brunt of the rate increase because, unlike residential owners, their rate increase would not apply to a reduced base amount. In some cases, an exemption is financed by the state, meaning the state will supplement revenue lost at the local level as a result of a tax relief program. In such a case, the tax burden is merely shifted from the local level to the state level (see, e.g., Division of Local Government Services and Economic Development, Office of the New York State Comptroller, “Property Taxes in New York State,” at 15 (April 2006)). Therefore, the program could actually result in a tax increase to particular taxpayers depending on their comparative exposure to tax at the state versus the local level.
Some states limit both the property tax rate and the property tax base (the assessed value of real property) in order to achieve a property tax reduction. Studies have shown, however, that in such instances tax authorities have shifted the burden to other taxes, such as the income tax, or to nontax revenues, such as fees and fines (Galles and Sexton, “A Tale of Two Tax Jurisdictions: The Surprising Effects of California’s Proposition 13 and Massachusetts’ Proposition 2½,” 57(2) Am. J. Econ. and Soc. 123 (1998)).
In addition to shifting taxes, many relief programs also create inequities between taxpayers. Some states, for example, limit the increase in assessed value of residential property in a given year. In general, such limitations are inapplicable to newly purchased homes (see, e.g., CA Constitution, art. XIIIA, §2). The intention of such programs is to prevent homeowners from being forced to leave their homes due to rising assessments. An unintended consequence, however, is that an inequity between taxpayers will arise because homeowners with similar properties will have vastly different effective tax rates depending on when they purchased their homes. Such a system may be challenged in court for violation of the Equal Protection Clause (see, e.g., Nordlinger v. Hahn, 505 U.S. 1 (1992)).
In addition, even assessment limits that apply equally to all property can produce inequities between taxpayers. This inequity can result because homes that rise in value at a rate less than the assessment limitation rate will not be affected by the limitation, while homeowners with rapidly increasing home values will receive a tax benefit—a perverse situation in which the system benefits the economically fortunate and further burdens the economically unfortunate. Again, because of the inequities created between taxpayers, such systems could be ripe for challenge.
Finally, some states have limited the total amount of revenue a state may collect and spend. These programs do, by definition, reduce the total tax burden. Critics of such programs claim that they cause a reduction in local services (see Lav, A Formula for Decline: Lessons from Colorado for States Considering TABOR (Center on Budget and Policy Priorities 2009)), but the proper level of services a locality should provide involves political considerations outside the realm of tax fairness or tax efficiency.
Once property value and tax rates have been established, the property tax due can be easily calculated. However, when state legislators feel called upon to reduce the tax burden, they are prone to make a simple tax calculation complicated and potentially create inequities between taxpayers that may lead to a challenge of the property taxation system.
From a policy perspective, the majority of tax relief programs currently in use merely shift the property tax burden at best, and create inequity and added complexity at worst. States should focus their attention on improving equity and efficiency within the current property tax model rather than implementing never-ending series of complicated contortions to the property tax model. In many cases, the most effective relief could come from simplification of the basic property tax model rather than the implementation of new measures designed to lower the property tax. For example, actions such as consolidating assessment authority to one statewide entity, annually revaluing property at 100% of fair market value, and appointing assessors to multiyear terms would simplify the taxation process and increase efficiency and equity.
Michael Koppel is with Gray, Gray & Gray, LLP, in Westwood, MA.
Unless otherwise noted, contributors are members of or associated with CPAmerica International.
For additional information about these items, contact Mr. Koppel at (781) 407-0300, or email@example.com.