With the housing market meltdown, we are seeing more proposals for across-the-board caps on property tax rates -- a bad idea that delivers most of the tax benefits to wealthier property owners. Instead, a better approach are Property Tax Circuit Breakers, which limit property taxes to a percentage of a taxpayer's income, while fully taxing the property of wealthy homeowners.
A new study from Connecticut emphasizes why circuit breakers, along with other reforms, are far better than a tax rate cap proposed by the state's governor. The basic idea is simple (see this policy brief for more). Instead of the typical proposal to cap property taxes at some percentage of the property value -- which disproportionately benefits the wealthy -- a circuit breaker caps property taxes at a percentage of a taxpayer's income. Different states restrict circuit breaker caps to various groups -- the elderly, the very poor -- or offer them to renters as well as homeowners. Some examples include:
- Illinois: Grants up to $700 per year to help low-income elderly and disabled homeowners and renters pay property taxes or rent. Renters can count 25% of their rent as accrued property taxes under the state formula). See the bill text here.
- Massachusetts: Provides a tax credit to homeowners over age 65 when they paid more than 10% of their total income for real estate taxes, including water and sewer debt charges. Renters can count 25% of their rent as real estate tax payments. In 2007, the maximum credit was $900.
Property Tax Deferral Programs: A variation on the circuit breaker idea are programs that defer payment of property tax increases for certain homeowners until the property is sold, allowing owners to wait until the profits from selling the land make paying the taxes less of a burden. Like other common tax relief measures, they are generally restricted to certain populations, including:
- Minnesota's Green Acres Tax Deferment program for owners of farm land
- Colorado's Property Tax Deferral program for those age 65 or older
Many argue for broader programs to allow a wider variety of taxpayers to defer paying property tax increases until they can cash out their property values at a sale-one way to fund public services while protecting homeowners.
Property Tax Homestead Exemptions: Forty states exempt a certain amount of a home's value from tax. This is a progressive tax solution, but many states restrict the exemption in ways that deny tax relief to many working families. Also, many exemptions are not indexed to housing inflation, so their value can rapidly be eroded in times of housing price booms.
A key strategy for progressives should be to expand these tax relief programs to include more working families, which would go a long way in undermining potential "tax revolt" strategies by rightwing politicians before they even start.