The mainstay of local taxation is the tax on real estate, known as the property tax. It is used to fund an array of state and local services, most notably public schools. Policymakers face challenges with the tax’s structure and administration. This includes its burden on households with low income. While property taxes mainly exist at the local level, states play an important role in creating property tax relief programs. States are also responsible for setting the parameters and practices for assessing the tax.
The property tax is the most burdensome tax for many individuals with low incomes and older people. It affects people directly as homeowners and indirectly as renters. Landlords may pass on tax burdens in the form of higher rents. The tax is imposed on an illiquid, indivisible asset rather than income. Thus, many people, particularly people with low incomes, have difficulty coming up with the money to pay it. All states have implemented various relief programs to deal with this problem.
The following are the most common ways in which states provide property tax relief.
Circuit breakers usually ease the property tax burden by setting a threshold above which property tax burdens cannot rise. They take their name from the mechanism used to relieve an overloaded electrical circuit. The threshold is typically equal to a percentage of income and tends to benefit residents with low and middle incomes. Tax expenditures can take many forms including reduced tax rates on some forms of income, credits, and deductions.
With property tax deferrals, homeowners can postpone payment of property taxes. Typically, they are not required to pay until the sale of the home or the owner’s death. Many states limit their deferral programs to older homeowners or those with disabilities.
Homestead exemptions reduce the amount of property value that is subject to taxation. In contrast, homestead credits directly reduce the amount of taxes owed. Many states offer these benefits only to homeowners with income under a specified threshold. The amount of the exemption, however, does not vary with income. Homestead exemptions and credits tend to be less progressive than circuit breaker provisions.
In addition to these property tax relief programs, policymakers can place other limits on property taxes. For example, policymakers can limit assessed property values, property tax rates, property tax liabilities, or property tax revenues. These limitations apply automatically, without any action on the part of the homeowner. But they reduce policymakers’ ability to respond to changing circumstances. They can create inequities among owners of similar properties and can lock long-term owners to their current residences. Also, they do not target the people who have the most trouble meeting their tax obligations.
Over time such limitations can cause problems by reducing essential government spending. This can weaken the quality of programs and services such as education. For example, California enacted a significant property tax cap in 1978, known as Proposition 13. Since then, school spending has decreased significantly. In the same period, the state’s standardized test performances have fallen from among the nation’s highest to the bottom third.
Some limitations can also cause unfair situations. For example, in some instances, property tax liability does not rise with increases in property value. Instead, property taxes are based on the purchase price of a property. Therefore, new owners could face substantially higher tax bills than a neighbor who owns a comparable home but purchased it years earlier for a lower price.
Finally, funding for elementary and secondary education relies mainly on local property taxes. This may lead to disparities in educational funding among school districts. Residents of poorer districts may face higher effective property tax rates compared to wealthier districts. Yet, they may have inferior educational facilities and services.
PROPERTY TAXES: Policy
PROPERTY TAXES: Policy
Property tax relief
Property tax relief should be equitable, cost-effective, and targeted to homeowners with low and moderate incomes burdened by their property tax bill.
Voluntary property tax deferral programs should be enacted, especially in the absence of other property tax relief programs or where tax burdens are high.
Any interest charged for the deferral should be at fair and equitable rates.
Property tax relief programs should be easy to participate in and well-publicized.
Property tax caps
States should generally avoid arbitrary limitations on property taxes.
Equity in assessments
To ensure equity in property taxation, assessors should use fair-market value as the starting point for determining property values.
Assessors should meet professional standards.
Properties should be assessed annually, if possible, to help ensure that property taxes do not increase abruptly.
The property tax assessment process should be easy to understand and appeals should be easy to file. Decisions should be reached within a reasonable time and in an equitable manner.
Prior to finalizing annual budget decisions, localities should inform taxpayers of the property tax rate required to maintain revenues at the same level as the prior year.
Policymakers should identify new spending or revenue reductions that warrant any proposed property tax increase.
States should adequately fund and broaden their methods of financing public education. Education financing should be shifted from property taxes to less regressive forms of taxation.