The mainstay of local taxation is the property tax on real estate which 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, including its burden on low-income households. While property taxes mainly exist at the local level, states play an important role in creating property tax relief programs and deciding on 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 because 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—taking their name from the mechanism used to relieve an overloaded electrical circuit, circuit breakers usually ease the property tax burden of residents with low and middle incomes by setting a threshold (typically equal to a percentage of income) above which property tax burdens cannot rise. Eligible residents receive a property tax rebate equal to the difference between the amount of property tax otherwise due and the threshold amount. Renters and homeowners may be eligible for tax relief. Some states limit their circuit breakers to various combinations of the blind, people with disabilities, widows and widowers, older adults, and young owners and renters.
Property tax deferrals—with property tax deferrals homeowners can postpone paying property taxes 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 and credits—homestead exemptions reduce the amount of assessed property value that is subject to taxation, whereas homestead credits directly reduce the amount of taxes owed. While many states offer these benefits only to homeowners with income under a specified threshold, the net benefit does not vary with income. Homestead exemptions and credits tend to be less progressive than circuit breaker provisions.
In addition to property tax relief programs such as these, policymakers can also place other types of limits on property taxes. For example, policymakers can limit assessed property values, property tax rates, property tax liabilities, or property tax revenues throughout their jurisdiction. These limitations apply automatically, without any action on the part of the homeowner. They reduce the ability of policymakers to respond to changing circumstances and can create inequities among owners of similar properties. Also, they do not target the people who have the most trouble meeting their tax obligations.
Over time such caps can cause problems by reducing government spending on important programs and services such as education. For example, in California, which enacted a significant property tax cap in 1978 (known as Proposition 13), school spending has decreased significantly, and the performance of students on standardized tests has fallen from among the nation’s highest to the bottom third.
Finally, funding for elementary and secondary education relies largely 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 yet have inferior educational facilities and services.
PROPERTY TAXES: Policy
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 basis for determining property values, so that owners of similar properties in the same area face the same property tax burden.
Assessors should meet professional standards, and properties should be assessed annually, if possible, to help ensure that property taxes do not increase abruptly.
The assessment appeals process should be easy to understand, appeals should be easy to file, and decisions should be reached within a reasonable time and in an equitable manner.
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 when there is no other property tax relief program 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.
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 and identify new spending or revenue reductions that warrant any proposed tax increase.
States should adequately fund and broaden their methods of financing public education, thereby taking some of the burden off the regressive local property tax systems and shifting it to less regressive taxes.