William Batt, Ph.D.
Joshua Vincent, Director
Center for the Study of Economics, Philadelphia, PA
For decades, a legislative cottage industry has provided for the “refund or forgiveness of real property tax liability of certain low income, disabled, infirm or senior citizens.” The measure would apply for relief from tax burdens “attributable to real property tax rate or assessed value increases, of the low-income senior citizen’s homestead (i.e., primary dwelling).” What relief measures to employ is the focus of this overview.
Comparative National Use of Property Tax Relief Measures
Four property tax relief mechanisms have been instituted nationally for selected groups of homeowners. These relief measures apply to the elderly and low-income households, less often for disabled and veterans. Sometimes they are employed as a local option for substate entities like counties and municipalities.
The Homestead Exemption was adopted by legislative design in several states during the 1960s and 70s; variants of this program exist in all states but Missouri and North Dakota in some form;
The Circuit Breaker is available in 34 states and provides reimbursement to localities by the states for revenue forgiven.
The Property Tax Freeze has come out of property tax revolts in a few states primarily due to public initiatives in the 1980s and 90s.
The Deferral option again arises from legislative design in 25 states and has the highest employment as a local option.
The 2002 NCSL (National Conference of State Legislatures) study, “A Guide to Property Taxes: Property Tax Relief,” although dated, reports that most states authorize localities to use a Homestead Exemption or Credit and a Property Tax Deferral. The Circuit Breaker is available on a statewide basis.
As a typical example, in Pennsylvania, the local option homestead exemption may be no larger than one-half of the homestead property’s median assessed value.
The commonly cited principles of sound tax theory, first defined by Adam Smith, are Neutrality, Efficiency, Equity, Administrability, Simplicity, Stability.
One tax policy with no downside effects and comports perfectly with these principles is a levy on land value, which is “inelastic” or has a fixed supply. That means commodities like land sites, air, water, and other natural resources. Both Mark Twain and Will Rogers said, “Buy land; they ain’t makin’ it anymore.”
One should also consider land use configurations and environmental impacts, particularly concerning the real property tax. Recall also that the property tax is two taxes with different dynamics — a tax on land values and a tax on improvements. The former has no harmful effects and fosters constructive behavior. The tax on buildings has many detrimental impacts.
Also, buildings depreciate, just like cars, computers, or refrigerators. Only the land appreciates. So the rise in the market value of real estate (beyond inflation) is due to the increase in land values.
The productivity of a community’s total enterprise is reflected in its land values by economic rent. Taxing land value stabilizes real estate prices, providing a measure of protection from speculative bubbles. Land taxation encourages the efficient use of locations by capitalizing the carrying costs.
Why is a tax on land value fair?
It is wholly:
Neutral to its influence upon behavioral choices,
Efficient insofar as there is no “excess burden” (a fancy word for productivity loss and economic drag).
Equitably progressive insofar, only individuals or households that own land pay any tax at all. For the most part, middle-class homeowners own only modest parcels under their houses or farms where land is cheap.
Administrable because it’s transparent, not likely subject to challenge, and cannot remove to an off-shore tax haven.
Simple to understand, by all members of the community, and
Stable, so that it doesn’t impact on budget designs very much.
Tax Relief measures can violate these principles in varying degrees.
The productivity of a community’s total enterprise is reflected in its land values by economic rent.
All taxes come out of economic rent. When not recaptured in taxes, rent is reflected instead in sites’ market values.
Giving property tax relief will result in more economic rent flowing through some sites than others, raising their market prices. This distortion affects tax neutrality and tax efficiency.
Real property taxes are not on people; they are on locations (though people pay them).
Giving property tax relief to some locations and not to others distorts land-use choices. This discretion happens either by altering either options or timeframes of use. Ideally, all sites should be taxed at the same rate, and none exempted.
We enact property tax relief measures at the state level. Assessments. Tax rates vary significantly by locality, making inequities by regions of the state.
How administrable are property tax relief measures?
The neutrality, efficiency, and fairness of the relief depend on an accurate assessment of property parcels and maintaining the integrity of the formulas employed. The laws’ procedures typically get out of date quickly and then distort the programs of relief. Property tax relief formulas frequently need to be adjusted and updated, making them subject to political influence.
Comparing the four relief measures, which one is best?
Homestead and Circuit Breaker instruments quickly become out of date and distorted.
Assessment freezes, and tax rate freezes both corrupt the tax regime.
All three preceding measures all cost the government in revenue forgone.
All three preceding measures often rely on the homeowner’s initiative to be eligible.
All three preceding measures are challenging to understand and enforce.
The Deferral provision has the following advantages:
It does not alter the market value of the parcel, as the levy redounds eventually.
It does not affect the use of sites because the titleholder has no incentive to alter use.
It is self-selecting for households desirous of employing the option, reflective of real income circumstances rather than arbitrary factors such as age.
Local governments are not deprived of revenue, though delayed.
It is fair to other homeowners in the community.
The program is simple to understand.
The deferral program ensures its intention: security for the elderly or low income as long as they wish to occupy that site