Study: Property tax relief popular but not effective

Hank Hayes • Jul 8, 2007 at 12:00 AM

State and local property tax reduction programs are growing and popular with voters, but fail to aid those actually needing assistance, a recently released Tennessee Advisory Commission on Intergovernmental Relations research paper said.

"These (property tax reduction) programs tend to restrict the ability of local governments to fund the growing service responsibilities they continue to face," the TACIR paper pointed out.

But the paper's introduction noted that the property tax is often cited as the most unpopular of taxes.

"Property owners have become more and more vocal in their opposition to property tax increases," the paper said. "This is particularly the case in Tennessee where the property tax plays a pivotal role in raising local revenue."

Last November, Tennessee voters approved a measure to authorize local governments to freeze property taxes for certain low-income senior citizens age 65 and over. The income threshold was set by state lawmakers, but the program itself is administered by local governments that will not be reimbursed by the state for lost property tax revenues.

The TACIR paper said states' property tax relief programs can be broken down into three categories: "circuit breaker" programs providing rebates or credits to certain homeowners and renters; homestead exemptions or credits; and deferral programs generally available only to elderly homeowners.

The circuit breaker programs, used in 33 states and the District of Columbia but not in Tennessee, are generally limited to a maximum percent of household income regardless of the home's value.

For instance, if lawmakers decided that property taxes should not exceed 3 percent of a household's total income, then a household with a $40,000 income would face a maximum property tax liability of $1,200. The circuit breaker program would pay the difference between the total taxes due on the property and $1,200.

Most circuit breaker programs place constraints on the amount of tax relief granted, either by phasing out the credit as household income rises or by capping the property's value, according to the TACIR paper.

The paper noted that in most cases, state government picks up the circuit breaker program's cost, but it generally provides no tax relief to the majority of taxpayers.

Tennessee does have a homestead exemption program providing a tax credit equal to the property taxes due on the first $25,000 of a home's market value for certain elderly or disabled homeowners, and a credit or reimbursement equal to taxes due on the first $175,000 of market value for certain disabled veteran homeowners.

State government paid out $9.8 million for its homestead exemption program in the 2006 fiscal year. Elderly and disabled homeowners are eligible for the exemption if their age is 65 or over, and the income of all owners of the property is $20,000 or less. Disabled veterans are eligible regardless of their age.

The program made payments on almost 70,000 claims during 2006, representing about 3 percent of all Tennessee households.

TACIR said homestead exemptions can be "politically popular," but aren't sensitive to income differences and can carry a hefty price tag. Florida spent $2.2 billion on its homestead program in the 2006-07 fiscal year. Forty states and D.C. have homestead exemptions.

Tennessee is also one of 25 states offering a property tax deferral program for certain low-income homeowners with income under $25,000 as reported on the homeowner's federal income tax form. The state's Hall Income Tax includes many other forms of income that are excluded from the federal income tax form.

As a result, in certain cases "very wealthy households" could request and be eligible for a property tax deferral based on total income, the paper said.

For more go to www.state.tn. us/tacir/recentpubs.htm.

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