September 27, 2006
RECENT PROPERTY TAX RELIEF PROPOSALS
By: Kevin E. McCarthy, Principal Analyst
You asked for brief summaries of property tax relief legislation adopted in 2004 and 2005 in Illinois, Maine, Nevada, Pennsylvania, and Montgomery County, Maryland. You also requested a summary of a New Hampshire legislative proposal on assessing property, particularly with regard to views.
Illinois adopted several tax relief measures in 2004, including increases in the basic and senior citizen's homestead exemptions (2006 legislation provided for further increases). The 2004 act also allowed counties to, in effect, cap property assessment increases at 7% per year for most residential properties. In 2005, Illinois increased the disabled veteran's exemption.
Maine passed comprehensive property tax reform in 2005, which among other things capped the growth in municipal tax levies, expanded the state's circuit breaker program, and increased the homestead exemption.
Legislation adopted in Nevada in 2005 capped property tax increases for (1) single family homes at 3% per year and (2) other property at 8% or the 10-year average rate of actual increases, whichever is less.
In Pennsylvania, legislation adopted in 2004 allows school districts to reduce property taxes through a residential homestead exclusion. The property tax relief is funded by a combination of state revenue from expanded gambling and dedicated new local income taxes.
A Montgomery County ordinance adopted in 2005 allows homeowners to defer paying the increase in county property taxes due on the owner's principal residence over the amount paid in the previous year.
In 2005, a New Hampshire legislative committee heard, but took no further action on a bill that would have barred assessors from considering the value of scenic views in assessing property.
In 2004, the legislature raised the basic homestead exemption to $5,000 statewide starting with tax year 2004, which is payable in 2005, (PA 93-715). Previously, the exemption was $4,500 in Cook County (Chicago and its nearer suburbs) and $3,500 elsewhere. Homestead exemptions are deducted from a property's assessed value, thereby reducing the taxes due on the property.
The act also allowed any county to adopt an alternative homestead exemption plan that provides higher exemptions for owners of residences when the assessment increases more than 7% per year. The alternative exemption, which is limited to $20,000 in any tax year, in effect ensures that the taxable value of most homes will not increase by more than 7% in any one year. This provision expires in tax year 2006 or 2007, depending on when the county adopted the alternative plan. Households not getting the senior citizens' exemption, with incomes under $30,000 and whose assessments increased by 20% or more since the last assessment can get an extra $5,000 homestead exemption in the first tax year after the alternative exemption plan ends. School districts' general state aid will not be reduced by the alternative or extra $5,000 exemptions.
The act increased the senior citizens' assessment exemption from $2,500 in Cook County and $2,000 elsewhere to $3,000 statewide and increased the income limit for the senior citizens tax freeze program from $40,000 to $45,000.
Legislation passed in 2005 (HB 270) increased the tax exemption for a home used exclusively by a disabled veteran, the veteran's spouse, or unremarried widow(er), from $58,000 to $70,000.
In 2006, the legislature passed HB 4789, which increased the maximum reduction in assessed value in the senior citizens homestead exemption from $3,000 to $3,500 starting with the 2006 tax year (collected in 2007). It also re-enacted the senior citizens tax freeze program after a court had invalidated it on procedural grounds. The bill increased the income limit for this program from $45,000 to $50,000 starting with tax year 2006, with eligibility phased out over the income range of $45,000 to $50,000 (each $1,250 increment of income over $45,000 will reduce the exempt amount by 20 percentage points).
Public Law No. 2 of 2005, among other things, limits the growth of municipal property tax levies. Specifically, the law establishes a “growth limitation factor” for these levies. So long as Maine remains in the top third of states in terms of total state and local tax burden, this factor is the growth in the municipality's grand list plus 2.75% per year. If the state were to fall to the middle third in terms of tax burden, the factor would be the growth in grand list, plus the growth in average real personal income, plus forecasted inflation.
The law allows municipalities to exceed the levy limit for several reasons, such as unfunded federal or state mandates, natural disasters and other catastrophes, court orders, and citizens' initiatives. It specifies the procedures they must follow to exceed the limit, which require approval or the town or city council or town meeting among other things. Parallel provisions apply to the county assessment.
The law also changes the Maine Residents Property Tax (circuit breaker) Program by eliminating income eligibility requirements, raising the maximum benefit from $1,000 to $2,000, and establishing the maximum property taxes and rent constituting property taxes that may be considered in calculating the benefit. It increases the homestead property tax exemption to $13,000 for all homesteads and provides 50% state reimbursement to municipalities. The law has many other provisions that limit the growth in the state budget, increase the state's share of education funding, and modify the uses of the state's “rainy day” fund.
AB 489, adopted in 2005, caps commercial property taxes at 8% annually or a 10-year average rate of increase, whichever is less. It also prevents property taxes from increasing more than 3% annually on single-family, owner-occupied homes.
The Nevada constitution requires a uniform and equal rate of assessment and taxation of property, but it allows the legislature to provide for tax abatements or exemptions on the assessed value of an owner-occupied home to the extent necessary to avoid severe economic hardship to the owner of the residence. Under AB 489, the legislature declared that an increase in the tax bill of a homeowner of more than 3% percent from the previous year constitutes such a hardship. The act provides for a partial abatement of the taxes of the homeowner who would otherwise experience the hardship. The effect of the abatement is to limit the increase in property taxes owed on the property to not more than 3% more than the amount levied or which would have been levied in the immediately preceding fiscal year if not for any applicable exemptions.
The act also provides for a separate partial abatement applicable to all properties. The maximum percentage of increase in tax liability that may be applied to any property is determined by a two-part formula. The first part is determined by establishing the lesser of: (1) the average percentage of change in the assessed valuation of all taxable property in the county over the 10-year period immediately preceding the fiscal year in which the levy is made, or (2) 8%. The second part is determined by establishing a percentage equal to twice the increase in the Consumer Price Index for the immediately preceding calendar year. After making those determinations, whichever part of the formula yields the greatest percentage is used to establish the maximum percentage of increase in tax liability for the property. This abatement may be used in lieu of the 3% cap if it yields a greater reduction in the property taxes of a homeowner or the owner of a residential rental dwelling.
The Homeowner Tax Relief Act (Act 72 of 2004) allows school districts to reduce property taxes through a residential homestead exclusion. The property tax relief is funded by a combination of state revenue from expanded gambling and dedicated local income taxes.
To participate in the program, districts had to pass a resolution by May 30, 2005. The resolution had to (1) authorize the levy of an additional 0.1% local Earned Income Tax (EIT), with the added revenues used to reduce local property taxes or (2) propose a ballot question for the 2005 municipal election on whether to reduce property taxes by shifting towards a local income tax. Districts that did not levy an EIT as of 2005 were given a third option of proposing a ballot question for the 2007 municipal election. The referendum question submitted to the district's voters in the 2007 election must state the rate of the proposed income tax to be levied, the reason for the tax, and estimated per homestead tax reduction Districts can exempt taxpayers whose household income is less than $12,000 from the income tax increase.
The amount of property tax relief under the program varies by district. The property tax relief formula is designed to send the most state resources to the school districts with the greatest tax burden and least local wealth. The formula is based on the school district's 2003-04 student attendance and its property tax reduction index. The property tax reduction index is the sum of its rankings on the following four factors divided by 1,000:
1. the district's 2002 personal income per 2003-04 student attendance;
2. the district's 2004-05 market value/personal income aid ratio;
3. the district's 2002-03 equalized mill rate; and
4. the district's 2002-03 school tax ratio, which is the 2002-03 local tax revenue collected divided by 2002 personal income
Approximately one quarter of the state's school districts have opted into the program.
MONTGOMERY COUNTY, MARYLAND
A Montgomery County ordinance adopted in 2005 (County Code, Chapter 52, Article I, Section 52-18F) allows homeowners to defer payment of county property taxes due on the owner's principal residence. The amount of taxes that may be deferred for any one year is the increase in county taxes over the amount paid in the prior taxable year.
To be eligible for a deferral:
1. the homeowner's gross income or combined gross income of all individuals who actually reside in the dwelling cannot exceed $120,000 for the preceding calendar year, and
2. at least one of the owners must have resided in the dwelling as their principal place of residence for at least 5 years.
The deferral covers the general county tax and special service area taxes. The county annually sets the interest on the deferred taxes, which cannot exceed the prime lending rate. The annual interest rate applies to any tax deferred that year, regardless of when the tax was first deferred. The accumulation of deferred taxes and accrued interest cannot exceed 50% of the full cash value of the property.
HB 284 of 2005 would have barred assessors from considering the value of scenic views or other views when determining a property's assessed value. The Municipal and County Government Committee heard the bill, but took no further action on.