The Connecticut General Assembly
OFFICE OF LEGISLATIVE RESEARCH
March 22, 1994 94-R-0378
FROM: Saul Spigel, Chief Analyst
RE: Vermont Property Tax Proposal
You wanted to know whether legislation proposed in Vermont to tax owner-occupied homes at a different rate than other homes is done elsewhere in the country and whether there have been legal challenges to this tax structure.
As part of an education reform package, the Vermont House has passed a bill (H. 541) which sets up a two-tiered property tax structure. Under it, all real property, except owner-occupied homesteads, is taxed at a statewide, uniform mill rate, which will be used primarily to pay for educational equalization. Owner-occupied homes are taxed at the local level to pay for municipal services. State resident, owner-occupants are also subject to a new, local income tax to pay for education. This change will effectively raise the taxes of nonoccupant owners with dwellings in towns with tax rates below the statewide mill rate, but it will lower taxes on similarly situated people in towns with higher tax rates. Anne Winchester, a counselor in Vermont's Legislative Counsel's Office, was not aware of a similar tax structure in the nation, nor were we able to find one. But the policy of taxing owner-occupied housing differently than other housing is not unique. Both Minnesota and Mississippi tax owner-occupied homes at rates different than other homes, and other states provide tax exemptions for “homesteads,” all of which have withstood legal challenges.
TAX CLASSIFICATION, GENERALLY
The power of a state to make reasonable and natural classifications for purposes of taxation is clear. Classifications may be made with respect to the subjects of taxation; the kinds of property to be taxed; tax rates; or the methods of assessment, valuation, and collection.
The legislature's discretion in making tax classifications is very broad and its actions are presumptively valid. Classifications must be based on real and substantial differences between the persons, property, or privileges taxed and not taxed, but these differences do not have to be great. They must bear some reasonable relationship to a legitimate government end or permissible governmental policy. Taxpayers within each class must be treated equally and uniformly. The taxpayer has the burden of proving that the classification is unreasonable, discriminatory, or arbitrary (71 Am Jur 2d, §§ 170-183).
CHALLENGES IN MISSISSIPPI AND MINNESOTA
Mississippi taxes owner-occupied residential real property (class I) at 10% of its value, while all other real property (class II) is taxed at 15% of its value (Miss. Const., Art. I, § 112; Miss. Code Ann. § 27-35-4). Owners of waterside condominiums challenged their class II designation on the grounds that the units were owner-occupied because they, their relatives, or an occasional friend were the only occupants. But they stipulated that the condominiums were not their principal residence. They did not challenge the legitimacy of the classification itself.
The Mississippi Supreme Court looked to the homestead exemption statute to settle the matter. That statute set encouraging homebuilding, homeownership, and family security as the public policy for the exemption. It and a companion statute defined home or homestead as a dwelling owned and actually occupied by a family. The court construed the constitutional provision in light of these statutes and determined that the legislature did not intend the class I tax preference to go to recreational or vacation homes that were not the owners' principal residence. It noted particularly that the benefit was not intended for people from surrounding states (Board of Supervisors v. Duplantier, 583 So.2d 1275).
Minnesota has many tax classifications, including different tax rates for owner-occupied residential dwellings; rental housing; and individually owned, seasonal residential lakeshore dwellings. It also has graduated tax rates for homestead property.
In 1983 two realtors challenged in Minnesota Supreme Court the scheme for taxing owner-occupied residences at a rate lower than renter-occupied residences on two grounds—equal protection under the federal Constitution and the “uniformity clause” of Minnesota's Constitution. They argued that the different graduated rates for homestead assessments violated the equal protection clause. And they asserted that exempting some, but not all similar property from taxation amounted to special legislation, which violated due process requirements.
Because it was a constitutional challenge, the court required the plaintiffs to demonstrate their claims beyond a reasonable doubt. The plaintiffs challenged the distinction between owners and renters on the grounds that it created a unequal preference for an owner-occupier over a renter-occupier. The court's test for the constitutionality of statutory classifications has three prongs: (1) the distinctions between classes must be genuine and substantial, providing a reasonable and natural basis to justify legislation; (2) the classification must be relevant to the purpose of the law, there must be an evident connection between the needs of the class and the remedy; and (3) the statute's purpose must serve a legitimate state end.
On this basis, the court rejected plaintiffs' claim of unequal preference. It held that the state may promote homestead ownership as a legitimate goal and that the legislature could reasonably have found that lower taxes would encourage this end. It also found a genuine distinction between owner-occupants, who face greater maintenance costs and risk of loss, and renters, who have fewer responsibilities arising from the property. These distinctions justify different tax treatment, according to the court.
The court rejected the equal protection challenge to graduated rates on the grounds that it had previously held that the legislature could properly consider ability to pay in classifying property for tax purposes. And it went on to say that the legislature could reasonably have concluded that a home's value was an indicator of the ability to pay.
Having found that the classification system was valid, the court rejected the argument that due process was violated by because of the lack of uniformity in tax treatment. The court found that the plaintiffs failed to show that similarly situated members of the same class were treated differently (Lund v. Hennepin County, 403 N.W. 2d 617).