By Jeff Austin, Legislative Advocate, State & Federal Relations, MMA
Many states that rely heavily on the property tax, as Maine does, also attempt to incorporate a targeted tax relief program. On the residential side, Maine’s targeted property tax relief program is unknown by its formal name. Everyone knows it as the “circuit breaker” program.
The way the program is organized, the circuit breaker benefit is only available or “trips” when a taxpayer’s property tax bill (or 18% of the taxpayer’s rent) exceeds 4% of the taxpayer’s income. Thus, property tax relief is contingent upon income.
The circuit breaker program has played a significant part of Maine’s overall property tax relief strategy since the late 1980s, although the roots of the program go back to the early 1970s for qualified elderly beneficiaries.
The Legislature is very attracted to the circuit breaker program for a variety of reasons. It only provides benefits to Maine residents and it provides the benefit directly to the taxpayer as a check in the mail. During the development of LD 1, the question was not whether it would be expanded, the question was by how much and in what manner.
The purpose of this article is to explain the LD 1 changes to the circuit breaker program in terms of the total statewide appropriation, the mechanics of the changes to the eligibility and benefit aspects of the program, and what the simple message is to the residents in your community so that they can calculate their potential eligibility for the benefits this year.
Statewide appropriation. Technically, the circuit breaker program isn’t funded by a legislative appropriation anymore. Since last year, the circuit breaker program has been funded “off-line.” That is, the Maine Revenue Services directly draws down from income tax revenue before that revenue is recognized as General Fund revenue and deposited in the State’s Treasury.
For FY 2005, $28.7 million in circuit breaker benefits were provided. With the expansion to both eligibility and benefit levels provided in LD 1, it is estimated that $43.6 million will be “appropriated” for the program in FY 06, a 52% increase. The number of households (both taxpayers and renters) that benefit from the program is anticipated to expand from around 70,000 to 93,000.
Eligibility changes. Under current law, the circuit breaker is available to single individuals having an income below $30,300 and multi-person households having an income below $46,900. In one sense, LD 1 removes these income limits, but another provision of the new law establishes a de facto income limitation of $100,000 for multi-member households and $75,000 for single-person households.
Benefit base. The income-limitation system has been replaced in LD 1 with a benefit-based system. The “benefit base” is the maximum amount of any property tax bill will be recognized by the state for the purpose of calculating eligibility. Single individuals will have a benefit base of $3,000 and multi-person households will have a benefit base of $4,000. Under the new circuit breaker, for example, if a married couple pays $5,000 in property taxes, the state will only look at the first $4,000 in determining eligibility and total refunds.
No one receives a circuit breaker benefit, even under the old law, until their property taxes exceed 4% of household income. The combination of a benefit base of $4,000 and the threshold trigger of 4%-of-income, establishes the de facto income limitation for multi-member households of $100,000; for individuals the de facto income cap is $75,000.
The rent standard. Under current law, 18% of a renter’s annual rental obligation is presumed to be that person’s property tax bill for the purposes of the circuit breaker program. LD increases that presumption to 20%.
Refund determination. LD 1 made no changes to the fundamental system of determining a refund. As has long been the case, the refund determination has two parts. First, an applicant will receive a “part one” refund if total property taxes paid (up to the benefit base limits) exceed 4% of the applicant’s income. The amount of the benefit is one-half the excess. An applicant will receive a “part two” refund if total property taxes (up to the benefit base limits) exceed 8% of the applicant’s income. If that happens, all of the excess above 8% is refunded, up to the maximum benefit.
Maximum Benefit. The changes discussed thus far will increase the number of people eligible for circuit breaker benefits, but do not change the benefits provided to current beneficiaries. Under LD 1, the aggregate refund cap was increased from $1,000 to $2,000, which will increase the benefits for some circuit breaker recipients.
Conclusion. The resident property taxpayers and renters in every community should be informed about the changes to the circuit breaker program. The message is as simple as a four-part test.
1) What was your property tax bill in 2004? (For renters, what was 20% of the rent paid in 2004?)
2) If the taxes (or 20% of the rent) were very high, consider only the first $4,000 (for a multi-person household) or $3,000 (for a single person household).
3) Compare the taxes (or 20% rent figure) with the 2004 household income.
4) If the taxes or 20% rent figure (capped at the $4,000/$3,000 levels) approaches or exceeds 4% of the 2004 household income, apply for circuit breaker benefits when applications become available on August 1.