Homestead Exemption Not Fully Reimbursed

(from Maine Townsman, March 2005)
By Jeff Austin, Legislative Advocate, State & Federal Relations, MMA

With the enactment of LD 1, the Legislature made several changes to the Homestead Exemption. The changes to the Homestead are contained in Part F of the bill.

This article discusses the changes made to the Homestead Exemption Program under LD 1 with emphasis on three issue: the effective date of Homestead Exemption changes; the amount of the exemption and level of reimbursement; and how the changed program will be administered.

The issues raised regarding the Homestead Exemption under LD 1 are not settled. Municipal officials are advised to delay the commitment of property taxes until the effective date questions regarding the Homestead Exemption have been clarified.

Exemption Amount/Reimbursement

The Homestead Exemption was established in 1998. The program was set up to allow for a $7,000 exemption (at full value) from property taxes for the principal residences of Maine residents. It is one of the most popular exemption programs because it is so broadly available. From the municipal perspective, it was also well-received because the State was reimbursing the full amount of lost property tax revenue created by the exemption to municipalities.

Approximately 310,000 households get property tax relief from the Homestead Exemption. Until 2002, the program that provided $40 million of property tax relief to Maine residents remained as it was originally enacted.

In 2002, the Legislature changed the law to make the exemption a graduated program where higher valued properties received smaller exemptions. The tiered system, which is the current law, reduces the exemption amount to $5,000 for properties between $125,000 and $250,000 and to $2,500 for properties valued at $250,000 and over.

LD 1 returns the Homestead Exemption to a flat amount again. Once again, all properties, regardless of value, will receive the same exemption. The new exemption amount is $13,000.

However, the state will no longer reimburse communities for the full amount of lost tax revenue as it has since the inception of the Homestead Exemption program. Instead, municipalities will only be reimbursed for 50% of the lost revenue, the minimum required under the state constitution.

Effective Date of Homestead

LD 1, as with any other law, does not become effective until 90 days after the Legislature adjourns the First Regular Session of the 122 nd Legislature. (LD 1 was not enacted as an emergency piece of legislation, which would have expedited the effective date.) The statutory date of adjournment is June 15, 2005; if the Legislature adjourns then, the effective date of LD 1 is accordingly September 15, 2005.

The Legislature, however, included a few retroactive provisions in LD 1, including one for the Homestead changes. Section F-5 of LD 1 establishes a retroactive date of April 1, 2005 for the $13,000 exemption. Obviously, that date was chosen because it is the statutory assessment date in Maine.

The assessment date is established in 36 M.R.S.A. §502, which reads:

"All real estate within the State, . . . is subject to taxation on the first day of each April as provided; and the status of all taxpayers and of such taxable property shall be fixed as of that date."

April 1 will occur a few weeks after publication of this issue of the TOWNSMAN. At that time, LD 1 will not be effective law. Thus, if §502 is to be respected, the Homestead Exemption will be fixed as of that date pursuant to the current ‘graduated’ exemption scheme. However, if the retroactivity provision is going to be respected, the real world will not matter and the new $13,000 Homestead Exemption will apply.

Municipalities are trapped between a law that is already on the books that conflicts with legislation (LD 1) that has a retroactive provision in it and is scheduled to become law in September. It is not a clear cut decision to make. If a town makes the wrong choice it will have committed its taxes incorrectly. This problem of an “illegal” commitment could surface anytime, including at a subsequent foreclosure action, where the tax lien could be challenged. This may not occur for years. Simply surviving state scrutiny in the short-term will not allow municipal officials to rest easy.

Many legislators now recognize the problem. Had there not been such a rush to enact LD 1, these kinds of errors could have been caught. Instead, legislators are collectively scratching their heads trying to figure out how to fix this clear ambiguity.

Two legislators, Sen. Richard Nass and Rep. Josh Tardy, have helpfully written to the Attorney General seeking his opinion on the matter. The text of the request and the AG’s response (to date) is in the February 25, 2005 Legislative Bulletin. The AG responded that the issue requires “detailed consideration” which will take a “significant amount of time.” The only immediate solution identified by the AG would be to have the Legislature re-adopt the Homestead Exemption portion of LD 1 as an emergency piece of legislation. Given the very lukewarm support for the homestead changes, it is quite doubtful this advice will be taken.

The Maine Revenue Service, which has been given various oversight roles in LD 1, has complicated the matter further with its interpretation of the law. As discussed above, the state will only reimburse towns 50% of the lost tax revenue under the new Homestead Exemption rather than 100% as has been done historically.

The reimbursement portions of LD 1 will be effective law in September; prior to the time the state will reimburse the towns for its share of the exemption. So, no matter what the resolution is to the issue of how much the exemption is ($13,000 vs. current graduated system), the state reimbursement provision does not appear to be governed by the §502 language establishing the assessment date as April 1. Thus, the retroactivity issue only involves the amount of the exemption, not the level of reimbursement. In other words, MRS officials are saying that MRS will only be allowed to reimburse 50% of the Homestead Exemption this year, regardless of whether or not a community applies the current (graduated) exemption or the $13,000 exemption. Please continue to follow this issue in the Legislative Bulletin and online at www.memun.org.

Administering Homestead Exemption Under LD 1

Municipalities will need to change the way they account for the portion of the exemption that is not reimbursed. Under current law, the value exempted by the Homestead is included a municipality’s total value; and the mill rate was unaffected. For the half of the Homestead that the state will still reimburse municipalities, the current accounting method should be used.

The unreimbursed amount of the $13,000 Homestead Exemption will have to be dealt with differently. The unreimbursed $6,500 (at full value) should be treated like any other property tax exemption. That is, the exemption amount will not be part of the total municipal valuation upon which the tax commitment is levied.

The net effect of this unreimbursed exemption is an increased local mill rate in most cases. The unreimbursed Homestead Exemption costs will be paid for, in large part, by property owners who do not qualify for the exemption and to a lesser degree — through a higher mill rate — by residential homeowners. The residential class will have to make-up a portion of the cost, thus, the beneficiaries of the exemption will not realize a full $13,000 exemption benefit. The other classes of property taxpayers — businesses, non-residents, owners of second homes and undeveloped land — will see no change in their valuation and their property taxes will also be increased by a higher mill rate.

Taxpayers in communities with a large residential tax base will see little benefit from the Homestead changes. Conversely, residential taxpayers in communities with a large commercial or industrial tax base or a high level of second home ownership will see the biggest benefits.

Many communities have expressed their frustration with the Homestead Exemption changes. In communities which are largely residential, the frustration stems from the fact that “raising” the exemption to $13,000 provides no net benefit when the mill rate increase offsets the exemption.

For example, in Brownville the State’s decision to raise the exemption without reimbursement does nothing more than raise the mill rate. According to Town Manager Sophie Wilson, “the increase in the allowable Homestead Exemption from $7,000 to $13,000 of value may seem like a great savings for taxpayers, but it comes at the cost of approximately $2.7 million dollars of taxable value being removed from the Town of Brownville without any reimbursement from the State.”

The net impact of the change raises Brownville’s mill rate by $1.98 per $1,000. “Not only will taxpayers not see the promised tax relief on residential property” says Wilson, “our local businesses and non-Homestead eligible property will see a significant increase to pay for this shifted tax burden.”

Even some communities where there will be a significant benefit to residential property owners are not happy with the change in the Homestead Exemption. While more reimbursed Homestead relief is welcome, it does them (businesses) no good when the state makes running a small business even harder, according to Jay Town Manager Ruth Marden. Marden estimates that businesses in this mill town pay almost 80% of the taxes already and many are hurting. For the Governor and Legislature to further burden Maine’s paper industry makes no sense to her. “Why would they do this to Maine’s struggling businesses?,” she asks.

There is a different perspective in some service center communities where skyrocketing residential property values are outpacing the increases in commercial values, shifting the property tax burden from businesses to homeowners. Conducting a revaluation can cause the tax burden to shift from the commercial properties to the residential base. As reported in the Kennebec Journal, residential owners in Augusta can expect to see their share of the city’s aggregate property tax collection to rise from 50% to 55-60% when the city finishes its revaluation.

The LD 1 Homestead Exemption changes will shift some of that tax burden back on to the commercial base and help minimize the impact of the revaluation on residential homeowners.

Overall, the reaction to the Homestead Exemption changes has been sharply negative, even by some of those directly responsible for the changes. Unfortunately, it is not clear whether the Attorney General's opinion or a legislative response will resolve the uncertainty and frustration with the Homestead Exemption change in LD 1. Municipalities will have to be patient and wait for clarification.