Homestead Exemption
(from Maine Townsman, March 1997)
By Jo Josephson, Staff Writer

A homestead exemption that subtracts $20,000 from the assessed value of the home of every Maine resident is the municipal tool of choice this legislative session for bringing property tax relief to more than 300,000 Maine homeowners.

Proponents say that the $20,000 deduction brings an element of progressivity to an otherwise regressive tax. Opponents say that giving everyone the same dollar amount deduction does nothing to reduce the regressivity.

Proponents say the deduction, which is designed to lower the amount of property taxes paid statewide by more than $100 million, or about 10 percent of the total, will bring about a better balance among the three major sources of tax revenue in the state: property, sales and income. Opponents say the tax shift required to pay for it would hurt businesses around the state and increase the state’s reliance on an already regressive tax, the sales tax.

Welcome to the Tax Reform Act of 1997, a.k.a., An Act to Comprehensively Realign the Tax Structure of the State. If municipal officials have their way, it will be approved by the Legislature this spring and come before the voters this fall in a statewide referendum.

If it is approved, property taxes would contribute only 38 percent of the $2.5 billion collected from the three taxes instead of the 45 percent it will contribute to the mix this fiscal year. If it is approved, homeowners could save as much as $500 on their property tax bills. If it is approved, downhill skiers will have to pay a sales tax for their day on the slopes and hospitals will have to pay a service charge for snow removal and fire protection. To name just a few new sources of revenue being considered in the name of the "realignment".

Maine is not the only state in the nation to look to homestead exemption for righting the wrongs of the property tax. According to Who Pays? A Distributional Analysis of the Tax Systems of all 50 States, which was published in 1996 by the Citizens for Tax Justice and the Institute on Taxation & Economic Policy, the homestead exemption is alive and well in more than a dozen states, including Florida which has a $25,000 homestead exemption.

Nor, as is discussed below, is it the first time Maine has attempted to implement a homestead exemption. Aside from looking at previous efforts, this article also looks at some of the major features of the proposed exemption by comparing it with property tax relief tools currently on the books. And last but not least, it looks at some of the issues the proposal has raised as it begins to make its way through the legislative process.

SOME HISTORY

Five Percent up to $50,000 of Assessed Value

As noted above, this is not the first time a homestead exemption has been proposed as a way of providing property tax relief in Maine. In 1989, a Republican- backed bill, in competition with a reformulated "circuit breaker" bill, was passed by the Legislature providing for a deduction of no more than $2,500 off the assessed value of a home (five percent up to $50,000 of assessed valuation). To pay for it, to reimburse the municipalities for the tax loss, the Legislature appropriated $10 million.

In early 1990, as Maine’s economic situation worsened, it became clear that the yet-to-be-paid $10 million would be sacrificed on the alter of the state’s $210 million budget deficit. Sales tax revenues were in decline, contributing a mere 25 percent to the tax mix. It was also clear that the administrative work of the exemption far outweighed the financial benefits of the program - the average taxpayer would only save about $33.

MMA’s Legislative Policy Committee voted to support the repeal of the law, provided that the $10 million go directly to the municipalities via the Municipal Revenue Sharing program. It was not to be. The state kept the $10 million to alleviate its own budget problems and Republican Governor McKernan vetoed the repeal. The Legislature was unable to override his veto.

In his veto message, the Governor wrote: "I believe the Homestead Property Tax Exemption accords the most direct property tax relief presently available and should not, therefore be eliminated…(I)n a time of limited State resources, a dollar of tax relief funded through the Homestead Exemption is the most cost effective way of easing the burden on Maine’s homeowners."

$35,000 Across the Board Deduction

The homestead exemption law was eventually repealed in 1991, but not before another homestead exemption proposal was floated by a group called "Property Tax Relief Now!" and then discarded on the altar of political reality in late 1990.

While that proposal, unlike its predecessor, would have provided for a substantial $35,000 homestead exemption, like its predecessor it did not provide for a meaningful funding mechanism. It relied on the Maine Constitution to provide for 50 percent of the reimbursement at a cost of $80 to $100 million but did not suggest how the state would come up with the money

To make up for the remaining 50 percent, it relied on a property tax shift to non-residential property tax payers (businesses) and highly valued residential properties in a community. For those municipalities with no commercial or industrial base there would have been very little benefit to the residential tax payers.

CURRENT TAX RELIEF

To understand the features of the proposed homestead exemption of 1997, it is also helpful to look at two other forms of property tax relief currently available to Maine property taxpayers: the veterans property tax exemption and the so-called "circuit breaker" program.

Veterans Exemption

The veterans exemption, like the proposed homestead exemption, is a dollar amount deduction, not tied to income, that comes off the taxpayer’s assessed value. The veterans exemption, like the proposed homestead exemption, reimburses a municipality directly for property taxes lost to it. However, the veteran’s exemption differs from the homestead exemption in that it does not require the state to fully reimburse municipalities for the taxes lost.

Under 36 MRSA, Section 653, veterans, who are 62 years of age and older or are receiving compensation from the U.S. Government for total disability, may deduct $5,000 from the just value of their home ($7,000 if they served during or before WW I). If they are a paraplegic, they may deduct as much as $47,500 from the assessed value of their home.

Under the statute, any municipality granting such exemptions "…. shall have a valid claim against the State to recover 90 percent of the taxes lost by reason of the exemptions as exceeds 3 percent of the total tax levy." Which is to say that the reimbursement by the state is a "partial reimbursement".

According to the Maine Bureau of Taxation, in 1995, the state reimbursed municipalities just over $770,000 for taxes lost to veterans exemptions.

Maine Residents Property Tax Program

The Maine Residents Property Tax Program, or "circuit breaker", unlike the homestead exemption, is tied to a person’s income. Whereas the homestead exemption is available to all Mainers regardless of their income, the circuit breaker is available to families with an income of no more than $36,000 and to elderly couples with an income of no more than $12,400.

The circuit breaker program reimburses homeowner and renters for their property tax obligation. In other words, the homeowner sends a copy of the property tax bill and if they meet the program criteria then they receive a refund check directly from the state. Under the homestead exemption, the tax break is received by the residential taxpayer directly on the front end. There would not be a tax liability for the $20,000 exemption. The municipality would receive a check from the state for revenue lost due to the exemption.

The program, as described in 36 MRSA, Section 6201-6220 and which came into full bloom in 1989, is popularly known as the "circuit breaker" program, because it "kicks in" when the amount of money a person is obligated to spend on their property taxes or rent exceeds a certain percentage of their income. Property tax refunds become available when a homeowner’s tax is more than 5 percent of income; rent refunds become available when the rent is more than 33 percent of income.

The current maximum reimbursement under the special elderly part of the program is $400 (for those with incomes less than $12,400); the maximum reimbursement for everyone else, including elderly if they qualify, is $700. For 1995, the average benefit was $351 per household, according to the Maine Bureau of Taxation

It has been estimated that 60,000 residents are eligible for the program which is currently budgeted at $20 million a year; however because it requires an annual application and because it is viewed by some as a "form of welfare", it is not fully utilized. Preliminary figures supplied by the Maine Bureau of Taxation indicate that in 1995 26,858 tax refunds and 12,204 rent refunds were issued by the state.

Homestead and Circuit Breaker

Some tax policy analysts say the circuit breaker is a more progressive approach to property tax relief than the homestead exemption because it targets low income residents of the state, while the homestead exemption would be available to all Maine homeowners regardless of their income.

But the circuit breaker doesn’t work very well by itself, say those who have observed it. Among other things, critics point to the fact that the circuit breaker requires an annual application process that for some smacks of "welfare" with its "check in the mail" refund. The administration of the circuit breaker program, by itself, uses up valuable state dollars that could be better spent as an actual benefit. They argue it would fare better if it were a tax credit on one’s state income tax.

They also point to the fact that the legislature continues to tinker with its eligibility requirements, thereby causing confusion among the populace as to whether they are eligible this year, even though their income level is the same as last year when they were in fact eligible.

As Michael Ettlinger of the Washington, D.C.-based Institute on Taxation & Economic Policy sees it, the homestead exemption works better than the circuit breaker in that it is automatic and therefore taxpayers see direct immediate property tax relief.

"My experience with rebates is that they don’t work, they don’t serve their political goal, because they are not directly and immediately connected to the property tax," says Ettlinger. He also notes that the rebate that comes in the mail after the fact is often put into the same category as an income tax refund or welfare check.

Simplicity and directness aside, Ettlinger argues that the homestead exemption is also a progressive form of property tax relief because it provides greater (proportional) relief for those with lower value homes." Taking $20,000 off the value of a home valued at $50,000 provides greater relief than taking $20,000 off a home valued at $150,00. Which is to say, the owner of the $50,000 valued home receives a 40 percent savings in property taxes, while the owner of the $150,000 home only receives a 13 percent savings in property taxes.

If Ettlinger has any reservations about the proposed Property Tax Act of 1997, it is about its impact on renters, who he sees as ending up on the short end of the stick because of the expanded sales tax base As such, he sees a need down the road to modify the circuit breaker program to increase the eligibility and rebates for renters. According to MMA projections, the homestead exemption would free-up 20-25% of the circuit breaker funds providing additional property tax relief - if eligibility guidelines are changed - for renters.

THE PROPOSED HOMESTEAD EXEMPTION OF 1997

So what is to be said of the so-called Homestead Exemption Program of 1997?. What are its key points at this point in time? As drafted:

It only applies to residential properties that are primary residences. Non-residents and owners of second homes are not eligible.

Determination of whether a property is a primary residence is up to the local tax assessor, using, but not limited to, such indicators as a taxpayer’s driver’s license, voter registration or State of Maine income tax return.

It applies to all residential property owners regardless of their income.

It applies to the dwelling and part of the land, up to 10 acres, upon which it is built.

It only requires an initial application, as a municipality may waive the annual application requirement after the initial application is made and the exemption is granted.

It requires reapplication when the property is sold or when the applicant no longer uses it as a primary residence.

Those eligible get immediate, instantaneous property tax relief; there is no up front payment and later reimbursement as in the case of the circuit breaker.

To receive the full $20,000 exemption, the municipality must be at 100 percent state valuation. Which is to say, should the municipality be only at 80 percent state valuation, the exemption would be figured at 80 percent of $20,000 or $16,000; should the municipality be at 110 percent valuation, the valuation of the property would be "equalized", or adjusted downward by 10 percent before figuring in the exemption.

The exemption has no impact on a municipality’s state valuation (meaning it would not affect general purpose aid to education or municipal revenue sharing), as it does in the case of the Tree Growth program.

It would not replace the veterans exemption or the $4,000 exemption given to those residents of Maine who are legally blind.

Nor would it do away with the circuit breaker program. However, it has been estimated that the circuit breaker program could be reduced by about 20 percent or some $4 million, because under the current circuit breaker formula fewer people would be eligible for the reimbursement.

Towns would automatically receive their reimbursement when they file their Municipal Valuation Returns with the Bureau of Taxation, as is the case in the veterans exemption.

It requires that the state reimburse towns at 100 percent of the tax loss and should the state not do so, the program would be repealed.

It will cost the state $115 million in 1998. The tax restructuring proposal would obtain the reimbursement revenues from an expanded sales tax "base". State revenues would be increased by taxing certain services - amusement, recreational, personal, business and professional - that are not currently subject to the sales tax. This is not a tax increase; it is a tax shift - expanding the sales tax to reduce property taxes and thereby creating a more appropriate mix for state and local revenues.

Some Hard Numbers

Just how much will be saved in individual property taxes under the proposed homestead exemption? Using three municipalities - Wallagrass Plantation, Mount Vernon, and Portland – MMA calculates a savings in property taxes from a low of $257 per household in Wallagrass to a high of $499 per household in Portland.

Even though all property taxpayers in a community would get an equal dollar amount off their tax bill, as the table on page 20 indicates $257 represents a far greater (proportional) savings in taxes on a low valued home (91 percent) in Wallagrass Plantation than it does on a high valued home (30 percent) in Wallagrass Plantation. While the difference in Portland is not as dramatic - 34 percent vs. 11 percent - the diminished value to owners of higher valued properties is similar.

Some Issues Raised

Progressivity aside, both proponents and opponents of the homestead exemption component of the three-legged stool that makes up the Tax Reform Act of 1997 have raised a number of other issues related to the proposed exemption, including the following:

Why redirect monies to a homestead exemption? Why not redirect monies into school funding, since education costs are the primary cause of the rise in property taxes? A simple, brief answer is that municipalities, for the most part, have little control over how educational funds are spent. The homestead exemption provides property tax relief directly, on the front end, to Maine's residential property taxpayers. The homestead exemption is directly reimbursable to municipal government.

Why not redirect the monies to the circuit breaker? A simple, brief answer is that the circuit breaker does not deliver as well as it should. Further, the homestead exemption provides property tax relief to a much larger number of people, including middle-income working families.

With the reduction in my taxes, what is to stop the municipality from purposefully increasing my valuation to get more money to spend?

The simple, brief answer is "you", the taxpayer. You control the municipal budget through your participation at town meeting or through the people you elect to your city/town council. Municipal assessors cannot just raise the value on a person’s home. The Maine Constitution requires that property be assessed at its "just value", or market value. The local assessor cannot raise your valuation or your neighbor’s without a sound, rational basis for doing so. Finally, an annual review process of municipal assessment practices by the State Bureau of Taxation keeps municipalities from overvaluing or inequitably assessing property.

Won’t Uncle Sam benefit from the homestead exemption if I include my property taxes as an itemized deduction when figuring my federal income tax? Yes. But those who itemize their deductions are generally in middle to upper income brackets. As such, this argument reinforces the progressivity of the homestead exemption. In other words, higher income homeowners get less of a benefit from the exemption than do lower income homeowners.

HOMESTEAD EXEMPTION ELSEWHERE

The Institute on Taxation and Economic Policy has identified 13 states and the District of Columbia which provide homestead exemptions to some or all of their residents. They include: Alabama, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Louisiana, Mississippi, Oklahoma, South Carolina, and Texas.

A scanning of the Property Tax Desk Book, 1995-96 edition, published by the American Bar Association indicates a great diversity in the amounts and applicability of the exemption. For example, Louisiana has a homestead exemption of $75,000 based on the market value; the assessed value, however, is only 10 percent of the market value. The actual amount of the homestead exemption is $7,500 off the assessed value. For the most part, Louisiana’s homestead exemption applies only to municipal taxes levied for school purposes.

Elsewhere, Florida’s constitution provides for a homestead exemption of $25,000 for all residents. In addition, the property of every widow, widower, blind person or totally and permanently disabled person is exempt from property taxes; the exemption is limited to $500.

Texas is proposing to up its current homestead exemption for all residents to $25,000. Alabama provides for an exemption for all residents not to exceed $4,000; residents over 65 are entitled to a full exemption. In California a "homeowners exemption" is worth $7,000 of the market value of a principal residence. In Georgia, all homeowners are exempt up to a value of $2,000. Owners in Hawaii are entitled to an exemption of $20,000.

In Georgia, the exemption is $1,000; with an additional $1,000 allowed for persons earning less than $10,000 a year. Idaho allows up to a $50,000 exemption for residential improvements. South Carolina provides for a $20,000 exemption for disabled and persons 65 and older. To briefly describe a few.