Affordable Housing Institute : US

Once we have accepted the principle that tax burdens should vary by taxpayer group – and everyone except a few economists have so accepted, at least in the world of political reality – we must choose who gains the more favored treatment – and how we package it.

Long ago, when I matriculated to Our Fair City, I was ecstatic to be awarded financial aid, and being young and capital-short, I made no mental distinction among its three forms: scholarship aid, on-campus employment opportunities, and student loans at generous interest rates. Many, many years later, long after I’d repaid the (government-funded) loans, I realized that if the university was trumpeting its delivery of financial aid to a high percentage of its students, what the typical student paid must more or less represent the education’s cost.

Which ones stand out?

Seeing the economics in a reverse light, what had seemed a generous discount for my benefit could also be viewed as a surcharge on other parents richer than mine were.

How ’bout now? Who’s got the advantage?

This didn’t bother me at the time – after all, I was the beneficiary – though it increased my cynicism regarding college administration. And then when I started thinking about those ‘legacy’ admissions, and realizing they probably came from richer families and hence were paying full boat, I came full circle. The surcharge being invisibly imposed on those richer if less quick-witted students were funding the scholarship for poorer smart kids like me.

When you turn it upside down, who’s advantaging whom?

So it is with local real estate taxes. To balance its basic budget algebra, the municipality needs to raise a totality of taxes from all its taxpayers. For a host of reasons that seem like a good idea at the time, some groups will be charged less (per dollar of property value) – meaning that others will be charged more. It gets especially tricky when, as in Massachusetts, the votes in their infinite wisdom have enacted a hard cap on real estate taxes (Proposition 2½), which can be increased only by a town override, as explored in an interesting Federal Reserve Bank of Boston article, Massachusetts Proposition 2½, Simulating Overrides with Low-Income Elderly Exemptions, in its summer issue of Communities and Banking:

In 1980, Massachusetts instituted Proposition 2½, a law limiting increases in local property taxes. Nevertheless, municipalities facing revenue shortfalls have repeatedly sought overrides—votes by community residents to approve levy increases higher than 2.5 percent. Of the approximately 1,180 override attempts since 2000, nearly 51% have passed.

After all, if you don’t tax people more, services have to be cut:

Proposition 2 ½ overrides offer a tempting solution for Massachusetts cities and towns searching for new revenues. When override ballot questions fail to pass, however, municipalities are left with budget shortfalls causing cuts in public services, school programs, public workers, and the like.

[Whether in good times we took on new municipal services as luxuries that we should now rethink is a discussion beyond the bounds of this humble blog post. – Ed.]

Overrides being hard to enact – they represent people voluntarily taxing themselves more – localities have devised means of buying votes by exempting some groups, particularly those with high voting rates, such as the elderly:

Now legislation has been introduced to exempt low-income elderly homeowners from property tax increases authorized by overrides.

Give people a discount and every will want one, so the proposed legislation carves a precise keyhole:

Let’s be precise about whom we let in

Three criteria must be met:

[0] The household must own a home.

I’ve added condition zero as a reminder: we are talking only about households that own a home – which is not insignificant since the home is a huge financial asset, and that asset is the sole cause of the tax burden for which this legislation proposes relief.

[1] The head of the household must be 65 years of age or older

[2] The total household income must be $60,000 or less

The first two criteria are easily comprehensible: you need an oldster at home, and the oldster must have limited income (although many people would consider $60,000 family income fairly decent, especially for elderly homeowners who probably have little or no mortgage remaining on their homes). The third is trickier:

Not that tricky at all

[3] The ratio of the household’s property tax to income (the property tax burden) must be 10% or greater.

Word can obscure arithmetic, so let us pause to calculate.

We’re going to make it perfectly clear

The household’s maximum income is $60,000; say $50,000 for the typical beneficiary. 10% of income is $5,000, and under Proposition 2½, that cannot exceed 2.5% of property value; since the legislation is aimed only at overrides, we can safely use the 2.5% ceiling, meaning that $5,000 in annual real estate taxes will be paid if your home is worth $200,000 or more ($5,000 / 0.025). With the Massachusetts median home price well above that – it was $300,000 back in 2005, and is likely higher than that now – just about every elderly homeowner will be eligible.

In effect, seniors who own their homes and have a fixed or moderate level of income are generally granted an exemption.

Try ‘every income-eligible elderly homeowner.’

Everybody’s eligible to be liked, anyway

To study the implications, the New England Public Policy Center [An arm of the FRB Boston -- Ed] developed a circuit-breaker analysis. The analysis was based on publicly available data from the 2006 American Community Survey, published by the U.S. Census Bureau. With its up-to-date demographic and economic data, including total household income and total property taxes paid, the ACS enabled the NEPPC to analyze the number of households that could benefit from the exemption and the potential effect on the property tax burdens of nonexempt households.

Thus the clever fellows at FRB Boston wanted to figure out how many people get real-estate tax scholarships, and conversely how many others pay how much surcharge.

So for purposes of simulating potential override effects, the NEPPC chose three municipalities that lie within their own PUMA—Cambridge, Springfield, and Worcester. (Although these three are not among those that regularly propose or pass overrides, they are useful for demonstrating the simulation tool.)

For Cambridge, just find Boston J

The three cities are a good choice, since they’re all large (Cambridge 100,000 people, Worcester 175,000, Springfield 150,000), scattered across the state, and in property markets that are great (Cambridge), weakening (Worcester), and downright awful (Springfield).

Average home $400,000

The authors find some interesting facts:

A tale of three cities: who pays what?

In Cambridge, elderly owner-occupied households have a much larger median income, are less burdened by property taxes than their counterparts statewide, and have more than double the median property tax burden of the city’s median owner-occupied households. Cambridge also has a larger percentage of owner-occupied households headed by elderly residents.

In Our Fair City, the elderly are rich, own big houses (double the tax burden), and numerous. (Cambridge is also a predominantly rental city, with only 39% owner-occupancy, compared with 48% in Worcester and 52% in Springfield.) Not the people for whom one would ordinarily wish to targeting subsidies, would one?

Average home $140,000

Property values rise and fall faster than changes in municipal budgets, so rich towns tax their homeowners less (percent of value) than do middle-income or poor ones. At least that’s the case contrasting Cambridge and Worcester, where Worcester’s lower-value markets, even with Worcester’s lower municipal budget, impose on property owners a higher tax burden, both in percentage of income and even in absolute dollars.

In Worcester, elderly owner-occupied households are more severely burdened then their statewide counterparts. Compared with the median owner-occupied household, the median elderly owner-occupied household in Worcester has exactly double the property tax burden.

Average home $100,000

Springfield’s got a lower budget – taxes are only $2,150 per house, instead of $2,650 in Cambridge and $2,750 in Worcester – but the highest tax burde4n because values are so low.

In Springfield, elderly owner-occupied households have a lower median property tax burden, lower median income, and a slightly higher percentage of all owner-occupied houses.

In Cambridge, the elderly pay higher taxes than average ($4,050 versus $2,650) because they’re richer in terms of assets: they own 50% more valuable homes. In Worcester, they’re poorer – $2,450 in taxes versus $2,750 average. In Springfield, they’re about the same ($2,050 for elderly homeowners, $2,150 for the average).

With all that data, the researchers were then in a position to do what legislatures should do more often: to quantify who gains and who loses from their proposal, and in each case by how much.

Pick a direction

[Continued tomorrow in Part 2].

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