Affordable Housing Institute : US

[Continued from yesterday’s Part 1].

 

Yesterday’s post examined the hypothetical of raising property taxes while exempting a particular class of elderly homeowners from the increased costs they would vote to impose.  As shown in a fascinating quantitative analysis, Massachusetts Proposition 2½, Simulating Overrides with Low-Income Elderly Exemptions, published in the Federal Reserve Bank of Boston article in its summer issue of Communities and Banking.

 

Looks like a Venetian blind, and for the same reason:

The Boston Federal Reserve Bank building

 

Having chosen three representative Massachusetts mid-size cities – Cambridge, Worcester, and Springfield – the authors were then able to calculate highly interesting granular data on the impact to each community:

 

To analyze the effects of a property tax increase with the proposed exemption for low-income elderly households, the override simulation froze the property tax bill of low-income elderly households currently paying more than 10% of their total income in property taxes at its current level.  If any such household reached a 10% property tax burden as a result of the override, the property tax burden was capped at that level.

 

Further, it isn’t just a redistribution of real estate taxes, it’s also an increase:

 

Clearly, since overrides increase the community’s total tax levy by a specified amount, taxes are higher on taxpayers not receiving the exemption.

 

The pain will depend on how big an increase:

 

So NEPPC asked the question, What is the potential impact of a 6% property-tax increase for each municipality?

 

Cui bono?  The effects of boosting taxes just on some

 

If the local real estate taxes go up 6% in the aggregate, then the average tax burden has to rise more on the non-exempt, and in all three cities, only a few households are exempt: 5.6% in Springfield, 8.3% in Worcester, and 9.6% in richer, older Cambridge.

 

According to the analysis, 9.6% of all owner-occupied households and 35.4% of elderly owner-occupied households in Cambridge would benefit from the exemption. That is, their taxes would be lower with the exemption than if the override passed without the exemption. (See “Simulation Results.”)

 

At least the benefits would be targeted, with just under one in ten homeowners gaining a benefit – and yet, somewhat surprisingly, only one-third of the elderly homeowners would qualify.  (In Cambridge, remember, elderly homes are quite a bit more valuable than even Cambridge’s high average.)  Perhaps that’s because the other two-thirds have incomes above the $60,000 eligibility ceiling.

 

The median property tax burden of a qualifying household is 23.9%.

 

That is a big chunk of their budget – one quarter of the spending goes to pay real estate taxes on their expensive homes.

 

   

Tails you lose?  For Cambridge’s elderly homeowners, one-quarter of their budget is real estate taxes

 

Meanwhile, those not advantaged are disadvantaged:

 

The average nonexempt household in the lowest- income quintile would see its property tax burden increase by 1.06 percentage points, a $170 increase. (See “Distributional Effects on Select Nonexempt Groups,” page 24.)

 

Who pays more taxes?  Non-elderly poor!

 

Most striking in the large table above is the non-elderly lower-income (below $60,000) group, where they who are already socked with taxes would see their taxes boosted by $253, while identical homeowners next door, if they have an elderly head of household, would pay no increase whatsoever.  What’s the public policy justification for advantaging an elderly homeowner over an otherwise-equally-ppoor non-elderly neighbor?

 

The same disjuncture arises in the other two things:

 

An override exemption would benefit 8.3% of all owner-occupied households in Worcester and 41% of elderly owner-occupied households.

 

Whereas in Cambridge, only one in three elderly homeowners was poor enough to qualify, in Worcester three out of seven would be eligible.

 

 

We’re eligible

 

 

We’re not

 

The median property tax burden of a qualifying owner-occupied household is 18.2 percent.  Of all the households that would not qualify for the exemption, the largest increase in property tax burden—0.49 percentage points, an additional $147—would occur for those in the lowest-income quintile.  The burden of households in the highest income quintile would increase by 0.12 percentage points, or $200.

 

Once again the non-elderly poor get socked, their taxes rising $206 per household:

 

Thank you sir, may I have another?

 

Of the nonexempt non-elderly owner-occupied households, about 6.6% have incomes less than $60,000 and would experience a property tax burden of 10% or higher in the event an override.

 

As a policy matter, do we really want to give tax-increase waivers to elderly people who own valuable homes? 

 

Proposals for exemptions protecting vulnerable groups may help municipalities successfully pass overrides.

 

While I understand the political imperative to relieve elderly distress, we could be confusing cash-flow limitations – fixed or slowly-rising incomes – with actual poverty.  If the house has that much value, the owner could sell the house and move to something smaller, or failing that take out a reverse mortgage. 

 

A reversal of my fortune?  Would be monstrous!

 

Don’t forget, the elderly more than likely have reduced mortgage payments.  They are no longer paying for children’s food, clothing, and education.  A larger portion of their annual income can go for shelter because smaller portions go for other things.

 

In other words, by granting cash-flow relief at no cost, we will be subsidizing the asset-rich cash-poor elderly in the manner to which they have become accustomed – at the expense of families who probably have higher household expenses (such as raising children).

 

However, other groups vulnerable to overrides—say, non-elderly low-income households with severe property tax burdens—may be motivated to vote against such proposals.

 

[We could also detour into an exploration of 'who benefits from municipal services'.  Families with school-age children obviously benefit more than do the childless; conversely, since they have more to protect, the rich benefit more than the poor from services such as police and fire.  That would take us far afield, so we won't. – Ed.]

 

Don’t go there so late in a blog post

 

I don’t mind subsidies.  I mind invisible subsidies, and I mind surcharges concealing themselves in the absence of subsidy.

 

You can look at it two ways, can’t you?

Send post as PDF to