How to Make Property Tax Relief Fair and Useful

December 15, 2008 — Even with the current dramatic fall in housing values, Virginia would benefit from a sound statewide property tax relief policy, according to a study in the latest issue of The Virginia News Letter, published by the University of Virginia's Weldon Cooper Center for Public Service.

In fact, well-designed property tax relief may be more crucial than ever for people squeezed by reduced income during this recession, writes economist John H. Bowman, an authority on public finance.

In an article titled "Property Tax Relief: Why Virginia Should Adopt a State-funded Income-targeted Approach," Bowman, emeritus professor of economics at Virginia Commonwealth University, says the property tax itself has a vital role to play in meaningful self-government by being under local control.

It is the oldest broad tax in the United States and more "visible" than many taxes, helping people stay aware of the costs they bear for government services. If it were eliminated in Virginia, the income tax would have to be doubled or the sales tax more than tripled to replace it, Bowman says.

Rather than eliminate the property tax, localities should streamline administration of it and keep their assessments fair and always abreast of market developments, he says.

Along with those improvements, Bowman argues, the General Assembly should adopt a statewide "circuit breaker" form of tax relief, designed to prevent an overload of the property tax on certain homeowners, just as an electrical circuit breaker protects against an overload of current.

Such relief is found in at least 35 states now. Virginia differs from other states by making property tax relief available only as a local option and with local funding.

In times of economic stress, many homeowners and renters need property tax relief to make ends meet, Bowman says. (Renters in effect pay property taxes because landlords pass it along, he points out.)

But across-the-board property tax relief is wasteful and ineffective, he says, because many households don't need it, and those truly in need don't get a meaningful amount.

The worst form of property tax relief is a system based on the amount of increase in assessed value, he says, noting that most homeowners don't suffer financial hardship just because their assessments rise.

Furthermore, age is not a good measure of  need. In fact, poverty rates are lower for the elderly than for the non-elderly, Bowman notes.

Targeting property tax relief to where it is needed can be achieved best by using a well-designed circuit-breaker approach, Bowman argues. "Relief based on income need is more effective than relief that is widespread for everyone."

The hallmark of circuit-breaker tax relief is that relief declines as income rises. Bowman advocates a Virginia policy that also includes these four key features:

• State funding, because income levels and community wealth differ widely across the state.

• A "threshold formula" that sets a level that the tax must exceed as a percentage of income before any relief is received. This can provide relief for people who are truly overburdened by rising property taxes due to rising home values, without the large revenue losses that result from caps on assessment.

• A broad definition of income that considers all sources, including Social Security, so that only the truly needy of all ages receive relief.

• Relief only up to a certain limit of home value, so that owners of very expensive homes don't get full relief.

To make such a system work, income numbers from all sources have to be kept current and relief must be targeted narrowly, Bowman says. Then, effective tax relief can be provided to those who actually need it.

"Because the relief is provided more narrowly, the underlying logic and revenue productivity of the property tax are better preserved."

— By Robert Brickhouse