Formula for Falling Behind: Lawmakers Should Fix Homestead Credit Formula
Many low-income Wisconsinites will get relatively little benefit from the Governor’s proposal for using the state surplus, even though part of that surplus comes from reduced spending for the tax credits intended to help low-income families.
According to the Legislative Fiscal Bureau, $23.3 million of the projected surplus is from lower-than-expected spending for the Homestead Credit during the current two-year budget period, and another $8.2 million comes from an unanticipated drop in spending for the state Earned Income Tax Credit. Undoing recent cuts to those credits would help create a more equitable plan for using the surplus.
Under the Governor’s proposal, many seniors whose income is solely or primarily from Social Security won’t benefit at all from the income tax cuts in the bill because their income is too low. Although the property tax cutting in the bill is more broadly distributed, that relief isn’t targeted at those who need it most. In addition, for many low-income property owners and renters, the savings provided by the bill have been offset by several years of erosion of the state’s Homestead Credit program.
In fiscal year 2013, the state spent $122 million on the Homestead Credit. That amount is expected to decrease over the next few years, in part because the state is devoting additional resources to scrutinize the tax returns of low-income filers who claim the Homestead Credit.
A Formula for Falling Behind
The erosion of the Homestead Credit is an example of how failing to account for even small increases in the cost of living can harm tax relief in a significant way.
The Homestead Credit uses a formula to cap the share of income a person has to pay in property taxes and to determine how large a credit someone gets. The formula is not adjusted for inflation. As living costs rise, the credit continues to lose value each year, and the amount of property tax paid by seniors and working-class people increases.
There are several ways in which the frozen formula drives up property tax bills for current and former recipients of the credit. For example, it reduces the value of the credit, and it causes many Wisconsinites to lose eligibility as their income gradually climbs above the upper income limit.
From one year to the next, the failure to adjust the Homestead Credit for inflation does not make a significant difference in who qualifies for the credit, or the amount of property tax relief beneficiaries receive. But over a longer period, not adjusting for inflation can have very significant, and negative, effects. The maximum income level to receive any benefit from the Homestead Credit has fallen by 21% over the last 21 years, and the income threshold to receive the maximum credit has dropped by 38%, as shown in Table 1.
The average amount of the credit has been on a steady downward march for at least 20 years, also because of the failure to adjust for inflation. In 1993, the average person who qualified for the credit received $718 for property tax relief, measured in current dollars. By 2013, the average value of the credit had dropped to $531, meaning that the property tax relief received by a typical low-income tax filer decreased by 26% over that period. The chart below shows how the value of the average credit declined between 1993 and 2014.
The Homestead Credit is especially important to Wisconsin’s senior population. In 2012, nearly a third of those receiving the credit were 63 years old or older. One out of 11 seniors in the state, or more than 80,000 older Wisconsinites, benefit from the credit.
The failure to index the Homestead Credit has real consequences, especially for those with fixed incomes, as many seniors have. The lack of indexing means that a person living on Social Security in Wisconsin has paid a total of nearly $12,500 more in property taxes over the last 20 years than he or she would have if the Homestead Credit formula had been adjusted to keep up with the cost of living, according to an earlier Wisconsin Budget Project report (A Hidden Property Tax Hike for Seniors, February 2012).
A Solution at Hand
Lawmakers should use a portion of the surplus to stop the ongoing decrease in the Homestead Credit, thereby keeping property taxes low for owners and renters with low incomes. The relentless erosion of the Homestead Credit could be halted if legislators linked factors used to calculate the credit to changes in the cost of living — a practice that is routine for almost all of the rest of the state tax code. By setting aside about $7 million of the $406 million the Governor has proposed in untargeted property tax cuts, lawmakers could help make sure that property tax relief is available for people who need it.
The Legislature has acknowledged in the past that the Homestead Credit should be adjusted for inflation. In the 2009-11 budget, the Legislature changed the Homestead Credit formula so that it took inflation into account. But in the 2011-13 budget, the Legislature reversed course and again froze the credit for years going forward.
If no action is taken, the value of the Homestead Credit will continue to erode, and people with the lowest incomes will pay more in property tax.
The Legislature could avoid this problem by requiring the Homestead Credit formula to be regularly adjusted for inflation.
By using a portion of the budget surplus for the Homestead Credit, lawmakers could give property tax relief to residents who have experienced shrinking tax credits and rising property taxes.
Tamarine Cornelius and Jon Peacock