Property Taxes for Low-Income People Will Continue to Rise Unless Legislature Takes Action


April 10, 2013

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 Working families and the elderly are paying higher property taxes as the Legislature allows targeted property tax relief to continually shrink. A straightforward solution would be to regularly adjust the Homestead Credit for inflation, which is the routine practice for almost all of the state tax code.

The Legislature’s decision two years ago to effectively freeze the Homestead Credit formula means the credit no longer keeps pace with cost increases for modest-income homeowners and renters. 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.

A new recommendation by Governor Walker may open the door to addressing the rising property tax bills caused by the gradually shrinking Homestead Credit. The Governor has proposed indexing a tax deduction related to higher education tuition costs, a move that would ensure that income eligibility limits for the deduction rise with the cost of living. That proposal is nothing out of the ordinary; nearly all of the tax code is adjusted each year for inflation.

Taking a similar approach with the Homestead Credit by linking income limits and other formula factors to increases in the inflation rate would ensure that those who need property tax relief would be more likely to receive it.

In fiscal year 2012, the state spent $134 million on the Homestead Credit. That amount is expected to decrease slightly over the next few years, in part because the Governor has proposed 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 rarely 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.

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 20% over the last 20 years, and the income threshold to receive the maximum credit has dropped by 37%, 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 1991, the average person who qualified for the credit received $749 for property tax relief, measured in current dollars. By 2011, the average value of the credit had dropped to $547, meaning that the property tax relief received by a typical low-income tax filer decreased by 27% over that period. The chart below shows how the value of the average credit declined between 1991 and 2011.

 

 

The Homestead Credit is especially important to Wisconsin’s senior population. In 2010, nearly a third of those receiving the credit were 63 years old or older. One out of ten seniors in the state, or more than 70,000 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 a February 2012 Wisconsin Budget Project report.

A Solution at Hand

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. Governor Walker’s proposed budget recommends linking the parameters for a different tax benefit to changes in the cost of living. By following the Governor’s lead and taking a similar approach with the Homestead credit, legislators could help make sure that property tax relief was available for people who needed it.

The governor has proposed adjusting the income phase-out levels for the higher education tuition deduction to take into account the pace of inflation. The result would be a small decrease in tax collections, but the move would make sure that the credit is available for modest-income families.

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. This move reduced state spending on the Homestead Credit by $14 million below what it would have otherwise been over the two-year budget period.

Missing Out on the Income Tax Cut

Governor Walker has made it a top priority to reduce state and local taxes. However, he has not taken action to address the rising property taxes paid by the low-income owners and renters.

The Governor has proposed a $343-million income tax cut. But many of the people who are eligible for the Homestead credit will not receive an income tax cut because their income is too low.

If policymakers are concerned about holding down property taxes for low-income people, they could slightly reduce the cost of the income tax cut and use those resources to adjust the Homestead Credit for inflation. The cost of indexing the Homestead Credit would only be about five percent of the cost of the income tax cut. That very modest amount would be a worthwhile investment in property tax relief and would enable far more Wisconsinites to benefit from the tax cut package.

Conclusion

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, as the Governor has proposed for a different tax benefit.