"The property tax is the oldest major revenue source for state and local governments. At the beginning of the twentieth century, property taxes represented more than eighty percent of state and local tax revenue. While this share has diminished over times as states have introduced sales and income taxes, the property tax remains an important mechanism for funding education and other local services." This quote from the Institute on Taxation and Economic Policy demonstrates how important property taxes are to state and local governments for generating revenue. The basics of property taxes, property tax homestead exemptions, property tax circuit breakers and the Michigan property tax story will be addressed in this policy brief to paint a concise picture about the issues surrounding this tax.. The idea of using a property tax is linked to the view that the tax functions as a user-charge on residents for local governments services, such as schools and police protection. It is a stable and very enforceable revenue source which makes it an attractive option for local governments as it is a predictable revenue stream. The property tax rate is usually in the form of a mill, which is one-tenth of a percent (i.e. 30 mill is 3%). What is actually payed in property taxes is a several step process, since you do not usually pay the property worth times the tax rate. The process first involves finding the estimated market value of a property, then finding out what the assessed, value for tax purposes, value is which is determined by multiplying the market value by an assessment ratio (a percentage between zero and one hundred). Once the assessed value is found exemptions are then factored in that reduce the value even more and this determines the taxable value, the taxable value is then multiplied by the tax rate. Finally tax credits are then taken into account and the property tax owed is determined. The general problem associated with the tax is that it is a regressive tax since low-income tax payers pay more of their income in property taxes then wealthier individuals, nationwide it's estimated by the Institute on Taxation and Economic Policy that the poorest twenty percent of Americans paid 3.6% of their income while the wealthiest 1 percent payed .7%. Several proposals have been implemented to address this issue in various states which will be discussed in the following paragraphs.
One policy to reduce the regressiveness of property taxes is the homestead exemption. The way that the exemption works is that a certain amount of the home's value will be sheltered from the tax, i.e. the first $5,000 of property will not be taxed, this is less regressive because the exemption reduces the property value more for low-income people. Two types of homestead exemptions exist: the flat dollar and the percentage exemptions. The flat dollar exempts a certain dollar amount from the value of the home, while the percentage exempts a certain percentage of the property value. Although this is a more progressive approach to reducing the property tax burden, the Institute on Taxation and Economic Policy suggests that the exemption has two major flaws: 1) renters are excluded from the exemption, and they tend to be lower income individuals 2) the exemption usually applies to all income levels which makes this policy more costly than other options.
Another approach to making property taxes more progressive is the circuit breaker credit. The way that the credit works is that people earning below a certain income level are given a property tax credit when their property taxes exceed a certain percentage of their income. The advantage of this policy is that it explicitly targets low-income taxpayers and reduces their tax burden. The main criticism of this proposal is that individuals have to apply for the credits, while something like the homestead exemption is given automatically, so people have to be aware of the credit.
In 1991 Michigan had the highest property tax rate in the midwest, and the fourth highest in the nation. A ballot initiative called Proposal A was passed by voters in 1994 to rectify the situation and reform property taxes. The proposal reduced school property taxes by 33%, and increased the sales tax by 2%. The policy reduced property taxes, reduced the reliance of schools on property tax funding, and made it so local school boards could not raise property taxes on their own. The property tax level in Michigan is now at about the national average, and the amount being payed by taxpayers is about $2,000 less than if Proposal A had not passed. The problem with the policy is that it has led to inadequate levels of funding to schools. Michigan tackled the burdensomeness of property taxes in a much different way then the two previously mentioned proposals, as the other proposals were more concerned with making the tax less regressive while Proposal A just transferred one regressive tax to another.
Whether you think that Proposition A, circuit breaker policies, the homestead exemption, or an entirely different policy is the right way to make property taxes less burdensome is up to you. Its clear that these are three very different approaches to "fixing" property tax problems and how effective they are in achieving their goals is debatable.
"How Property Taxes Work." ITEP. Institute on Taxation and Economic Policy, Aug 2011. Web. 18 Apr 2012. .
"Property Tax Homestead expemtions." ITEP. Institute on Taxation and Economic Policy, Sep 2011. Web. 18 Apr 2012. .
"Property Tax Circuit Breakers ." ITEP. Institute on Taxation and Economic Policy, Sep 2011. Web. 18 Apr 2012. .
Peterjohn, Karl. "The Property Tax Cut Debate." Mackinac Center for Public Policy. Mackinac Center for Public Policy, 19 Apr 1991. Web. 18 Apr 2012. .
Brouillette, Matthew. "Property Tax & School Funding Reform." Commonwealth Policy Brief. The Commonwealth Foundation, Sep 2002. Web. 18 Apr 2012.
"Proposal A -- Background Information." Proposal A was a landmark event in Michigan school finance. Michigan State University, n.d. Web. 18 Apr 2012. .