When it comes to property tax reform, there are better ways
Jeff Chapman

Consider for a moment a family living in a typical Olympia home worth $250,000. Last year, that household would have paid property taxes that provided roughly $1,700 in support for public schools, $400 for police and justice, $200 for fire protection and emergency medical services, and $500 for all other local government services, including libraries, parks, and economic development.

If our hypothetical family earned $100,000 last year, their property tax contribution to these important services would have equaled less than 3 percent of their income. Not a bad bargain.

On the other hand, if our family had earned $50,000 (about the median household income in Olympia), they would still have the exact same property tax bill, but it would require nearly 6 percent of their income.

This contrast is typical of the situation in Washington today. Across the state, home owners in the bottom 40 percent of income distribution pay over twice as much in property taxes as a share of household income as do the richest 20 percent. The responsibility for funding schools and local governments is greater for those with less income. That’s unfair. To make matters worse, it potentially creates a barrier to home ownership.

The good news is that this problem is not unsolvable. By adopting reforms successfully implemented in other states, policymakers could ease property taxes on truly struggling homeowners while still adequately funding the services - including schools, emergency services, parks, criminal justice - to which property tax receipts are dedicated.

Instead, recent attempts at property tax reform have used the blunt instrument of broad tax limitations - such as I-747, which since 2001 has limited growth in property tax levies well below the level needed to maintain quality services. Those caps have sharply curtailed the ability of our governments, particularly our local governments in rural communities, to fulfill their essential roles.

Yet these limits have done nothing to address the inequities in the system. Last June, a lower court overturned I-747, creating an opportunity - if legislators are wise enough to seize it - to start a broad discussion about how to simultaneously address the adequacy and equity problems of the current property tax system.

There are better, smarter approaches to reform. One idea is a homestead exemption, which would exempt a certain portion - $50,000 might be reasonable - of the value of primary residences from taxation. At that level, state homeowners in the lowest 20 percent of income would receive a 12.5 percent cut on average, while highest income households would receive a 3.1 percent cut. It would make the system fairer and could be paid for by a shift of some tax responsibility to commercial and non-primary residential property

Best of all, perhaps, would be the creation of a circuit breaker in Washington state. Just as a circuit breaker in a home protects the electrical system from an overload that exceeds its capacity, a property tax circuit breaker protects homeowners from a tax bill that is too high relative to their income. One reasonable circuit breaker scenario would be to give a tax credit of up to $1,000 to lower and middle income homeowners whose property tax bill exceeds five percent of their income.

Such a plan would be very efficient in targeting help to those who need it most while remaining revenue neutral. Lowest income homeowners would receive a tax cut of nearly 15 percent while the highest income households would see a slight increase of two percent. And it would entail only a small shift in taxes to non-residential property, and so would likely be more palatable to the business community than a homestead exemption.

It is not a radical idea: 18 states already have circuit breakers of this sort on the books, and 16 of those states extend circuit breaker protection to renters as well as homeowners (renters indirectly pay a portion of property taxes in the form of higher rents).

Here in Washington State, we already recognize that property taxes should depend to some degree on ability to pay. An existing program for low-income retired homeowners lowers their property taxes from what would be 11 percent of income to three percent. Our proposed circuit breaker would in some ways be an expansion of this existing program.

Legislators should avail themselves of this important window of opportunity to consider a reform that would fund needed services while making the system fairer. By marrying these two principles, they can implement a sensible and sustainable reform that will meet the needs of both stressed homeowners and local governments straining to maintain the core services we all depend on.

Jeff Chapman is the research director at the Washington State Budget & Policy Center.