Testimony of Ed Lazere, Executive Director DC Fiscal Policy Institute At the Public Hearing on Bill 16-124, the “Owner-Occupant Residential Tax Credit and Exemption Expansion Act of 2005”, Bill 16-126, the “Commercial Property Tax Credit Act of 2005”, Bill 16-128, the “Senior Citizen Real Property Tax Deferral Act of 2005”, District of Columbia Committee on Finance and Revenue| March 18th, 2005 |
PDF of this testimony
Chairman Evans, other members of the Committee, thank you for the opportunity to speak today. My name is Ed Lazere, and I am the executive director of the DC Fiscal Policy Institute. DCFPI engages in research and public education on the fiscal and economic health of the District of Columbia, with a particular emphasis on policies that affect low‑ and moderate‑income residents.
The issue of rising property assessments is a serious one and deserves Council attention. Nevertheless, I have strong reservations about the proposal to cap property tax increases at five percent per year for all homeowners, as well as the proposal to cap commercial property tax increases at 10 percent.
Bill 16-124, the “Owner-Occupant Residential Tax Credit and Exemption Expansion Act of 2005”
A five percent cap would constrain growth in tax revenues and could create serious fiscal problems in the future. On average, state and local governments have grown at a rate of six percent per year over the past 20 years. Constraining the growth of a major revenue source, as this bill would do, could make it hard to finance basic services over the long term. Flexibility with the property tax, the most stable of our major tax sources, is critical because other tax sources can be highly volatile. Between 2002 and 2003, for example, the District’s income tax collections dropped $240 million. (Even today, despite our strong economy, income tax collections will be no higher than in 2002.) If property tax revenue growth had been capped tightly that year, the city’s budget shortfall would have been much larger than the $323 million gap that we experienced.
It is important to note that the existing 12 percent property tax cap already is providing significant relief from rising assessments. For this testimony, I reviewed 80 homes that sold in the last six months. The average sales price was near $700,000, but they are being taxed under the cap as if they are worth $450,000 on average. Most homes are now being taxed well below their actual value.
It also is worth noting that both DC and federal income tax rates have been cut in recent years, providing real relief that offsets the increase in property taxes. For a family earning $100,000, combined DC and federal income taxes are about $3,000 per year lower than five years ago. The remaining steps of the Tax Parity Act would provide an additional $1,000 in relief for such a family. If the concern behind the five percent cap is that property tax bills are becoming unaffordable, the fact that other tax bills have declined is relevant.
A tax cap is problematic because it leads to situations where two homes with identical market values can pay vastly different tax bills under a cap. A home that rises in value from $300,000 to $400,000 over three years would pay less in tax under a five percent cap than another home that rises from $350,000 to $400,000, even though the homes would have the same value. Also, two identical homes sitting side by side could have very different tax burdens under a cap if the homes were bought just a few years apart, because homeowners do not get the cap in the first year they own their home.
The basic premise behind a tax cap seems to be that property taxes are the most burdensome for owners whose homes are rising the fastest in value. Yet a rising assessment is not necessarily a good measure of tax hardship or ability to pay taxes. A cap provides substantial relief to the wealthiest DC households, even though they can probably afford to pay their full tax bill. Meanwhile, low-income homeowners may struggle to pay their tax bill even if it is not rising rapidly. Thus, a tax cap may provide more relief than needed to some residents but not enough to others.
One example is a home on Foxhall Road that sold for $3 million in 2003. Its assessed value is now $3.1 million, but its taxable assessment is just $2.3 million. This home is receiving nearly $8,000 in tax relief under the 12 percent cap. Under a five percent cap, the owner would get an additional $1,000 next year.
This is not purely anecdotal. If a five percent cap is adopted, 38 percent of property tax relief will go to the 13 percent of homes assessed at $750,000 or more. Just 11 percent of the relief would go to the 33 percent of DC homes assessed below $250,000.
Given these concerns, the Council should consider targeting tax relief to low-income households who struggle to pay tax bills and meet their basic needs. The District already provides a 50 percent property tax break to seniors with incomes below $100,000 in income. And there is a property tax credit for low-income households, but it is limited to those with incomes below $20,000. That income eligibility level has not been adjusted since the credit was created in the late-1970s. The maximum credit amount — $750 — has been unchanged since 1979. Modernizing the “schedule H” property tax credit to cover a wider range of low and moderate-income families thus is one step that can be taken to target aid on those most in need of property tax relief.
Another alternative is to expand the Homestead deduction beyond the $45,000 level included in this bill. The Homestead Deduction provides tax relief to all homeowners, but the relief is greatest as a percentage of home value for owners of the lowest-value homes.
It appears that the budget submitted by Mayor Williams will include a freeze on property taxes for households under $50,000 in income and an increase in the homestead deduction to $60,000. While I have not seen the specifics of this proposal, this type of targeted tax relief is consistent with the principles noted above. It is the kind of property tax relief the city should consider.
Bill 16-126, the “Commercial Property Tax Credit Act of 2005”
This bill would set a 10 percent cap on annual tax increases for commercial property, including residential rental properties. While this cap is not as tight as the proposed five percent cap on owner-occupied homes, it raises the same concern that it would constrict growth of a key revenue source. A growth rate of 10 percent may seem reasonable, but a stronger growth rate may be needed to maintain overall revenues if other sources are declining, as happened in the District in 2002.
Moreover, the concerns that lend logic to offering property tax relief to homeowners generally do not apply to commercial properties. Commercial properties are used to earn profits, and their assessed values are directly related to the profit-earning potential of the property. Rising tax assessments correspond with rising attractiveness of a property for commercial use and thus are likely to correspond with rising lease charges and rising business income. This is unlike the situation for homeowners, who are not using their property to generate income.
It also is worth pointing out that the District has a very low commercial vacancy rate, despite a relatively high commercial tax rate and rising assessments. The office vacancy rate in DC stood at 5.5 percent in January, compared with more than eight percent in Montgomery County and more than nine percent in Northern Virginia. Taxes do not appear to be affecting the desire of businesses to locate in the city.
While rising assessments may be changing the types of businesses that can succeed in certain parts of the city, that is market driven and is not uncommon. Commercial tenants change constantly in response to market changes. By and large, commercial properties should be used in the most profitable way.
Moreover, it is unlikely that a cap on property taxes would have a significant effect on business activity or location. If the goal of the property tax cap is to help certain types of businesses remain in certain areas of the city despite market pressures, a more targeted approach may make sense.
In the case of rental residential properties, it is worth noting that the tax rate paid by owners of these properties has fallen by one-third in recent years as a result of the Tax Parity Act. The rate reduction is likely to have offset a large share of the impact of rising assessments. Nevertheless, rising property taxes for residential properties could add to market pressures that have driven rents up dramatically in recent years. Tax relief targeted on owners of residential rental properties may be warranted, but only if they are coupled by a commitment of landlords to limit rent increases. Without that commitment, the proposed 10 percent cap may do nothing to help renters.
In sum, I do not see evidence that broad business property tax relief is warranted for economic development reasons. The city’s commercial real estate market is strong. The fact that business leaders agreed just last year to a tax increase on mid- and large-sized businesses to help finance a baseball stadium provides further evidence that tax relief is not needed at this time. To the extent that business property tax relief is considered this year or in the future, it may make sense to focus on lowering the tax rate, which businesses regularly note is higher than in suburban jurisdictions.
Bill 16-128, the “Senior Citizen Real Property Tax Deferral Act of 2005”
I support the intent of this bill to allow low- and moderate-income senior citizens to defer property taxes on their home. The bill would allow elderly homeowners with incomes under $50,000 to defer taxes until the amount of the deferral reaches 25 percent of the value of their home. This bill would assist homeowners who are “house rich” and “cash poor” without resulting in a permanent loss of revenues for the District, because the deferral ultimately would be repaid with interest.
This bill would add to other provisions that aid elderly homeowners, including the 50 percent property tax break for elderly homeowners with incomes below $100,000, the Schedule H property tax credit for households under $20,000 in income, and the five percent property tax cap for long-term, low-income homeowners. As is the case with the existing provisions, outreach would be needed to ensure that eligible residents know about the option to defer and the process for getting a deferral.