Testimony of Ed Lazere, Executive Director, DC Fiscal Policy Institute, At the Public Hearing on the Homestead Exemption Amendment Act of 2003, Bill 15-188, the Residential Real Property Tax Deferral and Recapture Act of 2003, Bill 15-619, and the Topic of Reducing the Real Property Tax Rate For Class 1 Owner-Occupied Properties| January 13th, 2004 |
Chairman Evans and 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 an emphasis on policies that affect low‑ and moderate‑income residents.
The DC Council is likely to adopt some form of property tax relief in the near future. One option is the 10 percent cap on annual tax increases that came before the Council for a first reading in December. Today’s discussion of other options should be held with the 10 percent cap in mind.
This is particularly important because the cost of any enacted tax relief should be a primary issue. The 10 percent cap would reduce revenues by $24 million if implemented this year. While District revenues are growing, it is not clear that the District will enjoy a large surplus this year or next. The CFO informally has reported that we will collect $90 million in higher revenues this year, but he also has reported $127 million in spending pressures that have not been resolved yet by the mayor and Council. For fiscal year 2005, revenue projections show an additional $100 million in revenues, but the budget projection made last summer assumed spending would rise only 2.2 percent in 2005. If the baseline budget that will be released in February shows that spending will need to grow more than that to maintain existing programs, some or all of the additional revenues will be needed to address those spending needs.
For these reasons, it may not be affordable to adopt both a 10 percent cap and an increase in the homestead deduction or a cut in the tax rate, and the Council may need to set priorities for property tax relief.
My organization has expressed serious concerns about the impacts of a 10 percent cap, particularly that a majority of its relief would go to owners of DC’s most valuable homes and to higher-income neighborhoods where the real estate market has been strongest. We have suggested that the Council adopt tax relief that would provide relief more broadly.
One such option is to increase the homestead deduction from the current level of $30,000, as proposed in bill 15-188. An increase in the homestead deduction provides the same level of relief — in dollar terms — to all homeowners. A $20,000 increase in this deduction, for example, would reduce each homeowner’s tax bill by $192.
While a higher homestead deduction would benefit all homeowners, it would target the greatest relief — as a percentage of the tax bill — to owners of lower-value homes.
For example, a $20,000 increase in the homestead deduction would equal 20 percent of home value for a home worth $100,000. The increase in the homestead deduction would equal 10 percent of the value of a home worth $200,000, and five percent of the value of a home worth $400,000. Thus, an increase in the homestead deduction is likely to provide the greatest relief to lower-income homeowners, those for whom property tax bills are most likely to be a burden.
Unfortunately, bill 15-188′s proposal to increase the homestead deduction to $100,000 is likely to be too costly, with an impact of roughly $70 million per year. A smaller increase thus is warranted.
Another option for providing property tax relief is to reduce the tax rate. Like an increase in the homestead deduction, a rate cut would provide relief to all homeowners. For several reasons, however, a rate cut is not as attractive as an increase in the homestead deduction. Rather than providing the greatest relief to lower-income homeowners, a rate reduction would provide the same relief as a percentage of the tax bill to all homeowners. A rate cut is also likely to have larger long-term effects on tax revenues than an increase in the homestead deduction. Finally, a reduction in the property tax rate for homeowners effectively would require the District to separate owner-occupied homes and rental residential properties into two classes, just a few years after collapsing two such classes into one. While creating a new class may not pose significant administrative burdens, since the District’s tax office already treats the two types of residential property differently as a result of the homestead deduction and the 25 percent cap for owner-occupied units. But the Council may be reluctant to reverse steps taken such a short time ago.
Finally, I would like to address bill 15-619, which would limit increases in property tax bills to 10 percent per year. Unlike the 10 percent cap, however, which would forgive taxes not paid as a result of the cap, bill 15-619 would defer the unpaid portion of the tax bill into future years. It thus would hold homeowners responsible for the taxes resulting from an increase in their home’s value, but would spread the burden of the higher taxes over a number of years. If this bill would not pose significant administrative challenges, it is an effective way to limit the immediate burden of rising property taxes sought by supporters of the 10 percent cap while also avoiding some of the negative effects of a cap. If a 10 percent cap is adopted, I urge the Council to consider a recapture provision.
That concludes my testimony. I would be happy to answer any of your questions.