Testimony of Ed Lazere, Executive Director, DC Fiscal Policy Institute, At the Public Hearing on the Owner-Occupant Residential Tax Credit Act of 2003, Bill 15-303, and the Homestead Exemption Amendment Act of 2003, Bill 15-188| July 10th, 2003 |
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 dramatic rise in property values in many District neighborhoods is a sign of the resurging popularity of the District. It also has led to a substantial increase in net worth for many DC homeowners. There are down sides to this progress, of course, including sharp growth in property tax bills and a shrinking supply of housing affordable to middle and lower-income families.
I am sensitive to the concerns DC homeowners have expressed over rising property assessments. I am a DC homeowner, and my home’s assessed value jumped 56 percent this year as my neighborhood transitioned from triennial to annual assessments. This increase started to make up for many years in which my home was well under-assessed. Even now, I think the city’s assessment of my home’s value is less than its actual market value.
While I understand the intent behind efforts to relieve growing property tax bills, I have serious concerns about the proposed remedies, particularly a 10 percent cap on annual increases in property tax bills.
Both the property tax cap included in bill 15-303 and the increase in the homestead exemption in bill 15-188 would reduce DC tax collections significantly at a time when the District is still in the midst of a fiscal crisis. The District has faced large budget deficits for three years, primarily as a result of revenue shortfalls that exceeded $300 million. Balancing the budget has required steep cuts in a number of services, as well as tax increases. Implementing a substantial new form of tax relief now would exacerbate our budget problems. It would force additional budget cuts, and it would make it difficult to reverse either the tax increases or spending cuts that have been implemented in recent years.
Beyond this over-riding concern, the 10 percent property tax cap would weaken DC’s tax system in several ways. First, it is important to note that rising property taxes have helped cushion the effect of the current fiscal downturn. The District’s budget deficits have resulted largely from a tremendous drop in income tax collections and a slowdown in sales tax revenues. Rising property tax revenues have helped offset these declines and therefore have limited the size of our budget shortfalls. This pattern is not unusual. It often is the case that weakness in one revenue source is offset by strength in another. Placing a restriction on the growth of property taxes would reduce this stabilizing effect.
Second, a property tax cap would create serious inequities by effectively taxing some homes at higher rates than others. Homeowners that do not qualify for the cap will pay tax on the full value of their home, while homeowners that qualify for the cap will pay tax on less than their home’s full value — in effect a lower property tax rate.
New homeowners are one group that would not be eligible for the property tax cap under bill 15-303, as is the case under the current 25 percent property tax cap. Complaints already have been raised by some new and potential homeowners that excluding them from the 25 percent cap unfairly taxes them at higher levels than their neighbors. At a time when the District is trying to attract new homeowners, setting higher property taxes on newcomers seems to be a move in the wrong direction.
More significantly, the 10 percent property tax cap will create inequities between low- and high-income residents and between lower and higher income neighborhoods. Property tax assessments have risen most rapidly in DC’s more affluent neighborhoods. While assessments have risen on other areas, the increases generally have been below 10 percent per year in the District’s less-affluent neighborhoods. Given these trends, a property tax cap would provide much more benefit to higher income neighborhoods than to homeowners in lower income neighborhoods.
A January DCFPI report that assessed the impact of the 25 percent property tax cap found that roughly nine of 10 homes in the neighborhoods such as Georgetown, Cleveland Park, and Foxhall are benefiting from the cap. By contrast, in less affluent neighborhoods — such as Trinidad and Congress Heights, the share of homes that qualify for the cap ranges from none to 14 percent. DCFPI’s report also found that half of the $20 million in property tax relief resulting from the cap goes to owners of homes worth $500,000 or more, even though they represent only 17 percent of DC homes. Homes worth $250,000 or less, which account for 60 percent of all DC homes, receive only 15 percent of the benefits of the cap.
This means that owners of DC’s most valuable homes effectively are paying a lower property tax rate than owners of lower-value homes in less affluent neighborhoods.
While a 10 percent property tax cap would benefit a broader set of homeowners than the 25 percent cap, the benefits undoubtedly would be skewed toward the owners of the most valuable homes.
It also is worth noting that while middle- and upper-income residents may be facing large increases in property tax bills, they have benefited from substantial cuts in both DC and federal income taxes in recent years. A family of four with income of $100,000 will pay $700 less in 2003 as a result of DC income tax cuts implemented since 1999 and $3,200 less in federal income taxes, a total of nearly $4,000.
Finally, I would like to challenge the notion that a property tax cap is needed to protect senior citizens living on fixed incomes and low-income families who might otherwise be priced out of their home by rising property taxes. DC already offers significant property tax relief to both groups. Senior citizens with incomes of $100,000 or less qualify for a 50 percent reduction in their property tax bill. This is a very generous benefit and covers nearly all elderly homeowners. While property taxes may be rising for elderly homeowners, their tax bills are likely to be far lower than elderly households at similar income levels in other jurisdictions. In addition, the District now has two tax relief programs for low income homeowners of all ages, including the recently enacted five percent cap for long-term low income owners.
For all of these reasons, a property tax cap is not an appropriate policy for the District. As noted earlier, significant property tax relief is not advisable at this time given the District’s still-weak budget conditions. Even if DC’s revenue collections improve significantly in the near future, making property tax relief more affordable, relief should come through broad-based changes such as a reduction in the property tax rate or an increase in the homestead exemption. These kinds of tax relief would be enjoyed broadly by all homeowners and would not restrict future growth in revenues the way a cap would. In fact, raising the homestead deduction would provide more relief, as a percentage of home value, to owners of the lower value homes than to owners of higher-value homes.
I therefore support the principle behind the Homestead Exemption Tax, which would increase the homestead exemption from $30,000 to $100,000, although I do think this relief is affordable at this time. In addition, I am concerned about the size of the homestead exemption increases proposed in the bill. A homestead exemption of $100,000 would effectively take a large share of home values out of the property tax base and thus could have a destabilizing effect on property tax revenues. A more modest increase in the homestead deduction, possibly coupled with a decline in property tax rates, may be more appropriate, when property tax relief becomes affordable.
In short, I urge the DC Council to hold off on enacting costly new property tax relief at this time. It is important to remember that the District is still in the midst of the transition from triennial assessments to annual assessments, with the final third of homes just transitioning this year. The shift from triennial to annual assessments is a major factor behind the large jumps in assessments. Once every home has been under annual assessments for a few years — and assuming that DC’s red-hot real estate market will have to cool down somewhat before long — it seems likely that assessment increases for most homeowners will drop to more tolerable levels over the next few years.
Finally, I think the Council could take steps to assist low- and moderate-income homeowners for whom rising property taxes are a significant problem, primarily by improving existing tax relief mechanisms. The District now has two low-income property tax relief programs — the long-standing property tax credit provided through Schedule H on the income tax form and a new five percent cap on property tax increases for “long-term low-income homeowners,” which will go into effect for the first time in 2004. While the intent of the new cap is laudable, it unfortunately may add confusion. Some homeowners will be eligible for one program, some will be eligible for the other program, and some will be eligible for both. Given this complexity, it is likely that many homeowners will find it difficult to claim all of the relief for which they are eligible. It may make sense to combine the two programs into one, using the best features of each one. The Council also could consider raising the maximum income eligibility to include more moderate-income households. The existing Schedule H property tax credit has an income limit of $20,000, and the five percent cap is limited to income of roughly $42,000 for a family of four. Later this year, the DC Fiscal Policy Institute plans to make specific recommendations for combining these two property tax relief programs.
Thank you again for the opportunity to speak today. I am happy to answer any questions you may have.