Report

What Kind of Property Tax Relief Should DC Provide?

by Ed Lazere
PDF of this Report

This month, the DC Council is likely to enact some form of property tax relief for District homeowners.  Home values have risen dramatically in many neighborhoods in recent years.  These increases have led to rising property tax assessments for many homeowners.

The Council has not agreed on the appropriate method for providing tax relief and is considering two leading proposals, both of which are expected to reduce taxes by $24 million a year.  Under one, a homeowner’s property tax bill could not increase more than 10 percent per year.  This bill would lower a 25 percent cap that was set in 2001.  A second proposal would lower the cap to 20 percent and also increase the District’s homestead deduction ‘ the amount of home value that is excluded from property tax ‘ from the $30,000 to $50,000.

An analysis of these two plans shows that the 10 percent cap would provide most of its relief to owners of DC’s most valuable homes and to higher-income neighborhoods.  An increase in the homestead deduction, by contrast, would provide relief much more broadly.  It would target a greater share of the relief on lower-income homeowners, those who are most likely to be burdened by rising property taxes. 

  • Some 53 percent of the relief from the 10 percent cap would go to homes worth $500,000 or more, even though they represent just 20 percent of DC homes.  Only 10 percent of the relief would go to the 36 percent of DC homes that are assessed at $175,000 or less.  (See the Appendix Table for information on median assessments by neighborhood.)
  • A $20,000 increase in the homestead deduction, by contrast, would provide the same dollar benefit to all homeowners.  As a result, the tax relief would be greatest as a share of home value for owners of the lowest-value homes.
  • For example, the proposed $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. 

An increase in the homestead deduction to $50,000 combined with a 20 percent cap on property tax increases thus would target relief on low-income homeowners while also providing assistance to homeowners facing sharp increases in their assessments, regardless of their home’s value.   It also would spread benefits more evenly than a 10 percent cap. 

  • Some 28 percent of the benefits of the 20 percent cap and $20,000 homestead deduction increase would go to homes worth $175,000 or less, compared with 10 percent under the 10 percent cap.
  • Some 30 percent of the tax relief would go to owners of homes worth $500,000 or more, compared with 53 percent under the 10 percent cap.  (This is still higher than the share of DC homes that are assessed at this level ‘ 20 percent.)

The proposal to combine an increase the homestead deduction with a 20 percent cap also would distribute benefits more evenly across the District’s eight wards, as shown in Table 2.

  • Under a $20,000 increase in the homestead deduction combined with a 20 percent cap, 21 percent of the relief would go to homeowners in Wards 5, 7 and 8.  By contrast, these homeowners would receive less than eight percent of the benefits of a 10 percent cap.
  • Homeowners in Wards 2 and 3 would receive 43 percent of the benefits of a homestead deduction increase and a 20 percent cap.  While this represents a substantial share of relief, it is lower than the 60 percent share of the relief they would receive under a 10 percent cap. 

The DC Council also may consider one or more proposals ‘ such as a combination of the 10 percent cap and a $20,000 increase in the homestead deduction.  Yet such a combination would increase the cost of relief well above the $24 million.  While the District’s finances are improving, it is not clear at this time that the District will enjoy a substantial surplus in 2004 or 2005.[1]  As a result, the District may not have sufficient revenues to cover the costs of tax relief beyond the $24 million level.

End Notes:

[1] See “Does the District Have $190 Million Additional Revenue to Spend this Year?”  DC Fiscal Policy Institute, January 9, 2004 (https://www.dcfpi.org/1-9-04bud.htm).