Presentation to the Wisconsin Department of Revenue The School Property Tax and Homestead Credits: Accuracy, Equity, and Contribution to Overall Fiscal Relief Vanessa Allen Danielle Fumia Kelly Krupa Rifelj Matthew Steinberg Presentation to the Wisconsin Department of Revenue Friday, May 4, 2007

Overview of Talk Research questions Property tax relief in Wisconsin Analytical methodology Conclusions Recommendations Limitations of the analysis Concluding remarks

Research Questions Does Wisconsin accurately estimate the Property Tax Equivalent (PTE) for renters? Does the percentage differential for renters in their PTE estimates accurately measure the cost of heat? How is individual property tax relief distributed across income levels and tenure status? What is the composition of overall fiscal relief – local assistance plus individual relief – realized by a median-valued home?

Property Tax Relief in Wisconsin Relief to Local Governments Funds local government functions and offsets need for higher property taxes (59% of GPR) Aid to schools, shared revenue, credits applied to tax bills, & fiscal controls Individual Relief Income tax credits for homeowners and renters School Property Tax expenditures in 2006: $373 million Homestead Credit expenditures in 2006: $114 million Classification laws (farmland) and tax deferrals (elderly)

School Property Tax Credit Enacted in 1989 Design: 12% of first $2500 in property taxes or PTE Eligibility: homeowners and renters No income limit Non-refundable Maximum award: $300

Homestead Credit Circuit-breaker program pioneered by Wisconsin in 1964 out of a concern for the low-income aging population 18 states now have circuit-breaker programs Design: Calculation: see page 6 of report Eligibility: all homeowners and renters age 18+ Refundable Income limit: $24,500 Maximum award: $1160 The credit limits are not adjusted annually.

Estimating the PTE Percentages for Renters Estimate of the property taxes renters pay or percent of rent which equals property taxes (100% incidence assumed) PTE percentage = 20% for renters with heat in their rent and = 25% for those without Calculation: Total Property Taxes/Total Rent From Census and City Assessor’s data Findings Milwaukee = 22% Madison = 13%

Estimating the PTE Percentages for Renters PTE Percentage Equation: Estimate property taxes paid for apartment buildings (5+ units) from city assessor’s office Property Taxes Paid = Property Value x Net Mill Rate Estimate contract rent paid and rent asked for on apartment buildings of five units or more Total Property Taxes Paid Total Contract Rent + Total Rent Asked for on Vacant Apartments

Evaluating the Heat Differential Assumption Rent with heat included = Rent with heat separate + heat paid (for equivalent properties) Implications if assumption is accurate: Heat = 25% of rent if heat is not included Heat = 20% of rent if heat included Renters with heat included would pay 25% more than those without heat included

Distribution of Relief Analyzed the equity impacts of the credits SPTC Adjusted gross income class and tenure status Homestead Credit Tenure status

Distribution of Relief (cont.) Findings Claimants distributed proportionately by tenure status Low-income claimants use less of their SPTC Distribution of SPTC Credit Claimants and Credit Amounts by Income Income Percentage of Claimants Using Some Portion of the SPTC Average Credit Claimed Average Credit Used Less than $10,000 13.7% $154.15 $26.73 $10,000 – 14,999 72.3% $164.36 $103.20 $15,000-24,999 95.2% $176.23 $157.81 $25,000 – 39,999 99.8% $200.34 $199.92 $40,000 – 59,999 99.9% $237.65 $237.61 $60,000 – 79,999 100.0% $264.97 $264.96 Source: Created by authors using tax return data provided by the Wisconsin DOR for 2005(06)

Distribution of Relief (cont.) Findings (cont.) Renters receive a smaller credit than homeowners Renters credits constitute a larger share of their PTE Distribution of SPTC and Homestead Credits by Tenure Status Homeowner Renter SPTC Average Credit Claimed $250 $143 Average Credit Used $248 $140 Percentage Using Some Portion of Credit 92% 83% Percentage of property taxes or PTE paid 7% 9% Homestead Average Credit $540 $475 27% 44% Source: Created by authors using tax return data provided by the Wisconsin DOR for 2005(06)

Composition of Overall Fiscal Relief Local Assistance Applied rate of state aid to median-valued home Local assistance programs with appropriations above $100 million Full value of taxable real estate property in Wisconsin Added lottery and gaming credit as provided by LFB Info. Paper 13 Individual Property Tax Relief Median-income & low-income homeowners SPTC – Property taxes, income tax liability Homestead Credit – Property taxes, household income

Individual Property Tax Relief as a Percentage of Overall Fiscal Relief

Conclusions Variation in the estimates of the PTE percentages for Madison (12.7) and Milwaukee (21.6) The non-refundability of the SPTC may create some inequities in the distribution of property tax relief based on income and tenure status The Homestead Credit may alleviate income disparity but inequities may remain based on tenure status Composition of overall fiscal relief has remained constant over the last 15 years (for a median-income family in a median-value home)

Recommendations To more accurately calculate the PTE percentages across municipalities and statewide, we recommend that the DOR disaggregate rental properties The DOR should survey property owners and management companies to acquire: Total residential units in the property Total contract rent on these units Property taxes on the residential rental portion of these properties

Recommendations (cont.) Wide variance in the PTE percentages in Madison and Milwaukee call for a further analysis investigating the causes of this disparity The Wisconsin DOR should support legislation that would annually adjust the Homestead Credit formula limits for inflation

Limitations of the Analysis Property tax data for rental units unavailable statewide Prohibits a systematic and comprehensive estimate of PTE for renters Data unavailable for the number of rental units with and without heat included in their contract rent, and for the approximate cost of heat for renters paying heat separately This analysis was unable to estimate whether (and to what extent) differences may exist in the PTE percentages among renters

Concluding Remarks Thank you Questions