1. Points to Ponder in Property Taxation Jeff Martin Legislative Research Analyst Montana Legislative Services Division

2. Recap of Property Tax Limitations-- Andrew Reschovsky  Response to rapidly rising property values--long-term condition?  Reduced state aid to local governments leading to rising property tax rates--State aid not reliable over time for property tax limits  Aging population--baby boomers  Response to economic uncertainty, rising job loss, increasing stock market volatility--localized?  increasing number of taxpayers facing alternative minimum tax thus losing property tax deduction (congressional fix late last year helps taxpayers with incomes between $75,000-$200,000--AMT affects 5 million returns rather than 23-25 million)

3. Recap of Property Tax Limitation Main Complaints About Property Tax  Tax liability not related to current income ability to pay v. benefits received lifetime income  Large year-to-year increases in tax liability  Local governments spend too much  Vies with federal income tax as the most unpopular tax--large (semi-annual) payments

4. Recap of Some Property Tax Measures in Montana Mitigation for reappraisal  Phase in valuation increases over 6 years--16.6% a year (15-7-111, MCA)  Phase in homestead and "comstead" market value exemptions over 6 years (15-6-222, MCA)  Phase-down of taxable percentage applied to residential and commercial property (and agricultural land) over 6 years (15-6-134, MCA)  Extended property tax assistance, applies this reappraisal cycle and the next (15-6-193, MCA) Property tax limitations under 15-10-420, MCA

5. Recap Continued Circuit breakers  Class four property tax assistance program--reduced tax rates (20%-70%) applied to first $100,000 of market value of residential property based on income (15-6-134, MCA) income levels up to $15,000 for single taxpayer and $20,000 for married or head of household taxpayers--income levels adjusted for inflation (personal consumption expenditures) affects local tax base  Refundable residential property tax credit for elderly homeowner or renter (paid by state)—15-30-171, MCA, et seq. applies to taxpayers 62 years of age or older credit applied to property taxes paid or rent-equivalent tax paid (15% of gross rent) based on income unadjusted for inflation credit phased out for gross household income between $35,000 and $45,000 maximum credit is $1,000--

6. Other Property Tax Relief Measures Targeted Relief  Circuit breakers—What is circuit breaker? program to prevent property taxes from overloading (like electrical circuits) the taxpayer. When property taxes exceed certain % of income, states provide rebate (or reduction) limited by income and/or age (2/3 of states) homeowners (8 states) or renters (Alaska and Oregon), or both (26 states)—36 states participation rates may be low and application complex

7. Other Property Tax Relief Measures— Con’t  Homestead exemptions (or credit)--49 states provides tax relief to all homeowners, but may provide proportionately more relief to owners of modest homes may have income and age limitations  Property tax deferral—25 states defer property taxes until house is sold— government lends money participation rates low

8. Other Property Tax Relief Measures— Con’t Other sources of revenue  Developer fees--affect housing prices  local option taxes sales taxes  disparities among localities—Montana proposals have had revenue sharing schemes  land use decisions income taxes  more equally distributed tax base  businesses may be off the hook

9. Other Property Tax Relief Measures— Con’t  Tax rate limits  Assessment limits--20 states have enacted assessment limits California--Proposition 13--applies to all property Florida--Save Our Homes--owner occupied residence, excludes 2nd homes, rental property, business property Some points for consideration  lock-in effects  installment sales tax  redistribution of wealth  horizontal and vertical equity  equity v. predictability  Have to have both to work effectively Short-term efficiency gains in government Costs outside control of government--pensions (demographics), health insurance, utilities—incentive to restructure--states with and without limits working on this

10. Other Property Tax Relief Measures— Con’t  Revenue caps—see table Voter overrides--success may depend on socio-economic characteristics-- smaller, wealthier communities (with school-aged children) may approve overrides

11. Random thoughts  Maintain existing policy to account for reappraisal with appropriate adjustments  Revise reappraisal cycle  Expand targeted property tax relief  Provide alternative revenue sources  Alternative methods of valuation e.g., acquisition value  Consider alternatives within context of market value standard and integrity of property tax system Visibility and transparency Multiple and conflicting views  Be aware of consequences (intended or not), shifting tax burdens, legal ramifications