The School Property Tax
and Homestead Credits:
Accuracy, Equity, and Contribution
to Overall Fiscal Relief
Presented by
Vanessa Allen
Danielle Fumia
Kelly Krupa Rifelj
Matthew Steinberg
Prepared for the Wisconsin Department of Revenue
May 4, 2007
Workshop in Public Affairs, Domestic Issues
Public Affairs 869
Spring 2007
Robert M. La Follette School of Public Affairs
University of Wisconsin-Madison
©2007 Board of Regents of the University of Wisconsin System
All rights reserved.
Foreword revised May 11, 2007
For additional copies:
Publications Office
La Follette School of Public Affairs
1225 Observatory Drive, Madison, WI 53706
www.lafollette.wisc.edu/publications/workshops.html
The Robert M. La Follette School of Public Affairs is a nonpartisan
teaching and research department of the University of Wisconsin–
Madison. The school takes no stand on policy issues; opinions
expressed in these pages reflect the views of the authors.
Table of Contents
List of Figures....................................................................................................... iv
List of Tables ........................................................................................................ iv
Foreword................................................................................................................ v
Acknowledgments ............................................................................................... vii
Key Terms............................................................................................................. ix
Executive Summary ............................................................................................. xi
I. Introduction ....................................................................................................... 1
II. Property Tax Relief in the United States ....................................................... 3
Local Government Reliance on Property Taxes .............................................. 3
Property Tax Incidence..................................................................................... 3
Property Tax Relief Programs .......................................................................... 4
Individual Property Tax Relief in Wisconsin................................................... 5
School Property Tax Credit........................................................................... 5
Homestead Credit.......................................................................................... 5
III. Accuracy of Credit Formulations ................................................................. 7
Property Tax Equivalent ................................................................................... 7
Property Tax Equivalent Analysis .................................................................... 8
Formulaic Heat Differential........................................................................... 11
Formulaic Heat Differential Analysis............................................................ 12
IV. Analysis of Equity......................................................................................... 13
Analysis of the Distribution of Individual Property Tax Relief .................... 14
Distribution of the School Property Tax Credit .......................................... 14
Distribution of the Homestead Credit ......................................................... 19
V. Contribution to Overall Fiscal Relief ........................................................... 21
Assistance to Local Governments................................................................... 21
Composition of Fiscal Relief .......................................................................... 22
VI. Conclusion ..................................................................................................... 28
VII. Recommendations ....................................................................................... 29
References............................................................................................................ 31
Appendix A: Property Tax Relief: “Circuit-Breaker” Programs........................ 35
Appendix B: History and Development of the Homestead Credit ..................... 41
Appendix C: Methodology for Estimating the Property Tax Equivalent........... 43
Appendix D: The Assumption behind the Heat Differential .............................. 44
Appendix E: Wisconsin Adjusted Gross Income............................................... 46
Appendix F: Distribution of the School Property Tax Credit
and Homestead Credit by Claimant Location............................... 49
Appendix G: Local Assistance Realized by a Median-Valued Home................ 52
iii
List of Figures
Figure 1: Distribution of Total Credit Dollars Claimed
and Total Credit Dollars Used by Income, 2005 ............................... 15
Figure 2: Total Amount of Used Credit as a Percentage of Property Taxes
Paid or Property Tax Equivalent by Income, 2005............................ 19
List of Tables
Table 1:
Table 2:
Table 3:
Table 4:
Table 5:
Estimate of the Property Tax Equivalent, 2005................................ 10
Cost of Heat Generated by 20/25 Percent Differential..................... 11
Possible Outcomes of Analyzing the Cost of Heat............................ 12
Distribution of Credit Claimants and Credits by Income, 2005 ........ 16
Distribution of the School Property Tax Credit
by Tenure and Income, 2005 ............................................................. 18
Table 6: Homestead Credit Distribution by Tenure Status, 2005................... 20
Table 7: Local Assistance Realized by a Median-Valued Home .................... 23
Table 8: Total Individual Property Tax Relief
for the Median-Valued Home............................................................ 25
Table 9: Annual Overall Fiscal Relief for Owner of Median-Valued
Home–Local Assistance and Individual Relief Combined................ 26
Table 10: Local Assistance and Individual Property Tax Relief
as Percentages of Overall Fiscal Relief for Medianand Low-Income Homeowners.......................................................... 27
Table A-1: Property Tax Circuit-Breaker Programs
in the United States (Tax Year 2005) ................................................ 36
Table F-1: Number of SPTC Claimants by Geographic Location ...................... 49
Table F-2: Average SPTC Credit Claimed
and Used by Geographic Location .................................................... 50
Table F-3: Average Homestead Credit and Number of Claimants
by Geographic Location .................................................................... 51
Table G-1: Local Assistance Provided to Counties, Municipalities, and School
Districts from 1992 to 2006............................................................... 53
Table G-2: Rate of Aid Calculation for All Taxable Real Estate Property.......... 54
Table G-3: Total Local Assistance Provided to Median-Valued Home ............. 55
iv
Foreword
This report analyzing the accuracy of underlying assumptions and the equity
in fiscal relief provided through the Wisconsin’s School Property Tax Credit
(SPTC) and Homestead Credits is the product of collaboration between the
Robert M. La Follette School of Public Affairs at the University of Wisconsin–
Madison and the Wisconsin Department of Revenue (DOR). This partnership
gives graduate students at La Follette the opportunity to practice their policy
analysis skills while contributing to the capacity of the Department of Revenue
to analyze and develop policies on issues of concern to the residents of the State.
The La Follette School of Public Affairs offers a two-year graduate program
leading to a master’s degree in public affairs. Students study policy analysis
and public management, and pursue a concentration in a public policy area of
their choice. They spend the first year and a half taking courses that incorporate
the tools needed to analyze public policies. The authors of this report are all
enrolled in Public Affairs 869, Workshop in Public Affairs, Domestic Issues.
Although acquiring a set of policy analysis skills is important, there is no
substitute for doing policy analysis as a means of learning policy analysis.
Public Affairs 869 provides graduate students that opportunity during
the final semester in the program.
The students were assigned to one of several project teams. One team worked
on this project for the Department of Revenue, while the others worked with the
Wisconsin Joint Legislative Council, and the Wisconsin Department of Health
and Family Services. The topic of this report—an investigation of the accuracy
of the assumptions of the SPTC and the Homestead Credit about the share of rent
that represents the property tax paid by owners but passed on to renters—was
chosen by the research staff of DOR.
Wisconsin has a long history of providing its local governments with fiscal
assistance. In collaboration with the Wisconsin DOR, the La Follette School’s
spring 2006 workshop class analyzed the state’s Shared Revenue Program,
which gives fiscal relief for municipalities, counties, and districts. The STPC
and Homestead Credit are means of providing individual fiscal relief. These
programs distribute assistance to people through the individual tax system.
The first provides a nonrefundable credit; the latter is a refundable credit against
property taxes paid. The mechanism for offsetting income taxes by a credit for
property taxes paid is straightforward in the case of homeowners. It is not so
clear in the case of renters who, of course, do not receive and directly pay
property tax bills but do pay property taxes as part of their rent. The question
of how to provide a credit to renters has been resolved by an assumption that
20 percent of rent represents property taxes if rent includes heat and 25 percent
if heat is not included in the rent. The DOR asked for an investigation of how
close these assumptions were to the percentage of rent that actually covers
property taxes in Wisconsin. The authors of this report have compiled data
that allowed them to address this question for Milwaukee and Madison,
v
the state’s two largest cities. They also analyzed the distribution of credits across
income groups, and between renters and homeowners. The first distribution
question is important on income distribution grounds. The latter is important in
determining whether property tax credits are provided equally across taxpayers,
including renters whose rents are determined in part by the property taxes
landlords pay. Finally the authors examine the extent to which these credits
provided relief during the last decade to a homeowner with the population’s
median income and, alternatively, with the median income among actual
Homestead Credit claimers. The authors suggest further study and outline
a methodology for doing so.
This report cannot give the final word on the complex issues the authors address.
The authors are graduate students constrained by the semester time frame, and
the topic they have addressed is large and complex. Nevertheless, much has been
accomplished, and I trust that the students have learned a great deal, and that the
Secretary and staff of the Department of Revenue will profit from this analysis
of the individual property tax credit programs.
This report would not have been possible without the enthusiasm and continual
support and encouragement of Paul Ziegler, leader of DOR’s Sales and Property
Tax Policy Team who first suggested the topic and wrote the draft project
proposal. Additional advice and guidance were provided by Rebecca Boldt, leader
of the Income Tax Policy and Economic Team; Brad Caruth, Division of
Research and Policy; and Maureen Richards of the city of Madison’s assessor’s
office. We are extremely grateful to DOR Secretary Robert Ervin for his support
in allowing his staff to collaborate so fully and expertly with the La Follette
School of Public Affairs. The report also benefited greatly from the support of
faculty and the staff of the La Follette School of Public Affairs. Professor Andrew
Reschovsky kindly helped in making contact with DOR, met with the authors
several times to refine their research goals and methodology, and reviewed a
draft of the report. Karen Faster, La Follette publications director, edited the
report and shouldered the task of producing the final bound document. I am very
grateful to Wilbur R. Voigt whose generous gift to the La Follette School supports
our public affairs workshop projects. With his support, we are able to finance the
production of the final reports, plus other expenses associated with the projects.
By involving La Follette students in the tough issues that state government faces,
I hope they not only have learned a great deal about doing policy analysis but
have gained an appreciation of the complexities and challenges facing state and
local governments in Wisconsin. I also hope that this report will contribute to the
work of the Department of Revenue and to the ongoing public discussions of state
policies to provide financial assistance to local governments and property tax
relief to Wisconsin’s residents.
Karen Holden
May 4, 2007
vi
Acknowledgments
Many individuals provided guidance throughout the completion of our project.
We would first like to thank the staff of the Wisconsin Department of Revenue,
specifically Paul Ziegler, Rebecca Boldt, and Brad Caruth for providing helpful
information and data for our analysis.
We extend our gratitude to those individuals who took time out of their schedules
to discuss ideas and clarify details in our draft reports. We would especially like
to thank Professor Andrew Reschovsky for offering a wealth of knowledge,
guidance, and motivation. We would also like to thank John Koskinen of the
Wisconsin Department of Administration, Rick Olin and Al Runde of the
Legislative Fiscal Bureau, and Maureen Richards at the Madison assessor’s
office for all their contributions along the way.
We also would like to thank our student colleagues Samuel Hall, Patrick Mueller,
Michael Pancook, and Carrie Schneck, who provided editorial feedback on earlier
drafts. In addition, we thank Karen Faster for her patience and assistance in
the production of our final report. Last, we extend a tremendous thank you to
Professor Karen Holden of the Robert M. La Follette School of Public Affairs
at the University of Wisconsin-Madison for her guidance and discussion
throughout the progression of our work.
vii
viii
Key Terms
Contract rent
Contract rent is the monthly rent agreed to or contracted for, excluding any
furnishings, utilities, fees, meals, or services that may be included (U.S. Census
Bureau, 2007a).
Fiscal relief
The combination of state aid provided to local governments and individual
residents. This relief gives local governments the ability to finance public services
and lowers their need to generate revenue through higher taxes. Fiscal relief also
includes property tax relief the state directs to individuals, lessening their property
tax burdens. (See definitions of local assistance and individual aid.)
Gross rent
Gross rent (total rent) is the contract rent (the monthly rent agreed to or contracted
for with or without utilities or other services) plus the estimated average monthly
cost of utilities (electricity, gas, water and sewer) and fuels (oil, coal, kerosene,
wood, etc.) (U.S. Census Bureau, 2007a).
Individual aid
Aid provided directly to individual residents through the income tax system with
the goal of reducing or compensating individuals for their property tax liability.
In Wisconsin, individual aid (also referred to as individual property tax relief) is
provided through the Homestead Credit and the School Property Tax Credit.
Local assistance
State aid provided directly to counties, municipalities, and districts that can
be used in supporting local public services or in lieu of collecting property taxes
(e.g. shared revenue, general school aid, school levy credit, lottery and gaming
credit, etc.) Aid can also take the form of fiscal controls that restrict per-pupil
revenue growth for school districts and limit the growth in which local
governments (i.e. counties and municipalities) are able to tax property.
Nonrefundable tax credit
A nonrefundable tax credit is paid only to the degree that it offsets an individual’s
tax liability. If the credit amount exceeds the amount of tax liability, it generates
a refund only up to the amount of tax liability. If the tax credit is an amount less
than the tax liability, the individual receives the full credit amount.
ix
Property tax equivalent
The term “property tax equivalent” (PTE) is also referred to as the “property tax
rent equivalent” or “rent constituting property taxes.” The PTE is the estimated
amount of rent that constitutes property taxes for rental units. The PTE is
estimated by multiplying the annual rent bill by the PTE percentage, which is the
fraction of rent that goes to property taxes. The actual share of property tax that
owners of real estate pass onto renters through higher rent is unknown. This
property tax equivalent is usually expressed as the PTE percentage and ranges
from 6 percent to 25 percent in states that provide property tax relief to renters
(Lyons, et al., 2007).
Refundable credit
A tax credit whose award is not constrained by the amount of an individual’s tax
liability. A nonrefundable tax credit can reduce an individual’s tax liability by no
more than zero. Refundable credits award the full amount of the credit, regardless
of income liability. If the refundable credit is larger than the individual’s tax
liability, the individual would receive a payment. The earned income credit
is an example of a widely received refundable credit in the United States.
Tenure status
Refers to the distinction between owner-occupied and renter-occupied housing
units (U.S. Census Bureau, 2007a).
x
Executive Summary
States provide fiscal relief to their residents to reduce or compensate them for
their property tax liability. Wisconsin provides fiscal relief to residents using
two approaches, assistance to local governments and direct property tax relief
to individuals. At the request of the Wisconsin Department of Revenue (DOR),
we have focused our analysis on individual relief provided through the School
Property Tax Credit and the Homestead Credit. We analyze these credits with
respect to accuracy, equity, and contribution to overall fiscal relief. We first
analyze the accuracy of the credit calculation; we then look at the equity of the
relief between renters and homeowners, among renters, and between income
classes; and we conclude with an analysis of how the composition of overall
fiscal relief has changed over the last 15 years.
Both credits use a property tax equivalent percentage to estimate the amount
renters pay in property taxes. This amount, referred to as the property tax
equivalent (PTE), affects the credit amount a claimant can receive. Using data
from Milwaukee and Madison, we estimate a PTE percentage of 22 percent
for Milwaukee and 13 percent for Madison. The percentage for Milwaukee is
similar to the 20 percent or 25 percent used statewide, depending on whether a
renter pays for heat. For Madison, however, the PTE percentage we found is
much lower. This indicates that there may be geographic variance in the PTE
percentages. Verification of the accuracy of the current PTE percentages
requires further analysis with more comprehensive data. We also suggest a
framework that could be used to analyze the accuracy of the heat differential
and determine the actual percentage of rent that represents the cost of heat.
The distribution of the School Property Tax and Homestead credits to
different groups allows us to examine the equity of relief allocation. We have
found that the non-refundability of the SPTC creates some inequities, with
higher-income individuals receiving greater benefit. When tenure status is
considered, homeowners receive a greater benefit from the SPTC in
comparison to renters. However, as a percentage of property taxes or PTE,
renters benefit more than homeowners.
The distribution of the Homestead Credit by tenure status resembles that of
the SPTC in that homeowners, on average, receive larger credits than renters.
Also, renters receive more relief on their PTEs paid than homeowners receive
on their property taxes paid. Unlike the SPTC, however, more renters than
homeowners claim the Homestead Credit.
Finally, we explore the contribution of these credits to overall fiscal relief.
We examine how the proportions of local assistance and individual aid have
changed. For a median-income homeowner with a median-valued home, we find
that the makeup of overall fiscal relief has remained consistent since 1991(92).1
1
The notation 1991(92) indicates that tax was paid in 1991 and collected in 1992.
xi
Local assistance made up 90 percent of overall fiscal relief while individual relief
provided 10 percent. For a low-income homeowner with a median-valued home,
however, the composition of overall fiscal relief has changed, with a decline in
individual aid as a percentage of overall fiscal relief, from 34 percent in 1991(92)
to 26 percent in 2005(06). Individual aid to low-income homeowners has become
more similar to that provided to median-income homeowners.
Our analysis has produced findings that serve as a base for further study and
suggests the need for credit adjustments. We recommend that the Wisconsin
DOR employ a more systematic approach to gathering data on rental properties
used as residences. To calculate more accurately the PTE percentages statewide
and across municipalities, the Wisconsin DOR should institute a comprehensive
data system. We recommend that the Wisconsin DOR collect data on the number
of rental units in properties classified as residential and commercial, the proportion of rental units with heat included in their contract rent, and the share of property taxes associated with rental units. We also recommend that the Wisconsin
DOR support legislation that adjusts the Homestead Credit formula for inflation,
which will help maintain the extent and composition of fiscal relief provided to
low-income households.
xii
I. Introduction
Property taxes are the primary source of funding in many states for municipal
services and public schools. In fiscal year 2004, property taxes constituted
approximately 94 percent of total local government tax revenue in Wisconsin
(U.S. Census Bureau, 2007b). They represented about 89 percent of local
revenue for public elementary and secondary schools (U.S. Census Bureau,
2007c). Although vital to local governments and public schools, property
taxes are burdensome to Wisconsin residents, taking up approximately
4.3 percent of total income in 2004, the eighth highest ratio of property
taxes to income in the country (Norman, 2007).
Property acts as a source of cash income to the owner only when the property
is rented or sold. Most property tax revenue; however, comes from residential
property. The net property taxes paid on residential property as a percentage
of the total collected in Wisconsin has increased from 51 percent in 1970 to
71 percent in 2005. (Wisconsin Legislative Fiscal Bureau [WLFB], 2007).
Therefore, property taxes are levied against mostly non-revenue generating
residential property. Because property taxes depend on property value and
not on income, they can impose a burden on taxpayers, particularly those
at lower income levels.
To reduce this property tax burden, states can provide relief in various forms.
Local assistance provides relief by giving state money directly to municipalities
to use in lieu of collecting property taxes or by limiting the rate at which
municipalities can tax property. States can give property tax relief directly
to individuals through the income tax system. In Wisconsin, individual
property tax relief is provided through the Homestead Credit and the School
Property Tax Credit (SPTC) through the income tax system. Both credits are
available to homeowners and renters; however, they differ in significant ways.
The Homestead Credit is a refundable credit targeted at Wisconsin’s low-income
residents. The SPTC is a nonrefundable credit that is universally available
to residents at all income levels. On behalf of the Wisconsin Department
of Revenue, we analyze these credits on the grounds of accuracy, equity,
and their contribution to overall fiscal relief.
An important aspect of individual property tax relief that we analyze involves the
provision of relief through these credits to renters. Because renters do not pay
property taxes directly, the legislature has estimated the property tax equivalent
(PTE), which is the estimated amount of rent that constitutes property taxes paid
by the rental property owners and shifted to their tenants through higher rents.
The credit values are then calculated from this PTE amount in the same way
they are calculated from the property tax bill paid by homeowners. The PTE is
calculated similarly for the Homestead Credit and the SPTC. Wisconsin has
structured credit formulas on the assumption that the PTE equals 20 percent of
annual rent if heat is included in the rent and 25 percent if heat is not included.
1
Thus, the first piece of our analysis provides an estimate of whether the legislated
percentages accurately reflect the fraction of rent that constitutes property taxes.
Equity issues may occur between homeowners and renters, across renter groups,
and across income levels. Horizontal equity refers to the equity between homeowners and renters in the same income category or with the same property value.
Vertical equity, conversely, refers to groups at different income levels and holds
that taxpayers with smaller disposable incomes should receive a larger credit.
Horizontal equity depends on the accuracy of the current PTE percentages.
If the percentages are inaccurate, claimants who pay similar property taxes
may experience different levels of relief based solely on tenure status. The PTE
percentage differential for those paying heat and those not paying heat may also
affect horizontal equity if the heat differential inaccurately captures the cost of
heat. Vertical equity concerns may arise among SPTC claimants across income
levels, because the credit amounts depend on one’s income or because credit
characteristics, such as non-refundability, differ.
To assess the performance of individual property tax relief from the perspectives
of accuracy, equity, and contribution to overall fiscal relief, we focus on these
four research questions:
1. Does Wisconsin accurately estimate the PTE for renters? In other
words, on average does 20 percent of annual rent paid go toward
property taxes if heat is included and 25 percent if heat is not
included?
2. Does the percentage differential seen in the PTE estimate accurately
measure the cost of heat?
3. How is individual property tax relief distributed across income levels
and tenure statuses?
4. What is the composition of total fiscal relief – local assistance plus
individual relief – for a median-valued home?
By answering these four questions, we illustrate how well the SPTC and the
Homestead Credit achieve their goals of relieving the property tax burden. This
analysis demonstrates whether individual relief is provided accurately and fairly
to all Wisconsin residents. Finally, we estimate how much of a role individual
relief plays in the larger picture of overall fiscal relief to Wisconsin residents.
2
II. Property Tax Relief in the United States
Local governments heavily rely on the property tax to function. States attempt
to offset the burden that property taxes create through aid to jurisdictions with low
revenue-raising capacity and through individual relief that lowers an individual’s
income tax liability or provides a cash transfer payment.
Local Government Reliance on Property Taxes
Property taxes are the principal funding source for local governments throughout
the United States. These funds are used to provide many local public services,
including street repair, police and fire protection, solid waste disposal, and public
parks (Cico, et al., 2004). However, the most prominent use of local property
taxes is the funding of K-12 education. The quality of a municipality’s local
school district is generally reflected not only in property values, but also in the
total property taxes municipal residents pay.
In 2005, tax revenue from property taxes totaled $352 billion nationally. This
represents more than a 77 percent increase in property tax revenue from ten years
prior, far outpacing the 28 percent inflation rate during the same time period. In
2004, property taxes constituted approximately 46 percent of all local government
revenues in the United States; furthermore, property taxes represented more than
73 percent of all local government tax revenue (U.S. Census, 2007d).
Compared to the national average, property taxes in Wisconsin make up a much
larger share of local revenues. In 2004, property taxes represented approximately
66 percent of all local government revenue.2 Moreover, property taxes represented
approximately 94 percent of local government tax revenue (U.S. Census, 2007d).
Property Tax Incidence
Given the share of local revenues that property taxes make up, this tax has not
been popular with the general public. From 1972 to 1994, the U.S. Advisory
Committee on Intergovernmental Relations conducted an annual survey on public
attitudes toward governments and taxes. For 20 of those years, the survey asked
respondents to identify the least fair tax among four common taxes: the property
tax, the federal income tax, the state income tax, and the state sales tax. In eight
of those 20 years, the local property tax was ranked the “least fair” among all
the state and local taxes (Baer, 1998). As a result, all 50 states have instituted
individual property tax relief programs, including homestead tax exemptions or
credits, circuit-breaker programs,3 tax freezes for certain categories of taxpayers
(such as senior citizens, war veterans, or disabled citizens), and deferral programs
2
Local government revenue also includes other sources of tax revenue, which include fees,
fines, and intergovernmental aid.
3
Circuit-breaker programs include refunds, rebates, credits, or exemptions state governments
give to reduce property tax liabilities for individuals whose property tax payments (or property
tax equivalents, in the case of renters) are deemed too great. Several states offer these programs,
which differ in scope and administration (Lyons, et al., 2007).
3
(such as those that allow senior citizens to defer paying taxes until their homes
are sold or their estates are settled) (Mikhailov, 1998).
While many taxpayers see the property tax as an unfair burden, the rationale
for property tax relief extends beyond this perception to the relationships among
property value, family income, and the generation of cash flow. Individual property, particularly an individual’s residence, generates very little, if any, cash flow
with which to pay property taxes (Cico, et al., 2004). High-income households
have the financial solvency to pay the taxes to support the property they own.
However, elderly residents and low-income families can face a disproportionately
high property tax liability relative to their ability to pay.
Therefore, property taxes are often considered regressive and can be the single
most burdensome tax for many low-income and elder persons (Baer, 1998).
Reschovsky (1994), for example, found that property tax liabilities for younger
homeowners were essentially proportional across income classes but were
regressive for older homeowners. Older homeowners had higher property tax
liabilities than younger homeowners with identical average incomes. This is due
to the fact that, on average, older homeowners live in higher-valued homes than
younger homeowners with similar incomes.
Property Tax Relief Programs
Property tax relief programs can be divided into two broad categories: local
assistance and individual property tax relief. Local assistance includes intergovernmental aid programs that aim to diversify local government revenue sources
and reduce the need for higher property tax levies. Individual property tax relief
is targeted to individual homeowners and renters with the intent to directly reduce
the tax bills for individual properties (Mikhailov, 1998).
Individual property tax relief programs also may be classified by the type of relief
that they provide to taxpayers. These programs include (a) tax exemptions; (b)
credits, rebates or refunds; (c) tax freezes for certain categories of taxpayers; and
(d) deferral programs.4 Property tax exemptions eliminate a portion of the tax
liability prior to receipt of the tax bill. Programs that use state income tax credits,
rebates or refunds require full payment of the tax liability but then return the
amount of tax relief to the taxpayer. Property tax freezes require full payment
of taxes but limit the growth of taxes through limiting the tax rate. Tax deferral
programs eliminate part or all of the current tax liability of a qualified homeowner
but attach a lien to the property and require repayment in full with interest when
ownership changes hands (Cico, et al., 2004).
If one objective of individual property tax relief is to reduce the burden on lowincome families, we must consider renters as a separate category. Renters are a
special case when considering property tax relief, because they do not directly pay
property taxes and because a larger proportion of renters are low-income than are
4
For more on other states’ individual property tax relief programs, see Appendix A.
4
homeowners. Although landlords receive property tax relief that could be passed
on to their tenants through lower rents, they are slow to do so; one study has
shown that individual property tax relief is realized three to five years later
(Advisory Commission on Intergovernmental Relations, 1973). When landlords
are not eligible for property tax relief, property taxes may be passed on to renters.
If these renters are not eligible for property tax relief, they will likely pay more in
property taxes than they would with relief.
In this report, we focus on income-based property tax relief delivered to the
individual in the form of a tax credit, refund, or rebate. A tax credit is subtracted
from the tax bill after an individual’s tax liability has been calculated. In this
way, the tax credit is tied directly to individual income and not to the property
value of a residence. According to Cico, et al. (2004), 19 states have a tax credit,
refund, or rebate program in place.5 All of these states have income eligibility
requirements, while ten of them also have age requirements.
Individual Property Tax Relief in Wisconsin
Individual property tax relief programs in Wisconsin include income tax
credits, classification laws (a different rate for taxing farmland), a freeze on local
school property taxes, and deferral programs (Mikhailov, 1998, and Baer, 1998).
Specifically, our analysis focuses on the School Property Tax Credit and the
Homestead Credit.
School Property Tax Credit
The School Property Tax Credit (SPTC) is a non-refundable tax credit designed to
offer relief to all homeowners and renters at all income levels. It was originally
enacted in 1989 and has been modified over the years. Initially, the SPTC equaled
10 percent of the first $2,000 in property taxes, or the PTE for renters, with a
maximum credit of $200. In tax year 1998, the credit increased to 14 percent of the
first $2,500 in property taxes or the PTE with a maximum credit of $350. After a
brief elimination of the credit in 1999, the legislature reinstated the SPTC in 2000
with the current rate of 12 percent for the first $2,500 in property taxes or the PTE
with a maximum credit of $300 (Wisconsin Legislative Fiscal Bureau, 2007a).
Homestead Credit
Pioneered by Wisconsin in 1964, the Homestead Credit is a refundable tax credit
targeted at low-income homeowners and renters who are 18 and older.6 In the
credit’s current form, a claimant must have a household income below $24,500.
A claimant with a household income at or below $8,000 receives a credit equal to
80 percent of the first $1,450 in property taxes or the PTE with a maximum credit
of $1,160. For an individual with a household income between $8,000 and
5
These 19 states provide property tax relief in the form of a refund, similar to the manner in
which Wisconsin provides individual property tax relief. For more information about such circuitbreaker property tax relief programs in particular, see Table A-1 in Appendix A for a comparison
across states. This table provides information on circuit breakers in 17 states and the District
of Columbia.
6
For information on the history of the Homestead Credit, see Appendix B.
5
$24,500, the credit is calculated differently (see below). All of a claimant’s
income above $8,000 is multiplied by 8.788 percent, and the resulting amount is
subtracted from the maximum allowed property taxes ($1,450). The final credit
is 80 percent of this amount (WLFB, 2005).
Credit = 80 percent x [Property Taxes (or PTE) –
{8.788 percent x (Household Income - $8,000)}]
Source: WLFB, 2005
The formula is designed to limit the credit a claimant can receive. When
a claimant’s household income rises above $8,000, the credit phases out
at a rate of 8.788 percent until his or her income reaches $24,500 and the
credit is zero. As a consequence, if the legislature does not change the
formula’s income limits, claimants will face a declining credit if their
incomes are only rising with inflation.
6
III. Accuracy of Credit Formulations
This section provides the analysis of the research questions pertinent to individual
property tax relief. First, we estimate the property tax equivalent for renters.
Then, we examine the accuracy of the different percentages used to calculate the
PTE for renters who pay heat separately and for those who have heat included in
their rent bills.
Property Tax Equivalent
The calculation of the Homestead Credit contains the assumption that the PTE
percentage equals 25 percent of rent if a renter pays heat separately and 20
percent if heat is included in rent. Additionally, our analysis assumes (as do the
20 and 25 percent figures) that landlords are able to shift all of their property
taxes (100 percent tax incidence) to their renters by charging enough to cover
property taxes. In reality, landlords may not be able to shift their entire property
tax bills, especially in communities where the supply of available rental units
exceeds demand.
The rationale for choosing the specific percentage of rent that is considered
equal to property taxes most likely reflects the vision of University of WisconsinMadison professor Harold Groves. First, the authors of the tax study commission
he co-chaired in 1959 concluded that 25 percent was a rough estimate of the share
of property taxes on gross rents (University of Wisconsin Tax Study Commission,
1959). Second, two later reports on property tax relief say Groves was the likely
author of the original proposal for the Homestead Credit, which was adopted in
1963 (Stark, 1991-92, and Quindry & Cook, 1969).
We examine whether the 20/25 differential accurately measures the PTE in
Wisconsin. Our findings determine whether Wisconsin has chosen accurate PTE
percentages for its Homestead Credit and SPTC calculations. Analyses of the
PTE assumption are scarce; however, the Minnesota Department of Revenue’s
consideration of this issue in 2005 uses its own property tax data and rent data
from the American Community Survey, a nationwide survey of housing and
economic characteristics. Analysts found that on average across Minnesota municipalities, property taxes as a percentage of rent are 15 percent or less. Given that
Minnesota uses 19 percent of rent as the PTE percentage, the authors of the report
suggest changing the percentage to 15 or less. The authors further conclude that
using 19 percent to estimate the PTE ends up subsidizing renters through Minnesota’s version of the homestead credit (Minnesota Department of Revenue, 2005).
Like Minnesota, if Wisconsin chose higher than necessary PTE percentages,
then Wisconsin subsidizes rent through the property tax refund program. This is
because renters receive higher refunds than they pay in property taxes. If these
credits were intended, in part, to be redistributive in favor of those with lower
incomes (renters typically being of lower incomes [Advisory Commission on
Intergovernmental Relations, 1973]), the higher percentage could be justified
as a subsidy to this group, though only for low-income renters but not low-income
7
homeowners. Additionally, because renters do not have the ability to rent
their homestead (imputed rent7) and they cannot take advantage of the federal
mortgage interest deduction and other property-related income tax deductions,
larger PTE percentages might be justified.
Property Tax Equivalent Analysis
To determine whether 20/25 percent of rent constitutes property taxes, we
use data from Madison and Milwaukee, Wisconsin’s two largest cities.8 To
estimate the accurate PTE percentage statewide, we obtained data on 2005
property values from Madison’s and Milwaukee’s assessor’s offices and 2005
rent data from the American Community Survey. Using these data, we estimate
the total property taxes paid on apartments and residential non-homestead
properties. We divide this aggregate number by the estimated annual rent
paid plus rent asked for vacant units to obtain the average PTE percentage
for each city.
Total Property Taxes = PTE Percentage
Total Rent
These data limit our analysis because we cannot observe the marginal effects
on the PTE percentage for renters with and without heat included in their rent
bills. Additionally, we cannot estimate the PTE percentages for those living
in buildings with less than five units. These PTE percentages are not readily
available and must be constructed from other data sources. First, the property
value information we use to estimate total property taxes is limited to the rent
data that are available from the American Community Survey. We use property
values of buildings with five units or more. The American Community Survey
breaks up the rent data based on buildings of one unit attached, one unit detached,
two to four units, five to 19 units, 20 to 49 units, and 50 or more units. Because
we could not obtain data on the property values for rental housing in Wisconsin
for less than four units, we used rent data from the American Community Survey
on buildings of five units or more.
7
Imputed rent refers to the possible revenue generated if a homeowner rents her or his property to
another individual. This income is most often excluded from income measures and goes untaxed.
8
Our preference would have been to follow the 2005 Minnesota study and use data from the
American Community Survey and the Wisconsin Department of Revenue (Wisconsin DOR);
however, the manner in which Wisconsin classifies property considers some residential rental
properties as residential property and others as commercial property. The Wisconsin DOR is
unable to factor out residential rental properties from either classification to provide total property
taxes paid on rental property in Wisconsin. Additionally, we considered obtaining addresses from
the Wisconsin DOR for a sample of renters who claimed the SPTC and Homestead Credit. We
would look up the property values for those properties and compute the property taxes paid on
those buildings. We would also find the number of units within each building and divide property
taxes by the number of units to obtain an average property tax amount per unit. However,
addresses were not available due to confidentiality reasons.
8
To estimate the total property taxes we use property values from the Milwaukee
and Madison assessors’ offices and add all the property values for buildings with
five or more units to obtain total property values. Finally, we multiply the net mill
rate9 by the total property values to find total property taxes (Table 1).
To obtain the estimate for the total rent we use American Community Survey data
for rent for apartment buildings. This includes total rent paid by tenants and rent
asked for on vacant units. The American Community Survey data includes total
gross rent (rent plus utilities), total contract rent (rent without utilities), and rent
asked for (rent on vacant units). To estimate the contract rent paid on buildings
of five units or more we estimate the percentage of gross rent that is for buildings
of five or more units by adding the gross rent for the buildings with five units or
more and dividing that by total gross rent. For Milwaukee and Madison, we find
that 37 and 61 percent of gross rent, respectively, comes from buildings with five
or more units. We multiply that percentage by the contract rent to find the
amount of contract rent collected on buildings with five or more units. We apply
the percentage equivalently to the rent asked for on vacant units to arrive at the
rent asked for on vacant units for buildings with five units or more. Finally, we
add the amount of contract rent on to the rent asked for on units that are not rented
for buildings of five units or more to obtain total rent asked for and paid on all
units. For further clarification of the calculations, see Table 1 and Appendix C.
We then divide the total property taxes by the total rent to estimate the accurate
PTE percentage for Milwaukee and Madison. The percentage for Milwaukee is
approximately 22 percent and 13 percent for Madison (Table 1).
9
The tax per dollar of assessed property value. The rate is expressed in “mills,” where one mill is
one-tenth of a cent, $0.001.
9
Table 1: Estimate of the Property Tax Equivalent, 2005
Milwaukee
Total Property Value (commercial apartments, five or more units)
Net Mill Rate per Thousand
Total Property Taxes
$2,568,824,600
$1,676,845,400
0.02586
0.0207845
$66,429,804.16
$37,630,337.25
37
61
$281,931,679.97
$263,176,915.24
$24,905,490.79
$34,290,106.23
$306,837,170.76
$297,467,021.46
Percentage of Gross Rent from buildings with five or more units
Estimated Contract Rent from buildings with five or more units
Estimated Rent Asked from buildings with five or more units
Total Estimated Rent Paid or Asked from buildings
with five or more units
Property Tax Equivalent Percentage
Madison
22
13
Source: Created by authors using 2005 data from the Milwaukee and Madison assessors’ offices and the American
Community Survey. See Appendix C for further clarification of these calculations.
Note: We estimate the PTE percentage for all renters but are unable to estimate the percentage separately for tenants
who pay heat and those who do not.
10
Formulaic Heat Differential
Our analysis explores how to examine the extent to which the implied 20/25
percent differential (between renters) is an accurate estimate of the portion
of rent representing the cost of heat. As noted, renters who pay heat as part of
their monthly rent can claim only 20 percent of their rent as constituting property
taxes, while renters who pay heat separately can claim 25 percent of their rent as
constituting property taxes. The intent of this differential is to prevent the
inclusion of heat in the estimation of property taxes paid by rental units. This
differential attempts to correct for the fact that those who have heat included in
their rent receive a credit based on their rent and heat payments. The differential
attempts to prevent inequity by providing a larger credit to those who pay heat
separately and thus do not receive a credit on their heat payments.
Other states have found alternative mechanisms to correct for this. New York,
for example, adjusts gross rent by subtracting out all utilities that claimants report
as part of their rent (New York State Department of Taxation and Finance, 2003).
When rent includes heat, New York assumes the cost of heat equals 15 percent
of rent. Adjusted rent equals gross rent minus 15 percent of gross rent. This
adjusted rent equals the rent paid by a renter of a similar unit who pays heat
separately. Therefore, when New York applies its property tax equivalent of
25 percent of property taxes to the adjusted rent, the estimated property taxes
paid are the same for both renters.
The accuracy of Wisconsin’s 20/25 percent differential has implications for the
distributional equity of property tax relief that individual renters claim. Implicit
in the differential is the assumption that heat makes up 20 percent of the annual
rent bills for renters who have heat included in their rents and 25 percent of the
annual rent bill for those without heat included.10 Table 2 provides an example
of how the 20/25 percent differential results in equivalent PTEs for those with
and without heat included in their rent bills.
Table 2: Cost of Heat Generated
by 20/25 Percent Differential
Renter A
Renter B
(heat included in rent) (heat paid separately)
Rent Paid
Cost of Heat
Total Expenses
(Rent Plus Heat)
PTE Percentage
Property Taxes Paid
$14,250
0
$11,400
$2,850
$14,250
$14,250
20%
25%
$2,850
$2,850
Source: Created by authors.
10
To see how we arrived at this implicit assumption, see Appendix D.
11
If the cost of heat deviates from the assumption that heat equals 20 percent
of Renter A’s rent, or 25 percent of Renter B’s rent there is subsidization of
one group over the other. Table 3 depicts the possible outcomes that may
result from further analysis of the cost of heat as a percentage of rent.
Table 3: Possible Outcomes of Analyzing the Cost of Heat
Possibilities
Beneficiary
Adjustment
Needed to 20/25
Percent PTE
Combination
A. Cost of Heat = 20% of X = 25% of Y
Equitable
None
B. Cost of Heat
Renters who have heat
> 20% of X; and
included benefit more
> 25% of Y
C. Cost of Heat
Renters who pay heat
< 20% of X; and
separately benefit more
< 25% of Y
X = the amount of rent paid by renters with heat included
Y = the amount of rent paid by renters who pay heat separately
Increase difference
between property tax
equivalents used
Decrease difference
between property tax
equivalents used
Source: Created by authors.
Formulaic Heat Differential Analysis
To analyze the heat differential, we would need data that could not be obtained
within the confines of this project. Instead we present a possible framework to
analyze the differential:
•
•
Estimate the average heat bill for renters who pay heat separately, and then
Calculate heat as a percentage of rent paid for those who pay heat separately.
o If the heat equals 25 percent, then estimate the heat paid by renters
who have heat included in their bills.
o If heat constitutes 20 percent of their bill, then it is clear the heat
differential results in equal treatments of renters.
In the event that heat does not equal 20 percent of the rent paid by renters with
heat included or 25 percent of rent for those who pay heat separately, then there
are three possible explanations:
(1) the differential is inaccurate;
(2) renters who pay heat separately live in properties that are systematically
different from renters who have heat included; or
(3) those who pay heat separately consume heat differently than those who
have heat included in their rents and do not have to pay extra for
additional heat usage.
As noted earlier, this analysis rests on the assumption that the differential applies
to renters in equivalent properties and the only difference is the inclusion (or
exclusion) of heat from the rent bill. If no equivalent properties exist, then one
cannot analyze the heat differential with the method discussed.
12
IV. Analysis of Equity11
Our analysis assesses whether the benefits of the Homestead Credit and the SPTC
are distributed equally to residents of Wisconsin. Because the Homestead Credit
and the SPTC are based on property and income, equity concerns may arise due
to income or tenure status. By closely examining the distributions of individual
property tax relief, we hope to determine if certain groups receive a disparate
amount of aid from the Homestead Credit and/or the SPTC. We illustrate how
the SPTC is distributed by income and examine the distribution of the SPTC
and the Homestead Credit by tenure status.
The non-refundability of the SPTC may raise equity concerns because credit claimants do not always receive the entire credit for which they would be eligible if it
were refundable. Indeed, non-refundability means that one can only receive a credit
equal to or less than income tax liability. For example, if a claimant would be eligible for a full $300 SPTC based on property taxes paid but has an income tax liability
of $200, he or she can only receive $200 of the SPTC. People with lower income
tax liabilities, often those at lower income levels, will receive different amounts of
relief even if they pay the same amount in property taxes as those with more income
tax liability. While the Homestead Credit may equalize the impact of non-refundability because it is available only to those at lower income levels, our analysis
examines the overall equity concerns raised by the non-refundability of the SPTC.
Second, we examine the possibility that disparities exist due to tenure status for
both the Homestead Credit and the SPTC. Specifically, does tenure status affect
the likelihood that one will claim these credits? In addition, does the amount of
the credit received have an association with tenure status? For this portion of the
analysis, we study homeowners and renters with the same incomes to see if tenure
status alone plays a role in how individual property tax relief gets distributed to
Wisconsin residents.
Finally, our analysis addresses the ability of these credits to relieve property tax
liability. A person who pays $3,000 in property taxes and receives a credit of $300
sees 10 percent of his or her property tax bill relieved by the credit. A person with
identical income who pays $1,000 in property taxes would also receive a credit of
$300, realizing greater relief as a share of total property taxes paid.
Thus, we address how well the SPTC and the Homestead Credit achieve their
goals of lessening the property tax burden. We examine this by income and
tenure status for the SPTC and by tenure status only for the Homestead Credit.
By examining the distribution of the SPTC and Homestead Credit by income
and/or tenure, we hope to illustrate to what extent, if any, disparities exist with
respect to individual property tax relief amid different groups in Wisconsin.
11
We use Wisconsin adjusted gross income (WAGI), referred to as “income,” throughout Section
IV as it is the only income data provided for SPTC claimants. Income sources that are included in
and exempted from the WAGI are reported in Appendix E: Wisconsin Adjusted Gross Income.
13
Analysis of the Distribution of Individual Property Tax Relief12
To assess the equity of individual property tax relief by income and/or tenure
status, we examine three main aspects of the Homestead Credit and the SPTC:
(1) the manner in which credit claimants are distributed
by income level and/or tenure status;
(2) the average credit amounts distributed by income level
and/or tenure status; and
(3) the impact of the credits in relieving property tax burden.
We examine the distribution of the SPTC by income and tenure status,
then we analyze the Homestead Credit by tenure status only.13
Distribution of the School Property Tax Credit14
More than 1 million Wisconsin tax returns received the SPTC in 2005(06).
The largest portion of SPTC funds, about 23 percent or $85 million, goes to
taxpayers with incomes between $40,000 and $60,000 per year. People with
incomes less than $10,000 make up approximately 7 percent of the claims but
receive less than half a percentage (about $675,000) of the SPTC expenditure.
This reflects the non-refundability of the SPTC because residents with lower
incomes receive no benefit if they have no income tax liability. Figure 1 illustrates
how much of the total credit amounts claimed and used go to people in different
income categories.
12
Unless otherwise noted, all data are obtained from the Wisconsin DOR.
We also examined the distribution of credit amounts in selected Wisconsin counties and the
City of Milwaukee. We found similar distributions for the SPTC as we report here for Wisconsin
overall. The Homestead Credit distribution is similar to the state’s, but it varies more by location
of the claimants than the SPTC. These results are described in Appendix F.
14
In discussing the SPTC we refer to a “claimed credit” as the amount of credit one is eligible
for based on his or her property taxes or PTE. Because the SPTC cannot exceed tax liability,
claimants with lower tax liabilities will not use the entire credit amount claimed. The “used
credit,” therefore, refers to the portion of the credit claimed that a claimant actually receives.
13
14
Figure 1: Distribution of Total Credit Dollars Claimed
and Total Credit Dollars Used by Income, 2005
Expenditures as a Percentage of Total School Property Tax Credit Claimed
Expenditures as a Percentage of Total School Property Tax Credit Used
25%
Total Amount
Claimed:
$419,110,163
Total Amount Used:
$373,053,033
20%
15%
10%
5%
0%
Less than $10,000- $15,000- $25,000- $40,000- $60,000- $80,000 - $100,000 $200,000
$10,000 14,999
24,999
39,999
59,999
79,999
99,999 - 199,999 - 499,999
Greater
than
$500,000
Income
Source: Created by authors using tax return data provided by the Wisconsin DOR for 2005(06).
We also examined the income distribution of the SPTC by the number of
claimants in each category. While approximately 25,000 claimants with incomes
of less than $10,000 receive some portion of the credit claimed, this represents
only about 14 percent of the total number of claimants in this income category.
For income above $40,000, on the other hand, almost all claimants receive
something from the SPTC. Thus, whether one receives a benefit from the
SPTC depends greatly on income.
To assess further the distribution of the SPTC, we examine by income the
average credit amounts claimed and used. The average credit claimed ranges
from approximately $154 for those with incomes less than $10,000 per year
to $296 for those with incomes greater than $500,000. The average credit used
ranges from approximately $27 at the lowest income level to $296 at the highest
level. Therefore, the credit received greatly increases as income rises. The
largest jump in the credit received occurs between those with incomes below
$10,000 and those with incomes between $10,000 and $15,000. For those in the
$10,000 to $15,000 range, the average credit used is almost 300 percent greater
than the average credit used for those with incomes less than $10,000. Table 4
summarizes the distribution of the SPTC by income level. Ultimately, as a nonrefundable credit, the SPTC goes to those with higher incomes more often than
those with lower incomes.
15
Table 4: Distribution of Credit Claimants and Credits by Income, 2005
Percentage of
Claimants Using Some
Portion of the SPTC
Average
Credit
Claimed
Less than $10,000
13.7
$154.15
Wisconsin Income
Class
Average
Credit Used
$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
$80,000 – 99,999
100.0
$280.21
$280.20
$100,000 - 199,999
100.0
$289.43
$289.43
$200,000 - 499,999
100.0
$293.96
$293.96
Greater than $500,000
100.0
$296.26
$296.24
Source: Created by authors using tax return data provided by the Wisconsin DOR for 2005(06).
We also find that tenure status plays a large role in the distribution of the
amount of SPTC used but not of the number of claimants. Of those claiming
the credit, the majority, approximately 68 percent, were homeowners.
Homeowners were an even greater proportion, 70 percent, of those using
some portion of the claimed credit. This reflects data obtained from the
U.S. Census Bureau indicating that approximately 70 percent people own as
opposed to rent their homes (U.S. Census Bureau, 2007e). Thus, renters and
homeowners seem fairly equally represented in the number using the SPTC.
Disparities exist, however, when examining the amount of credit claimed
and used by tenure status. The SPTC, as noted in Section II, is equal to 12
percent of the first $2,500 in property taxes or PTE for a maximum credit of
$300. As the PTE percentage equals 20 percent of rent if heat is included
and 25 percent of rent if heat is not included, annual rent must amount to
$12,500 if heat is included in the rent and $10,000 if heat is not included for
a renter to claim the full $300 credit. According to data on the SPTC,
however, the average annual rent for those with heat included is about
$5,000 and about $5,200 for those paying heat separately. Thus, most
renters cannot claim the full SPTC amount, even at the highest income
level. For example, at the highest income level, those with heat included
have an average annual rent bill of about $11,000 and could claim an
SPTC of at most $285. Homeowners, therefore, will almost always
have a larger average credit claimed amount.
At each income level, a higher percentage of renters claim some portion
of their SPTC than homeowners. Overall, however, more homeowners
receive at least some portion of the credit claimed because there are more
homeowners in the higher income categories. At the lowest income level,
16
for example, about 18 percent of renters receive some portion of the SPTC
claimed while only 9 percent of homeowners use a portion of their claimed
credits. In total, however, we find that about 91 percent of homeowners
versus 83 percent of renters use some portion of the claimed credit. Table 5
illustrates these differences between homeowners and renters.
17
Table 5: Distribution of the School Property Tax Credit by Tenure and Income, 2005
Percentage of
Renters Using
Some Portion of
Credit Claimed
Average
Renter Credit
Claimed
Average
Renter Credit
Used
$23.31
17.5
$108.82
$27.18
$216.17
$125.25
83.0
$120.93
$88.77
91.6
$217.34
$184.51
98.2
$134.12
$130.00
99.7
$224.61
$224.05
99.9
$153.06
$152.96
$40,000 – 59,999
99.9
$246.32
$246.29
100.0
$174.28
$174.24
$60,000 – 79,999
100.0
$266.64
$266.63
100.0
$187.70
$187.70
$80,000 – 99,999
100.0
$280.07
$280.06
100.0
$191.91
$191.88
$100,000 – 199,999
100.0
$288.79
$288.79
100.0
$195.46
$195.41
$200,000 – 499,999
100.0
$293.66
$293.66
100.0
$219.51
$219.51
Greater than $500,000
100.0
$296.46
$296.45
100.0
$223.96
$223.96
91.9
$250.44
$247.52
83.2
$142.61
$140.95
Percentage of
Homeowners Using
Some Portion of
Credit Claimed
Average
Homeowner
Credit Claimed
Less than $10,000
8.9
$207.08
$10,000 – 14,999
57.6
$15,000 – 24,999
$25,000 – 39,999
Wisconsin Income
Class
Average
Average
Homeowner
Credit Used
Source: Created by authors using tax return data provided by the Wisconsin DOR for 2005(06)
18
The final piece of analysis regarding the SPTC examines how well it provides
property tax relief to individuals. We find that as a percentage of property taxes
or PTE, the credit going to renters represents a larger portion of their PTE than
it does of homeowners’ property taxes. Thus, even though renters receive, on
average, a smaller credit, that credit relieves a larger portion of their property tax
liability. Furthermore, while the credit does not relieve the property tax or PTE
liability as much for those with incomes below $15,000, the property tax relief is
distributed relatively equally for those with incomes greater than $15,000. Figure
2 illustrates the individual property tax relief due to the credit by income and
tenure status.
Figure 2: Total Amount of Used Credit as a Percentage of Property Taxes
Paid or Property Tax Equivalent by Income, 2005
School Property Tax Credit Used as a Percentage of Property Taxes Paid (Homeowners)
School Property Tax Credit Used as a Percentage of Property Tax Equivalent (Renters)
14%
12%
10%
8%
6%
4%
2%
0%
Less than
$10,000
$15,00024,999
$40,00059,999
$80,000 99,999
$200,000
- 499,999
Total
Wisconsin Income Class
Source: Created by authors using tax return data provided by the Wisconsin DOR for 2005(06).
As expected due to the non-refundability of the SPTC, people at lower income
levels receive less benefit from the credit than do those at higher income levels.
In examining the SPTC by tenure status, we find some disparity in its distribution,
with homeowners receiving larger credits on average. However, as a percentage
of property taxes or PTE, the SPTC appears to benefit renters more than homeowners. The next section provides a similar analysis of the distribution by tenure
status of the Homestead Credit.
Distribution of the Homestead Credit
The Homestead Credit differs from the SPTC in three significant ways. First,
the Homestead Credit targets low-income residents, specifically those with
household incomes below $24,500. Second, because the credit is refundable,
19
a claimant receives all that he or she is eligible to receive regardless of tax
liability. Last, because one need not file income taxes to receive the Homestead
Credit, Wisconsin adjusted gross income does not provide an accurate measure of
income by which to analyze the distribution of the Homestead Credit. Thus, our
analysis of the Homestead Credit is limited to an analysis by tenure status only.
In 2005, approximately 226,000 residents received $114 million from the
Homestead Credit. Of those who claimed the credit, approximately 55 percent
rented their homestead while 45 percent were homeowners. Using data from
the American Community Survey, we find that in 2005 approximately 48 percent
of the total population with incomes less than $25,000 were homeowners while
the other 52 percent were renters (2005). Thus, as with the SPTC, the overall
distribution of claimants by tenure status reflects the distribution of renters and
homeowners in the general population. We also find that about 36 percent of the
eligible renter population claims the credit, while about 32 percent of the eligible
homeowners claim the credit. This indicates that while many renters and homeowners are not receiving the Homestead Credit, the distribution of those not
claiming the credit does not appear to favor renters or homeowners. The
following table highlights how the Homestead Credit differs by tenure
status in its use and credit amount received.
Table 6: Homestead Credit
Distribution by Tenure Status, 2005
Homeowner
Renter
105,725
$540
126,524
$475
26.5%
44.1%
Number of Claimants
Average Credit Amount
Credit Expenditures as a
Percentage of Property
Taxes or PTE paid
Source: Created by authors using tax return data provided
by the Wisconsin DOR for 2005(06).
As is the case with the SPTC, the Homestead Credit makes up a much larger
percentage of a renter’s PTE than it does of a homeowner’s property tax bill
although the average credit is smaller for renters. Overall the Homestead
Credit constitutes about 45 percent of a renter’s PTE and about 26 percent
of a homeowner’s property tax bill. Unlike the SPTC, however, more renters
than homeowners—approximately 20,000 more—claim the credit.
.
20
V. Contribution to Overall Fiscal Relief
Our final analysis expands the assessment of property tax relief to include local
assistance and local government fiscal controls. We compare local assistance
and individual property tax relief to evaluate the effects of legislative trends that
have shifted the focus of fiscal relief toward local assistance and limitation of
local government taxing authority and away from individual property tax relief.
We analyze the patterns that emerge to determine if the degree and composition
of fiscal relief has changed during the last 15 years.
Assistance to Local Governments
Wisconsin dedicates approximately 59 percent of its general purpose revenue15
to local government assistance (Wisconsin Department of Administration, 2006).
As practiced in other states, school districts, municipalities, counties, and other
special districts receive this aid to help offset the need to increase property taxes.
Aid comes in the form of direct payments to local governments and property tax
credits. While the state requires a certain portion of this aid to be dedicated to
property tax relief, the majority is used at the discretion of local governments.
For the most part, local governments determine whether funds will support public
services or contribute to property tax relief.
The largest share of local assistance goes to funding K-12 education. Approximately 51 percent of school district revenue comes from state aid, representing
the largest revenue source for school districts (National Center of Education
Statistics, 2005). School aids include general school aid16 and categorical aid.17
The state distributes general school aid using a formula that aims to equalize each
school district’s per-pupil property tax base. Categorical aid provides targeted
funding for services such as education for students with exceptional needs and
class-size reduction in low-income schools. In addition to K-12 funding, the state
gives technical colleges funding that is mostly directed to partially equalizing
the fiscal capacities of all Wisconsin technical college districts (WLFB, 2007f).
15
General purpose revenue is state revenue that is collected through several revenue sources,
mainly the individual income tax, the general sales and use tax, and the corporate income and
franchise tax. This revenue is not confined to any specific purpose and makes up the majority
of funding used to support state operations.
16
The state distributes general school aid to local K-12 school districts on the basis of the
relative fiscal capacity of each school district as measured by the district’s per-pupil value
of taxable property. This is known as either the “general school aid” or the “equalization aid
formula.” Many states have used this type of aid because different per-pupil property tax bases
among districts means that a district with higher property wealth can raise more money with
the same tax rate as another district in the state (WLFB, 2007e).
17
The state provides categorical aid to fund specific K-12 program costs, including special
education, class size reduction, pupil transportation, and bilingual education. Categorical
aid is paid on a formula basis or awarded as grants (WLFB, 2007e).
21
State aid constitutes approximately 39 percent of Wisconsin’s municipal and
county revenues (U.S. Census, 2007b). The shared revenue program18 provides
the primary source of state assistance to municipal and county governments. Aid
also comes in the form of community aids19 and general transportation aid.20
The school levy credit21 and the lottery and gaming credit22 supplement school aids
and shared revenue. These credits are provided to local governments for the distinct
purpose of property tax relief. Alongside this state aid, Wisconsin has imposed
fiscal controls23 on several taxing jurisdictions. Fiscal controls restrict the annual
increase in school districts’ per-pupil revenues. Additionally, fiscal controls limit
tax rates, as seen in counties and municipalities, so that tax rates essentially maintain
their 1992(93) level. Increases in revenues or tax rates above the statutorily
allowable limits can be approved only through referendum (WLFB, 2007c).
Composition of Fiscal Relief
To gauge the effects of changing property tax relief policy, our analysis estimates
the local assistance benefit and individual property tax relief realized by an owner
of a median-valued home. Home values allow us to assign the appropriate
fraction of local assistance and individual property tax relief that benefits
a particular household.
We have estimated the local assistance benefit for the median-valued home
using data from the Legislative Fiscal Bureau and the Department of Revenue.
The estimate for total local assistance derives from the total statewide funding
provided by the state for local assistance programs with appropriations over
$100 million. Though local assistance varies among counties, cities, and school
districts, we use aggregate funding to develop an average rate of local assistance
for the state overall. Appendix G develops the process used to determine the local
18
The shared revenue program delivers state aid primarily to municipal and county governments
to provide property tax relief, to offset the impact of exempt property on local tax bases, and to
supply additional payments for certain municipalities that limit spending (WLFB, 2007b).
19
Community aids are provided jointly by the state and federal governments. These funds are distributed to counties to support human services programs (e.g. services related to mental health, substance
abuse prevention, child abuse and neglect, family support, and Alzheimer’s support (WLFB, 2007h).
20
General transportation aid is paid to municipalities for the exclusive use of road maintenance,
improvement, and construction (WLFB, 2007g).
21
The state allocates the school levy credit to municipalities to reduce individual property tax
bills. The credit is allocated based on a municipality’s share of statewide school levies in the
previous three years. The credit is provided to individual taxpayers in proportion to their share of
the municipality’s total assessed property value (WLFB, 2007d).
22
The lottery and gaming credit provides additional property tax relief, and depends on the
amount of revenue that the state receives from lottery, pari-mutuel on-track betting, and bingo
receipts in a given year. The credit amount received by individual homeowners (renters are not
eligible for this credit) shows up on an individual’s tax bill, and is based on the school tax rate in
the individual’s municipality and the maximum credit value for a particular year (WLFB, 2007d).
23
Revenue limits began in 1993(94) and place fiscal controls on the revenue received by school
districts, technical college districts, counties, and municipalities from a combination of
intergovernmental aid and local levies (WLFB, 2007c).
22
assistance benefit realized by the median-valued home for a 15-year period, from
1991(92) through 2005(06).
Table 7 shows the resulting total local assistance benefit for a median-valued
home. The owner of a median-valued home realized the highest increase in
local assistance in 1996(97), an estimated $261, largely as a result of the state’s
commitment to fund two-thirds of Wisconsin public K-12 education (WLFB,
2007e). The increased funding put into assisting public schools more than offset
the brief elimination of the lottery and gaming credit during the same year.24 The
more substantial changes in local assistance in reference to a median-valued home
include an increase of $440 in general school aid, a $62 increase from the school
levy credit, and a $125 decrease from the lottery and gaming credit. In recent years,
local assistance has decreased with more frequency. The largest drop occurred in
2003(04), an estimated decrease of $79 in aid. In 2003(04), the more substantial
changes in local assistance in reference to a median-valued home include decreases
of $39 in shared revenue, $22 in community aids, and $19 in categorical school
aids. Table 7 lays out the net property tax bill faced by the owner of a medianvalued home, factoring in local assistance.
Table 7: Local Assistance Realized by a Median-Valued Home
MedianValued
Home
1991(92)
1992(93)
1993(94)
1994(95)
1995(96)
1996(97)
1997(98)
1998(99)
1999(00)
2000(01)
2000(02)
2002(03)
2003(04)
2004(05)
2005(06)
$68,555
$71,789
$76,226
$81,478
$87,295
$92,472
$97,188
$101,095
$106,160
$112,200
$119,370
$126,473
$133,821
$142,814
$153,525
Percent
Change
4.7
6.2
6.9
7.1
5.9
5.1
4.0
5.0
5.7
6.4
6.0
5.8
6.7
7.5
Benefit from
Local
Assistance
$1,885
$1,944
$1,957
$2,102
$2,196
$2,457
$2,595
$2,577
$2,755
$2,709
$2,698
$2,737
$2,659
$2,645
$2,706
Percent
Change
3.1
0.7
7.4
4.5
11.9
5.6
(0.7)
6.9
(1.6)
(0.4)
1.4
(2.9)
(0.5)
2.3
*Net
Percent
Property
Change
Taxes Paid
$1,857
$2,011
$2,165
$2,201
$2,221
$2,090
$2,075
$2,180
$2,109
$2,331
$2,428
$2,517
$2,587
$2,706
$2,730
8.3
7.7
1.7
0.9
(5.9)
(0.7)
5.1
(3.3)
10.5
4.2
3.7
2.8
4.6
0.9
* Net property taxes paid equals the property tax bill net all local assistance. The SPTC is calculated is
calculated from this amount...
Source: Created by authors using data collected from the Wisconsin LFB: Informational Paper 13 (1999,
2007b) and the Wisconsin DOR: Town, Village, and City Taxes – 2005, Table VI (2007).
24
The Wisconsin Legislature passed legislation in 1991 that created the lottery credit to provide
property tax relief to property used as an owner’s primary residence. However, a circuit court
found that, by providing lottery proceeds exclusively to homeowners, the provision violated the
uniformity clause of the Wisconsin Constitution. Following this decision, the lottery credit was
eliminated in 1996, and then distributed to all taxable properties in 1997. In 1998, following the
constitutional amendment, lottery proceeds once again targeted homeowners (WLFB, 2007d).
23
In the case of individual credits, home values serve as an inadequate indicator
for the credit amount received by a household. Though credit calculations
involve home values, the amount of benefit realized also relies on income,
in the case of the Homestead Credit, and tax liability, in the case of the SPTC.
To measure the effects of both the SPTC and the Homestead credit, we estimate
individual property tax relief for two median-valued homes with differing
household incomes.25 We use Wisconsin’s median household income as a
representation of a typical Wisconsin resident. We use the median household
income of Homestead Credit claimants to capture the individual property tax
relief realized by a lower-income household. These assumptions allow us
to develop a realistic estimate of the benefit level received by the owner of a
median-valued home from the two credits at two different levels of income.
The households under review are defined as:
1. Median-income homeowner – A homeowner of a medianvalued home and with a median household income.
2. Low-income homeowner – A homeowner of a median-valued
home and with a household income equal to the median
household income of the Homestead Credit claimant
population.
Wisconsin’s median household income for 2005 was approximately $44,000
(U.S. Census, 2007f). This income level makes a median-income homeowner
ineligible for the Homestead Credit. Ineligibility for the Homestead Credit holds
for every year between 1991 and 2005. Therefore, the individual property tax
relief provided to this homeowner equals the SPTC. To calculate the SPTC, we
make the assumption that the owner of a median-valued home in each year has
tax liability that allows her or him to use the entire SPTC for which he or she is
eligible. The estimated SPTC amounts for the median-valued home are provided
in Table 8.26 In our analysis, the changes in the SPTC are solely a result of
legislative changes made throughout the years.
25
Our analysis does not take into account the possibility of a correlation between household
income and housing consumption. Additionally, we chose to maintain the median-valued home
for both household income levels due to a lack of data. As discussed in Appendix G, we were
unable to calculate benefit amounts resulting from the lottery and gaming credit. The Wisconsin
LFB Informational Paper 13 (1999, 2007b) only provides estimates for the median-valued home.
26
As discussed, the SPTC has gone through several adjustments since being enacted in 1989.
The amounts provided in Table 8 reflect the credit formula used in each year. See Section II:
Property Tax Relief in the United States for a discussion of the legislative changes to the SPTC
since its enactment.
24
Table 8: Total Individual Property Tax Relief for the Median-Valued Home
SPTC Eligible
& Used
Percent
Dollars
Change
1991(92)
1992(93)
1993(94)
1994(95)
1995(96)
1996(97)
1997(98)
1998(99)
1999(00)
2000(01)
2000(02)
2002(03)
2003(04)
2004(05)
2005(06)
186
200
200
200
200
200
200
305
0
280
291
300
300
300
300
7.7
0.0
0.0
0.0
0.0
0.0
52.6
(100.0)
N.A.
4.2
3.0
0.0
0.0
0.0
Homestead Credit:
Median-Income
Homeowner ($)
Low-Income
Homeowner ($)
Percent
Change
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
770
822
822
822
770
770
770
770
759
721
685
685
650
650
650
6.8
0.0
0.0
(6.3)
0.0
0.0
0.0
(1.5)
(5.0)
(4.9)
0.0
(5.1)
0.0
0.0
Source: Created by authors using data provided by the Wisconsin LFB and collected from Wisconsin LFB:
Informational Paper 13 (1999, 2007b).
Table 8 also provides the individual property tax relief for a low-income homeowner. We apply the same tax liability assumption as used with the median-income
homeowner to calculate the SPTC amount. Since tax liability decreases with
income, our assumption may estimate somewhat higher SPTC amounts than
actually experienced by low-income homeowners. To calculate the Homestead
Credit realized by a low-income homeowner, we estimate the median household
incomes for Homestead Credit claimants for each year under observation.27
Using this income and the net property taxes paid on a median-valued home,
we calculate the appropriate Homestead Credit.
The annual fluctuations in the Homestead Credit are largely due to legislative
changes in the credit calculation and their effect on the median-income level
of claimants. Since the maximum income in 1999(00) increased from $19,154
to $20,290, the median income for a Homestead Credit claimant increased as
well. The $8,000 income threshold combined with increased household income
had the effect of decreasing the Homestead Credit realized by a low-income
homeowner and reducing property tax relief. In 2000(01), the maximum
27
The data available to calculate median household incomes found in the Homestead Credit
claimant population for 1991(92) through 1995(96) provided claimant counts within certain
household income ranges. Counts were listed in household income increments of $500. We
use mid values as estimates for everyone who fell in any given range. These are rough estimates,
and the actual median household income will fall in the vicinities of our approximations.
25
income increased further from $20,290 to $24,500. The expansion of the
Homestead Credit contributed to a decrease in individual property tax
relief for a low-income homeowner.
The expansion of the Homestead Credit discussed above only takes into account
the changes in the median-income of claimants that result from legislative changes
in income eligibility. However, the median-income naturally adjusts with the
economy as well. As briefly mentioned at the end of Section II of this report, the
higher incomes that result from inflationary pressures diminish credit amounts that
are realized by a claimant and begin to push him or her out of eligibility. Many
policy recommendations have been put forth to allow the formula factors, specifically the maximum income level (i.e. $24,500 currently) and the income threshold
(i.e. $8,000) to adjust with inflation. Though the nominal incomes of claimants
rise, the costs of the goods they consume rise as well. Inflationary-adjusted
formula factors would recognize the diminished purchasing power of fixed
formula factors and would preserve the real value of claimant incomes.
Table 9 provides the overall fiscal relief provided to a median-income homeowner
and a low-income homeowner. Overall fiscal relief equals local assistance plus
individual property tax relief. The amount that the low-income individual
receives through the Homestead Credit represents the difference in overall fiscal
relief seen between a median-income homeowner and a low-income homeowner.
Table 9: Annual Overall Fiscal Relief for Owner of Median-Valued
Home–Local Assistance and Individual Relief Combined
MedianIncome
Homeowner
1991(92)
1992(93)
1993(94)
1994(95)
1995(96)
1996(97)
1997(98)
1998(99)
1999(00)
2000(01)
2000(02)
2002(03)
2003(04)
2004(05)
2005(06)
$2,071
$2,144
$2,157
$2,302
$2,396
$2,657
$2,795
$2,882
$2,755
$2,989
$2,990
$3,037
$2,959
$2,945
$3,006
Percent
Change
Low-Income
Homeowner
Percent
Change
3.5
0.6
6.7
4.1
10.9
5.2
3.1
(4.4)
8.5
0.0
1.6
(2.6)
(0.5)
2.1
$2,841
$2,966
$2,979
$3,124
$3,166
$3,427
$3,565
$3,652
$3,513
$3,710
$3,675
$3,723
$3,609
$3,596
$3,656
4.4
0.4
4.9
1.3
8.2
4.0
2.4
(3.8)
5.6
(0.9)
1.3
(3.1)
(0.4)
1.7
Source: Created by authors using data provided by Wisconsin LFB and collected from the
Wisconsin LFB: Informational Paper 13 (1999, 2007b) and the Wisconsin DOR: Town, Village,
and City Taxes – 2005, Table VI (2007).
26
This discussion provides understanding of how local assistance and individual
property tax relief have changed throughout the last 15 years. The relationship
between these two forms of state aid is depicted in Table 10. For the medianincome homeowner with a median-valued home, local assistance has provided
approximately 90 percent of overall fiscal relief realized. The SPTC provides
the remaining 10 percent. The composition of overall fiscal relief has remained
relatively unchanged throughout this period. Conversely, the makeup of fiscal
relief for a low-income homeowner with a median-valued home has changed
during the last 15 years. Individual relief has contributed a larger fraction of
overall fiscal relief in comparison to a median-income homeowner; however,
that fraction has fallen from 34 percent in 1991(92) to 26 percent in 2005(06).
The expansion of the Homestead Credit and the inflexibility of the $8,000
income threshold have reduced the difference in fiscal relief between the
two income levels.
Table 10: Local Assistance and Individual Property Tax Relief
as Percentages of Overall Fiscal Relief
for Median- and Low-Income Homeowners
Median-Income
Low-Income
Homeowner
Homeowner
Local
Individual
Local
Individual
Assistance Property Tax Assistance Property Tax
(%)
Relief (%)
(%)
Relief (%)
1991(92)
1992(93)
1993(94)
1994(95)
1995(96)
1996(97)
1997(98)
1998(99)
1999(00)
2000(01)
2000(02)
2002(03)
2003(04)
2004(05)
2005(06)
91
91
91
91
92
92
93
89
100
91
90
90
90
90
90
9
9
9
9
8
8
7
11
0
9
10
10
10
10
10
66
66
66
67
69
72
73
71
78
73
73
74
74
74
74
34
34
34
33
31
28
27
29
22
27
27
26
26
26
26
Source: Created by authors using data provided by Wisconsin LFB and collected
from the Wisconsin LFB: Informational Paper 13 (1999, 2007b) and the Wisconsin
DOR: Town, Village, and City Taxes – 2005, Table VI (2007).
27
VI. Conclusion
Several states provide fiscal relief to their residents to limit property tax burdens.
Wisconsin provides such relief using two approaches, aid to local governments
and property tax relief for individuals. As requested by the Wisconsin DOR, we
have focused our analysis on individual relief provided through the SPTC and
Homestead Credit.
We have analyzed the accuracy of two formula assumptions that affect the credits
that claimants receive; specifically, the 20/25 PTE percentages and the cost of
heat as a percentage of rent. Our evaluation of Wisconsin’s estimation of the PTE
finds that the current formula percentages of 20 and 25 percent are close to our
Milwaukee estimate of 21 percent for rental properties of five or more units.
Our estimate for Madison’s PTE percentage, however, varies significantly at
13 percent.
We also looked at the distribution of these credits and their contribution to overall
fiscal relief. We have found that the non-refundability of the SPTC has created
some inequities, with higher-income individuals receiving a greater benefit.
When looking at tenure status, homeowners receive a greater benefit from the
SPTC in comparison to renters. However, as a percentage of property taxes or
PTE, renters benefit more than homeowners.
The distribution of the Homestead Credit by tenure status closely resembles that
of the SPTC. Specifically, homeowners, on average, receive larger credits than
renters. Also, renters receive more relief on their PTEs paid than homeowners
receive on their property taxes paid. However, more renters than homeowners
claim the Homestead Credit, unlike the SPTC. In addition, the average Homestead
Credit amount also appears to vary more by geographic location than the SPTC.
We also find that the composition of overall fiscal relief has remained steady
throughout the last 15 years for a median-valued home owner with a medianincome. Individual relief provided 10 percent of overall fiscal relief. However,
individual relief has made up a declining share of overall fiscal relief realized by
the owner of a median-valued home with a low-income. In this case, individual
property tax relief has declined from 34 percent in 1991(92) to 26 percent in
2005(06). This shift has diminished the difference in relief provided to medianincome individuals and lower income individuals.
28
VII. Recommendations
The architecture established to analyze the extant research questions and the
empirical findings are a first step in assisting the Wisconsin DOR to improve its
understanding of how the School Property Tax Credit and the Homestead Credit
provide and distribute individual property tax relief. However, further analysis is
necessary to verify the accuracy of the PTE across municipalities and statewide.
Additionally, the Wisconsin DOR should address the diminished proportion
of overall fiscal relief that is provided to low-income residents through direct
individual property tax relief. Toward this end, we recommend that the
Wisconsin DOR consider the following to extend the present study and
strengthen the effect of individual property tax relief:
Currently, rental properties used as residences are classified as either
residential or commercial, depending on the number of units in each building.
We recommend disaggregating these rental properties in the following way:
(a) identifying the number of rental units (used as residences) contained within
residential properties (properties with four units or less); and (b) identifying the
number of rental units (used as residences) contained within commercial
properties (properties with five units or more). Distinguishing these properties
would allow for a more accurate calculus of the total number of rental units used
as residences. The distinction also would allow for an accurate measure of the
property values and therefore property taxes assigned to rental units used as
residences. This information can be used in conjunction with the rent data
provided by the American Community Survey to calculate a more precise
statewide PTE percentage.
Alternatively, a survey of owners and managers of rental properties could be
used to estimate the PTE percentage.28 The survey should include requests for
the following items: (a) total residential units in the property; (b) total contract
rent; (c) property taxes on residential rental portion of the property. In addition,
the survey could request the share of residential rental units in which heat is
included.29 The information from the survey would yield the PTE percentage
for renters with heat included in their contract rent and for those who pay heat
separately. This would provide an estimate of the accuracy of the 20/25 percent
differential.
Our analysis has revealed wide variance in the PTE percentages between the
cities of Madison (13 percent) and Milwaukee (21 percent). While the reasons
for this disparity are unclear, we recommend that the Wisconsin DOR explore the
potential factors contributing to such variance. For example, the proportion of
rent we were able to estimate may have contributed to differences in the PTE
percentages; we estimated 61 percent and 37 percent of the rent paid on
28
For a model survey developed by the Minnesota Department of Revenue, see pages 10 and 11
of the Minnesota Department of Revenue report entitled “Property Tax as a Percentage of
Residential Rent” (Minnesota Department of Revenue, 2005).
29
In addition, the survey could request the approximate cost of heat (when included).
29
apartments in Madison and Milwaukee respectively. However, systematic
differences may exist between Madison and Milwaukee in the nature of their
rental stocks and markets, requiring further analysis by the Wisconsin DOR.
In addition to the above approaches for verifying the PTE, we recommend that
the Wisconsin DOR support legislation that would annually adjust the Homestead
Credit formula for inflation. This would require adjusting the maximum income
(currently $24,500) as well as the income threshold (currently $8,000). This
would allow the Homestead Credit to provide consistent property tax relief
on an inflation-adjusted basis. An inflation-adjusted formula would work toward
maintaining the composition of overall fiscal relief to Wisconsin’s low-income
households.
30
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U.S. Census Bureau. (2007e). Housing Vacancies and Homeownership, Annual
Statistics: 2006. Retrieved March 26, 2007 from
http://www.census.gov/hhes/www/housing/hvs/annual06/ann06t13.html.
U.S. Census Bureau. (2007f). Wisconsin Fact Sheet. Retrieved February 15, 2007
from http://factfinder.census.gov/servlet/SAFFFacts?_event=Search&
geo_id=01000US&_geoContext=&_street=&_county=&_cityTown=&_st
ate=04000US55&_zip=&_lang=en&_sse=on&ActiveGeoDiv=geoSelect&
_useEV=&pctxt=fph&pgsl=010&_submenuId=factsheet_1&ds_name=DE
C_2000_SAFF&_ci_nbr=null&qr_name=null&reg=null%3Anull&_keyw
ord=&_industry=.
32
University of Wisconsin Tax Study Committee. (1959). Wisconsin’s State and
Local Tax Burden – Impact, Incidence, and Tax Revision Alternatives.
University of Wisconsin-Madison.
Wisconsin Continuing Revenue Survey Commission. (1960). Progress Report
Number Two. Madison: Author.
Wisconsin Council on Children and Families. (2005). The Homestead Credit: An
Effective Form of Property Tax Relief that is Losing Its Punch. Wisconsin
Budget Project. Retrieved March 1, 2007 from
http://www.wccf.org/pdf/homesteadlosingpunch.pdf.
Wisconsin Department of Administration. (2006). Annual Fiscal Report:
Budgetary Basis. Madison: Author. Retrieved April 20, 2007 from
http://www.doa.state.wi.us/docs_view2.asp?docid=6136.
Wisconsin Department of Revenue. (2006). The Wisconsin Individual Income
Tax. Madison: Author. Retrieved April 20, 2007 from
http://www.dor.state.wi.us/ra/06inctax.pdf
Wisconsin Department of Revenue. (2007). Town, Village, and City Taxes –
2005, Table VI. Madison: Author. Retrieved April 20, 2007 from
http://www.dor.state.wi.us/pubs/slf/tvc05.pdf.
Wisconsin Legislative Fiscal Bureau. (1999). Informational Paper 13: Property
Tax Level in Wisconsin. Madison: Author.
Wisconsin Legislative Fiscal Bureau. (2005). Informational Paper 24:
Homestead Tax Credit. Madison: Author.
Wisconsin Legislative Fiscal Bureau. (2007a). Informational Paper 2: Individual
Income Tax. Madison: Author. Retrieved March 28, 2007 from
http://www.legis.state.wi.us/lfb/Informationalpapers/2.pdf.
Wisconsin Legislative Fiscal Bureau. (2007b). Informational Paper 13: Property
Tax Level in Wisconsin. Madison: Author. Retrieved March 28, 2007 from
http://www.legis.state.wi.us/lfb/Informationalpapers/13.pdf.
Wisconsin Legislative Fiscal Bureau. (2007c). Informational Paper 12: Local
Government Expenditure and Revenue Limits. Madison: Author. Retrieved
April 15, 2007 from
http://www.legis.state.wi.us/lfb/Informationalpapers/12.pdf.
Wisconsin Legislative Fiscal Bureau. (2007d). Informational Paper 21: State
Property Tax Credits (School Levy and Lottery and Gaming Credits).
Madison: Author. Retrieved March 28, 2007 from
http://www.legis.state.wi.us/lfb/Informationalpapers/21.pdf.
Wisconsin Legislative Fiscal Bureau. (2007e). Informational Paper 27: State Aid
to School Districts. Madison: Author. Retrieved April 15, 2007 from
http://www.legis.state.wi.us/lfb/Informationalpapers/27.pdf.
33
Wisconsin Legislative Fiscal Bureau. (2007f). Informational Paper 35: Wisconsin
Technical College System. Madison: Author. Retrieved April 20, 2007
from http://www.legis.state.wi.us/lfb/Informationalpapers/35.pdf.
Wisconsin Legislative Fiscal Bureau. (2007g). Informational Paper 22:
Transportation Aid (General Transportation and Connecting Highway
Aid). Madison: Author. Retrieved April 20, 2007 from
http://www.legis.state.wi.us/lfb/Informationalpapers/22.pdf.
Wisconsin Legislative Fiscal Bureau. (2007h). Informational Paper 49:
Community Aids (Financial Assistance to Counties for Human Services).
Madison: Author. Retrieved April 20, 2007 from
http://www.legis.state.wi.us/lfb/Informationalpapers/49.pdf.
Wisconsin State Commission on Aging (1962). First Annual Report of the State
Commission on Aging. Madison: Author.
34
Appendix A: Property Tax Relief: “Circuit-Breaker” Programs
The nature and composition of income-based property tax relief varies
considerably throughout the United States. The state of Massachusetts,
for example, has a circuit-breaker credit known as the “Real Estate Tax Credit
for Persons Age 65 and Older.” This is a refundable credit for senior citizens
in which the maximum credit allowed for renters and homeowners in the 2005
tax year is $840. The law assumes that 25 percent of rent goes toward property
tax, without any allowances for heat paid as a portion of rent (Massachusetts
Department of Revenue, 2007).
In contrast, the property tax credit in Connecticut, known as the “Income Tax
Credit for Property Taxes,” bears little resemblance to the credit in Massachusetts.
First, there is no age requirement to claim a tax credit in Connecticut. Second, the
credit is only allowed for homeowners; renters in Connecticut are disallowed
from claiming a credit, even if the landlord explicitly bills the tenant for property
taxes. Finally, the credit is not refundable; depending on a homeowner’s property
taxes and household income, the amount of the credit may be reduced to zero
(Connecticut Department of Revenue, 2007). Therefore, Connecticut’s property
tax relief program is not a circuit breaker, as it is a non-refundable credit available
only to homeowners.
Seventeen states in addition to Massachusetts have circuit-breaker programs in tax
year 2005. However, even among those 18 states, there exists significant
heterogeneity in eligibility requirements and maximum property tax relief
benefits, as Table A-1 shows.
35
Table A-1: Property Tax Circuit-Breaker Programs in the United States (Tax Year 2005)
30
State
Program Name
Renter
Eligibility
(PTE
Percentage)30
District of
Columbia
Individual Income
Property Tax Credit
Illinois
Maine
Age Eligibility
Income Eligibility
Limits
Maximum Benefit
Type of
Rebate
Yes
(15%)
All
Single and joint filers:
income < $20,000
$750
Income tax
credit (filers);
rebate check
(nonfilers)
Circuit Breakers
Yes
(25%)
65 and older; 16 and
older and disabled;
or surviving spouse
63 or older
$21,218 (one person
household); $28,480 (two
person household); $35,740
(three person household)
$700
Rebate check
Maine Residents
Property Tax and Rent
“Circuit-Breaker”
Refund
Yes
(20%)
All
Single filer: income <
$77,000
joint filers: income <
$102,000
$2,000
Rebate check
Property tax equivalent (PTE) percentage for renters who pay heat and utilities separate from their monthly rent.
36
Program Name
Renter
Eligibility
(PTE
Percentage)30
Maryland
Homeowners’
Property Tax Credit
Program/ Renters’ Tax
Credit Program
Yes
(15%); Renters
under age 60
must have at
least one
dependent under
18 living with
them
Massachusetts
Real Estate Tax Credit
for Persons Age 65
and Older
Yes
(25%)
Michigan
Homestead Property
Tax Credit
Yes
(20%)
State
Minnesota
Property Tax Refund
Yes
(19%)
Age Eligibility
Income Eligibility
Limits
Maximum Benefit
Type of
Rebate
All
Homeowners:
Single filer: net worth <
$60,000
joint filers: net worth <
$200,000
Renters:
Under age 60 income <
$38,659; Over age 60
income < $30,00
Homeowners:
Amount by which
property taxes (based on
assessed value <
$300,000) exceed
established “Tax Limits”
Renters:
$600
Homeowners:
Property tax
credit
Renters
Rebate check
Age 65 and older
Single filer: income <
$45,000
joint filers: income <
$67,000
$840
Income tax
credit
All
Single and joint filers:
income < $82,650
$1,200
Income tax
credit (filers);
rebate check
(nonfilers)
All
Homeowners:
Single and joint filers:
income < $87,780
Renters:
Single and joint filers:
income < $47,350
Homeowners:
$1,640
Renters:
$1,350
Rebate check
37
State
Program Name
Renter
Eligibility
(PTE
Percentage)30
Age Eligibility
Income Eligibility
Limits
Maximum Benefit
Type of
Rebate
Age 65 and older,
disabled, or 60 and
older receiving
surviving spousal
Social Security
Single filer: income <
$25,000
joint filers: income <
$27,000
Homeowners:
$750
Renters:
Lesser of 20% of rent
paid or $750
Rebate check
$1,000
Income tax
credit (filers);
rebate check
(nonfilers)
Missouri
Property Tax Credit
Claim
Yes
(20%)
Montana
Elderly
Homeowner/Renter
Credit
Yes
(15%)
Aged 62 and older
Single and joint filers:
income < $45,000
New Jersey
FAIR Rebate
Yes
(18%); tenant
must be 65 or
older or disabled
Homeowners:
All
Renters:
Age 65 or older
Homeowners:
Single and joint filers:
income < $200,000
Renters:
Single and joint filers:
income < $100,000
Homeowners:
$1,200
Renters:
$825
Rebate check
New Mexico
Property Tax Rebate
Yes
(6%)
Age 65 or older
Single and joint filers:
income < $16,000
$250
Income tax
credit
New York
Real Property Tax
Credit for
Homeowners and
Renters
Yes
(25%); average
monthly rent
must be $450 or
less
All
Single and joint filers:
income < $18,000; market
value of home must not
exceed $85,000
$375 (age 65 and older);
$75 (under age 65)
Income tax
credit (filers);
rebate check
(nonfilers)
Oklahoma
Property Tax Refund
No
Age 65 and older or
disabled
Single and joint filers:
income < $12,000
$200
Rebate Check
38
Program Name
Renter
Eligibility
(PTE
Percentage)30
Age Eligibility
Income Eligibility
Limits
Maximum Benefit
Type of
Rebate
Elderly Rental
Assistance Program
Yes
(n/a); renters
must pay more
than 20% of
income for rent,
fuel and utilities
Renters only; age 58
and older
Single and joint filers:
income < $10,000; asset
limit of $25,000 if under age
65; no asset limit if over age
65
$2,100
Rebate check
Pennsylvania
Property Tax/Rent
Rebate Program
Yes
(varies – range
from 20% for
income < $5,500
to 2% for income
between $13,000
and $15,000)
Age 65 and older;
spouse age 65 or
older; disabled; or
widow age 50 or
older
Single and joint filers:
income < $15,000
$500
Rebate check
Rhode Island
Property Tax Relief
Credit
Yes
(20%)
All
Single and joint filers:
income < $30,000
$250
Income tax
credit (filers);
rebate check
(nonfilers)
Single and joint filers:
income < $47,000
None – State rebates
difference between
maximum % of income
claimant expected to pay
in property taxes
(between 3.5 and 5.0%)
and amount of property
taxes actually owed
Income tax
credit (filers);
rebate check
(nonfilers)
State
Oregon
Vermont
Property Tax Rebate
Yes
(21%)
All
39
State
Wisconsin
Program Name
Renter
Eligibility
(PTE
Percentage)30
Education Property
Tax Payment
(“Prebate”)
No
Homestead Credit
Yes
(25%)
Income Eligibility
Limits
Maximum Benefit
Type of
Rebate
All
Single and joint filers:
income < $110,000
None – State rebates
difference between
maximum % of income
claimant expected to pay
in school property taxes
(between 2.0 and 4.5%)
and projected amount of
school property taxes
owed
Rebate check
All
Single and joint filers:
income < $24,500
$1,160
Income tax
credit (filers);
rebate check
(nonfilers)
Age Eligibility
Source: Lyons, et al. (2007).
40
Appendix B: History and Development of the Homestead Credit
The Homestead Credit was born in the 1960s out of a concern for the aging
Wisconsin population. At the time, three influential studies created the
argument for providing property tax relief to the elderly. A 1959 tax incidence
study conducted through the University of Wisconsin – Madison and led by
Harold Groves showed that Wisconsin had an above average property tax burden
for the United States and surrounding Midwestern states. Moreover, given that
housing was a top financial priority for individuals and that housing was a larger
portion of the budget for low-income taxpayers, the property tax was regressive
at the lowest end of the income scale (University of Wisconsin Tax Study
Committee, 1959).
This committee also discussed the plight of renters with regard to the property tax.
They noted that a landlord could shift a “substantial” portion of property taxes to
the tenant and that the tenant was unable to take advantage of a federal income tax
deduction for property taxes as could a homeowner (University of Wisconsin Tax
Study Committee, 1959).
In its 1960 report, the Revenue Survey Commission also showed that individuals
in the lowest income bracket were hardest hit by the property tax. Additionally,
it noted that many low-income individuals were elderly and retired.
The Revenue Survey Commission took into consideration the dual realities of the
enormous growth of the school-age population and the increased reliance on the
property tax that this growth would create. The first reality was that the main
function of the property tax was to support public education. The second reality
was that the property tax was the main revenue source for local governments.
For example, in 1950 there were 6 percent more people in the labor force than
in dependent groups, but, by 1960, the reverse would be true with 18 percent
more people in the dependent groups. The Commission projected that by 1965,
expenditures would exceed revenues by more than $50 million if costs remained
constant and only the numbers of units (per pupil, per capita, etc.) would increase
(Wisconsin Continuing Revenue Survey Commission, 1960). This meant
property tax rates would not cover 22 percent of the expected budget.
Both of these studies discussed the possible use of a homestead exemption.
A homestead exemption for low-income homeowners would allow individuals
to exclude part or all of the value of their property from the assessment of their
property value, effectively lowering their property tax bill. (This exemption was
unlike the Homestead Credit in that it reduced the property tax bill while a credit
reduced the income tax an individual must pay). The studies noted that while an
exemption would be most beneficial to the low-income homeowner, it would
significantly reduce the property tax base and do nothing for renters (University
of Wisconsin Tax Study Committee, 1959; and Wisconsin Continuing Revenue
Survey Commission, 1960).
41
The last influential study was conducted by the Wisconsin Commission on Aging
in 1962. This descriptive study surveyed the aging population on their views of
aging and described the services available to this population. The finding of the
24 hearings in the fall of 1962 was that the increasing property tax burden was
one of the biggest concerns of the elderly, second only to the growing costs of
medical care (Wisconsin State Commission on Aging, 1962). This report also
noted that bill number 301-A, at that time before the legislature at the request of
the Commission on Aging, was designed to bring property tax relief to persons
over the age of 65 through an income tax credit.
The constitutionality of the credit was challenged on the grounds that it violated
the uniformity clause of the Wisconsin constitution. The clause states that all
property taxpayers should be treated alike. However, the Wisconsin Supreme
Court ruled that it did not violate the clause because the credit was administered
through the income tax and because the credit was designed to provide relief –
which is linked to welfare and not the tax system (Stark, 1991-92).
Formula Changes
Since 1964, when the Homestead Credit was finally enacted – probably due
to a surplus in state revenues – there have been significant changes. In 1964,
the credit was only for those above age 65 with incomes below $3,000. Rent
constituting property taxes was equal to 25 percent for all renters. In addition,
it was a credit “against income taxes for 50 percent (75 percent if the person’s
income was $1,000 or less) of property taxes or rent constituting property taxes
that exceeded 5 percent of the person’s income. This credit could not exceed
$300, but it was refundable” (Stark, 1991-92). The credit was changed in the
1987-89 biennial budget from 25 percent of rent equal to the PTE, to its current
form where 25 percent of rent is the PTE for those who pay their own heat and
20 percent for those who have heat included in their rent.
Other significant changes to the credit have broadened the relief of the credit.
In 1973, the age restriction was changed to include any person age 18 or older.
This change increased the program cost from $10 million in 1972-73 to $35
million in 1973-74 (WLFB, 2005) but seniors still receive the most relief
(Wisconsin Council on Children and Families, 2005). Due to the fact that
from 1990 to 1998, the maximum income limit was not adjusted for inflation
or any other measure, the number of claimants fell by 35 percent and expenditures
fell by 32 percent during this period (WLFB, 2005). Finally, in 1999, Act 9
increased the maximum income limit to $20,290 (from $19,154) and then to
$24,500 in the year 2000 and thereafter (WLFB, 2005).
42
Appendix C: Methodology for Estimating
the Property Tax Equivalent
Calculations for TOTAL RENT
Step 1:
Gross Rent on Buildings of 5 or More = % of Gross Rent for buildings with 5+ units
Total gross rent
Step 2:
% of Gross Rent for 5+ buildings x Total Contract Rent = amount of contract rent
for buildings with 5+ units
Step 3:
% of Gross Rent for buildings with 5+ units x Rent Asked = amount of rent asked
for buildings with 5+ units
Step 4:
Add values from Step 2 and Step 3 to obtain Total Rent for All Units
Calculations for PROPERTY TAXES
Step 1:
Add values of all apartment property values for buildings with 5+ units together
Step 2:
Multiply Step 1 value by net mill rate per thousand (e.g. if mill rate = 25, then the
net mill rate per thousand = 0.025) to obtain Property Taxes on Rental Property
Calculations for PROPERTY TAX EQUIVALENT
Divide the TOTAL RENT by the PROPERTY TAXES.
43
Appendix D: The Assumption behind the Heat Differential
We assume the purpose of using different percentages to calculate the PTE for
tenants who have heat included in their rents and renters who pay heat separately
is to equate the PTE for those in equivalent properties regardless of whether heat
is included in the rent.
Now, let A = total annual rent for those with heat included in their rent bills and
let B = annual rent for those paying heat separately. Also, let H = the heat paid by
renters regardless of whether heat is included in the rent. Then, A = rent + heat.
For those in equivalent apartments, we assume that A = B + H.
The differential assumes that the following equation for the percentage used to
calculate the PTE must hold:
20% of A = 25% of B.
As A = B + H, we then have,
0.2 x B + 0.2 x H = 0.25 x B.
Solving for H yields,
0.2 x H = 0.05 x B
H = (0.05 x B) / 0.2
H = 0.25 x B.
Thus, heat must equal 25 percent of annual rent for those paying heat separately
in identical housing.
Now, because H = 0.25 x B and A = B + H, we have,
B=4xH
A=4xH+H
A = 5 x H.
Again, solving for heat yields,
H = 0.2 x A.
The differential, therefore, also implies that heat constitutes 20 percent of total
rent for those with heat included in their bills.
Finally, as H = 0.25 x B and A = B + H, we have
A = B + 0.25 x B
or
A = 1.25 x B.
Thus, renters with heat included pay 25 percent more than those without heat
included in their rent.
44
Problems with the differential arise if heat use or costs do not conform to the
formulas calculated above. For example, if because of differences in heat use
motivated by explicit payments for heat, heat constitutes 20 percent of rent for
those with heat included in their rent bills and only 15 percent of rent for those
who pay heat separately, then the equation for the percentage used to calculate the
PTE equation for those with heat included becomes
Percentage used to calculate the PTE (heat included) = 0.2 x A = 0.2 x B + 0.2
x H = 0.2 x B + 0.2 (0.15 x B) = 0.23 x B < 0.25 x B.
In this situation, we can see that those paying heat separately receive a larger
benefit from the PTE percentages. If, however, heat constitutes more then 25
percent for those paying heat separately, for example 30 percent, then the PTE
equation for those with heat included is
PTE = 0.2 x A = 0.2 x B + 0.2 (0.3 x B) = 0.26 x B > 0.25 x B.
Here we see that those with heat included benefit from the percentages used to
calculate the PTE. A similar analysis shows that if heat is 25 percent of rent bills
for those who pay heat separately and not 20 percent of rent bills for those with
heat included, then the PTE will not be equal. Therefore, to ensure equitable
PTEs for those who do and do not have heat included in their rent bills, we find
that heat must equal 20 percent of A and 25 percent of B.31
31
If the Wisconsin DOR or another agency were to collect data on the heat tenants pay for those
who have heat included in their rent, this analysis would be more possible.
45
Appendix E: Wisconsin Adjusted Gross Income
The base for the state income tax, Wisconsin adjusted gross income (WAGI), is
federal adjusted gross income, modified to add income exempt from federal tax
but subject to state tax, to subtract income taxed federally but not by Wisconsin,
and to subtract expenses allowed by Wisconsin but not permitted under federal
law. Additions include:
•
•
•
•
•
•
•
State and municipal bond interest, which may not be taxed by the federal
government but may be taxed by state and local governments. Wisconsin
does not tax some state and municipal bond interest, so these amounts are
not added back to federal adjusted gross income. These include interest
on bonds issued by municipal housing, community development, and
redevelopment authorities; local exposition, cultural and sports stadium
districts; the Wisconsin Housing Finance Authority; and the governments
of Puerto Rico, Guam, and the Virgin Islands. In addition, interest on
Wisconsin higher education bonds and certain bonds issued by the Wisconsin Housing and Economic Development Authority and public housing
agencies located outside Wisconsin are exempt from the state tax.
Capital losses in excess of $500. Under federal law, a taxpayer may use
up to $3,000 in capital losses to offset ordinary income; Wisconsin limits
this offset to $500.
Farm losses for persons not actively engaged in farming when income
exceeds certain amounts. Farm losses may be deducted fully when nonfarm WAGI does not exceed $55,000 ($27,500 for married persons filing
separately). At higher incomes, the amount of farm losses is reduced as
income rises, and no losses are allowed when non-farm WAGI exceeds
$600,000 ($300,000 for married persons filing separately).
Federal net operating loss carryovers, when these carryovers are different
from carryovers for Wisconsin purposes.
Lump-sum distributions.
Excess distributions from a passive foreign investment company.
Farmland preservation, farmland tax relief, and development zone credits
allowed under Wisconsin law. These credits are allowed for business
expenses that are deducted in determining net business earnings included
in federal adjusted gross income. They are added back to income so that
the taxpayer is not allowed both a deduction and a credit for the same
expenses.
Subtractions from federal adjusted gross income in the determination of WAGI
include:
• 60 percent of capital gains on assets held for more than one year. These
gains are fully included in federal taxable income, though long-term gains
are taxed at lower rates than ordinary income.
• Interest on U.S. government bonds, which the federal government may,
but states may not tax.
46
•
•
•
•
•
•
•
•
•
Railroad retirement benefits, railroad unemployment insurance, and
sickness benefits, which are taxable under federal law, but which states
are not permitted to tax.
Pensions received by persons who were members of or retired from
Milwaukee city and county retirement funds, the state teachers’ retirement
fund, and the civil service retirement system prior to January 1, 1964.
Veterans’ pensions also are exempt from Wisconsin income tax and
subtracted in determining WAGI.
A portion of Social Security benefits that is taxable for federal purposes.
Up to 85 percent of Social Security benefits are subject to federal tax, but
Wisconsin limits the amount taxed to 50 percent of those benefits. For
taxable years beginning in 2008 or after, all federally taxable social
security benefits are allowed as a subtraction.
Active duty military pay received by a member of a reserve component of
the armed forces, including pay for partial mobilization, for presidential
selective reserve call-up, and for special state service. Persons who take
this exemption may not claim the armed forces tax credit also provided
under state law; this credit is for up to $300 of military income for services
performed while stationed outside the United States.
A portion of unemployment compensation, which is fully taxable under
federal law but taxed by Wisconsin only when income exceeds $18,000
for married couples and $12,000 for most other filers.
Disability income for certain persons younger than the mandatory
retirement age, or age 65, who were permanently and totally disabled
when they retired.
Fifty percent of health insurance premiums paid by employed persons
whose employers do not contribute to their health insurance. Wisconsin
allows a deduction for 100 percent of the premiums paid by the selfemployed, to the extent those premiums are not deductible for federal
purposes. Starting in 2006, the 50 percent subtraction for employed
persons whose employer does not contribute to their health insurance will
be increased to 100 percent. Additionally, a subtraction for individuals
with no self-employment income and no employer will be phased in
during 2007 and 2008. In 2009 the full amount of health insurance
premiums these individuals pay will be allowed as a subtraction.
Premiums paid for long-term care insurance.
Tuition payments to post-secondary institutions in Wisconsin and to postsecondary institutions in Minnesota covered under Minnesota-Wisconsin
tuition reciprocity. For each qualified student, the subtraction is limited to
two times the average amount charged to resident undergraduates by the
University of Wisconsin System at four-year institutions for the most
recent fall semester. For tax year 2005 the available subtraction was
$4,244 per student. A deduction for tuition and other education expenses
also is allowed under federal law, but Wisconsin does not allow this
deduction since it provides its own.
47
•
•
•
•
•
•
•
•
Contributions to and distributions from Wisconsin’s EdVest College
Savings Program that are included in federal adjusted gross income.
Adoption expenses of up to $5,000 in the year the final court order
of adoption is entered, for expenses incurred that year and the two
previous years.
Travel expenses, lodging expenses, and lost wages incurred by a person
who, while living, donates one or more of his or her human organs to
another human being for human organ transplantation. The expenses and
wages are deducted from federal adjusted gross income in the calculation
of WAGI.
Gain from the sale of business or farming assets to a related person.
Settlements received or gain on assets recovered due to persecution by
Nazi Germany or any Axis regime from 1933 to 1945. Subsequent to
Wisconsin’s enactment of this subtraction, a similar exemption has been
created in federal law.
Wisconsin net operating loss carryforwards, when these amounts are
different from the federal net operating loss carryover.
Farm loss carryovers for persons subject to the Wisconsin farm loss limits.
State income tax refunds. In the federal tax calculation, persons who claim
an itemized deduction for state income taxes paid must add back any
refund received so that the federal deduction is allowed only for net tax
liability. Since Wisconsin does not allow a deduction for its own taxes, it
does not require its income tax refunds to be added back to income.
Source: Wisconsin DOR, 2006
48
Appendix F: Distribution of the School Property Tax Credit
and Homestead Credit by Claimant Location
At the request of the Wisconsin DOR, we analyzed the School Property Tax
Credit (SPTC) by geographic location. We looked at Grant, Milwaukee, Portage,
Vilas, and Winnebago counties as well as the City of Milwaukee to represent the
rural and urban areas of Wisconsin. We found that while these areas vary in the
total number of claimants and the average credit amount claimed and used, the
distribution within counties reflects the statewide distributions discussed earlier.
Specifically, people at lower income levels receive less benefit from the credit,
and homeowners receive larger credits than renters.
Distribution of the SPTC by Geographic Location
To demonstrate how different geographical areas reflect the overall distributive
trends discussed earlier, we highlight the number of claimants and the average
credit received by county and the City of Milwaukee for the SPTC. Table F-1
below shows how the distribution of claims by tenure status looks approximately
the same regardless of county.
Table F-1: Number of SPTC Claimants by Geographic Location
County
Grant
Milwaukee
Portage
Vilas
Winnebago
City of
Milwaukee
Statewide
Number of
Renter
Claimants
Using Some
Portion of
Claimed Credit
Total
Number of
Homeowner
Claimants
Number of
Homeowners
Using Some
Portion of
Claimed Credit
11,670
178,165
16,132
6,259
36,903
10,183
163,648
14,848
5,261
34,273
4,217
146,409
6,594
1,432
17,554
3,417
117,790
5,436
1,126
14,640
88,940
79,931
103,242
79,963
1,323,695
1,216,246
614,304
510,833
Total
Number
of Renter
Claimants
Source: Created by authors using data provided by the Wisconsin DOR.
49
We also examine the distribution of the average credit amounts by county
shown in Table F-2. While some counties, Grant County, for example, have
lower average credit amounts than other areas of Wisconsin, the overall pattern
between homeowners and renters is reflected in all counties. Furthermore, while
Grant County’s average credit amounts differs from other areas highlighted by the
Wisconsin DOR, all of the other counties in Table F-2 fall within $50 of the
statewide average.
Table F-2: Average SPTC Credit Claimed
and Used by Geographic Location
County
Average
Homeowner
Credit
Claimed
Average
Homeowner
Credit Used
Average
Renter
Credit
Claimed
Average
Renter
Credit
Used
Grant
Milwaukee
Portage
Vilas
Winnebago
City of
Milwaukee
$184.71
$270.30
$234.51
$208.90
$252.35
$185.21
$264.03
$232.55
$203.85
$249.13
$102.65
$159.65
$115.95
$126.32
$125.53
$100.79
$156.96
$114.87
$124.22
$124.45
$255.14
$248.56
$154.48
$151.89
Statewide
$250.44
$247.52
$142.61
$140.95
Source: Created by authors using data provided by the Wisconsin DOR.
Distribution of the Homestead Credit by Geographic Location
The distribution of the Homestead Credit by geographic location somewhat reflects
the overall trend discussed earlier in the average credit received. First, homeowners
receive a larger credit than renters in every place we examined, which matches the
statewide trend. Also, the average credit for homeowners fell within $30 of the
statewide average credit for every area examined except Vilas County. With
respect to renters, however, the variation was much greater.
The average credit for renters ranged from $383 in Grant County to $567
in the City of Milwaukee. All but Grant County fall within $92 of the statewide
average. Thus, the credit renters receive varies more by location than it does
for homeowners. Table F-3 shows the variation by geographic location in both
number of claimants and credit amounts.
50
Table F-3: Average Homestead Credit
and Number of Claimants by Geographic Location
Location
Grant
Milwaukee
Portage
Vilas
Winnebago
City of
Milwaukee
Statewide
Total
Number of
Homeowner
Claimants
Total
Number of
Renter
Claimants
Average
Credit for
Homeowners
Average
Credit for
Renters
1,136
16,251
1,431
744
2,968
888
36,702
1,274
334
3,629
$522
$566
$559
$476
$540
$383
$549
$444
$441
$443
11,033
28,749
$579
$567
105,725
126,524
$540
$475
Source: Created by authors using data provided by the Wisconsin DOR.
The distribution of Homestead Credit claimants also varies by location. Statewide
we see that more renters than homeowners claim the credit; however, in Grant,
Portage, and Vilas counties, more homeowners claim the credit. These areas are
more rural and may have fewer renters in general.
51
Appendix G: Local Assistance Realized by a Median-Valued Home
The estimate for the local assistance benefit realized by a median-valued home derives
from the total aggregate funding provided to all taxing jurisdictions within Wisconsin.
Table G-1 displays statewide totals for state-funded programs that provide local
assistance. Local assistance differs by county, city, and school district; however the state
aggregate amounts allow us to determine an average rate of aid. Aid is distributed
uniformly as dictated by the Wisconsin Constitution. However, a 1999 constitutional
amendment allowed the lottery and gaming credit to deviate from the uniformity clause.
Therefore, unlike the other local assistance categories, the lottery and gaming credit
provides property tax relief exclusively to property used as an owner’s primary residence.
We exclude this credit when determining the rate of aid for all types of real estate
property. We then add the credit back into the estimated aid realized by the medianvalued home (Table G-3).
52
Table G-1: Local Assistance Provided to Counties, Municipalities, and School Districts from 1992 to 2006
Year
1991(92)
1992(93)
1993(94)
1994(95)
1995(96)
1996(97)
1997(98)
1998(99)
1999(00)
2000(01)
2001(02)
2002(03)
2003(04)
2004(05)
2005(06)
Shared
General Categorical Technical
General
Revenue &
Community
School Aid School Aid College
Related Transportation
Aids ($)
($)
($)
Aid ($)
Aid ($)
Programs
($)
911,000,000
928,700,000
972,300,000
1,012,600,000
1,008,600,000
1,008,600,000
1,008,600,000
1,008,600,000
1,019,200,000
1,019,200,000
1,029,400,000
1,039,700,000
951,700,000
951,700,000
956,400,000
239,200,000
248,500,000
261,200,000
276,100,000
284,400,000
292,900,000
326,500,000
326,500,000
348,500,000
348,500,000
359,000,000
373,300,000
373,300,000
373,300,000
380,800,000
304,900,000
309,800,000
320,300,000
328,100,000
331,900,000
303,400,000
303,100,000
295,500,000
306,500,000
302,300,000
262,900,000
261,700,000
206,200,000
206,200,000
212,300,000
1,618,200,000
1,696,800,000
1,832,200,000
2,093,500,000
2,349,100,000
3,184,500,000
3,396,000,000
3,562,500,000
3,767,900,000
3,931,900,000
4,051,600,000
4,200,900,000
4,273,100,000
4,317,500,000
4,613,900,000
332,200,000
335,900,000
349,900,000
370,400,000
364,000,000
381,500,000
408,700,000
426,900,000
458,300,000
531,400,000
550,800,000
574,200,000
533,200,000
540,400,000
545,200,000
109,200,000
111,800,000
117,000,000
123,500,000
124,400,000
124,400,000
126,900,000
128,600,000
130,100,000
140,700,000
139,300,000
137,300,000
135,700,000
138,000,000
138,000,000
Total Local
School
Lottery &
Assistance
Levies
Gaming Tax
Provided by
Credit ($) Credit ($)
the State ($)
319,300,000
319,300,000
319,300,000
319,300,000
319,300,000
469,300,000
469,300,000
469,300,000
469,300,000
469,300,000
469,300,000
469,300,000
469,300,000
469,300,000
469,300,000
173,400,000
203,700,000
128,700,000
136,600,000
156,200,000
205,800,000
142,700,000
216,200,000
90,600,000
105,000,000
105,100,000
118,200,000
131,900,000
119,900,000
4,007,400,000
4,154,500,000
4,300,900,000
4,660,100,000
4,937,900,000
5,764,600,000
6,244,900,000
6,360,600,000
6,716,000,000
6,833,900,000
6,967,300,000
7,161,500,000
7,060,700,000
7,128,300,000
7,435,800,000
Source: Created by authors using data collected from the Wisconsin Legislative Fiscal Bureau: Informational Paper 13 (1999, 2007b) and the Wisconsin Department of
Revenue: Town, Village, and City Taxes – 2005, Table VI (2007).
53
Table G-2 below provides the rates of aid for all taxable real estate property for
1991(92) to 2005(06). As mentioned, this rate excludes the lottery and gaming credit.
We calculated the rate of aid by dividing local assistance by the full value of taxable
real estate property. This rate of aid has fallen from 1991(92) through 2005(06). When
these rates are applied to the value of the median-valued home, we obtain an estimate of
realized aid. This includes the fraction of shared revenue, transportation aid, community
aids, general school aid, categorical aid, technical college aid, and the school levy credit
that makes up the local assistance benefit realized for the median-valued home.
Table G-2: Rate of Aid Calculation for All Taxable Real Estate Property
Year
1991(92)
1992(93)
1993(94)
1994(95)
1995(96)
1996(97)
1997(98)
1998(99)
1999(00)
2000(01)
2001(02)
2002(03)
2003(04)
2004(05)
2005(06)
Local Assistance
Provided to All
Taxable Real
Estate Properties
($)
Full Value of
Real Estate
Property ($)
3,834,000,000
3,950,800,000
4,172,200,000
4,523,500,000
4,781,700,000
5,764,600,000
6,039,100,000
6,217,900,000
6,499,800,000
6,743,300,000
6,862,300,000
7,056,400,000
6,942,500,000
6,996,400,000
7,315,900,000
150,927,756,160
159,587,003,190
171,677,163,530
184,994,866,100
201,538,109,000
216,943,757,600
233,074,233,400
248,994,915,200
266,567,513,500
286,321,491,800
312,483,706,600
335,326,478,700
360,710,211,300
391,187,814,700
427,933,562,000
Rate of Aid
Medianfor All
Valued
Taxable
Real Estate Home ($)
Property ($)
0.025
0.025
0.024
0.024
0.024
0.027
0.026
0.025
0.024
0.024
0.022
0.021
0.019
0.018
0.017
68,555
71,789
76,226
81,478
87,295
92,472
97,188
101,095
106,160
112,200
119,370
126,473
133,821
142,814
153,525
Estimated
Amount
Provided
to MedianValued Home
($)
1,741
1,777
1,852
1,992
2,071
2,457
2,518
2,525
2,589
2,642
2,621
2,661
2,576
2,554
2,625
Source: Created by authors using data from the Wisconsin Legislative Fiscal Bureau: Informational Paper 13
(1999, 2007b) and the Wisconsin Department of Revenue: Town, Village, and City Taxes – 2005, Table VI (2007).
To estimate the total local assistance benefit for the median-valued home, we must add
the estimated lottery and gaming credit. The WLFB has estimated the lottery and gaming
credit amount for the median-valued home. Table G-3 displays total local assistance for
the median-valued home, taking the lottery and gaming credit into account. The final
column in Table G-3 provides a state average for the total benefit realized by the medianvalued home through state assistance to local governments (i.e. county, municipality,
and school district).
54
Table G-3: Total Local Assistance
Provided to Median-Valued Home
Year
1991(92)
1992(93)
1993(94)
1994(95)
1995(96)
1996(97)
1997(98)
1998(99)
1999(00)
2000(01)
2001(02)
2002(03)
2003(04)
2004(05)
2005(06)
Estimated Aid
without Lottery
and Gaming Tax
Credit ($)
Lottery and
Gaming Tax
Credit ($)
Total
1,741
1,777
1,852
1,992
2,071
2,457
2,518
2,525
2,589
2,642
2,621
2,661
2,576
2,554
2,625
144
167
105
110
125
77
52
166
67
77
76
83
91
81
1,885
1,944
1,957
2,102
2,196
2,457
2,595
2,577
2,755
2,709
2,698
2,737
2,659
2,645
2,706
Source: Created by authors using data from the Wisconsin Legislative Fiscal Bureau:
Informational Paper 13 (1999, 2007b) and the Wisconsin Department of Revenue: Town,
Village, and City Taxes – 2005, Table VI (2007).
55