September 2006
Keeping Housing In Rural Towns Affordable
Through Targeted Property Tax Relief
by
David A. Grossman
Long-time residents of rural Connecticut towns face serious and growing
pressures on housing affordability. Part of this pressure comes from rising
prices for land and buildings that make it very hard for low and moderate
income families to afford to buy even modest properties. In addition, sharply
rising prices of heating fuel, electricity and other essentials exert serious
pressures on low income families who have lived in the same house for
many years.
Local property taxes add to these burdens. Towns in Connecticut rely more
heavily on property taxes than is the case anywhere else in the United States.
This heavy reliance has a very negative effect on low income families
because the real property tax is regressive – meaning that it has an unfairly
heavy impact on low income families.
A Homeowner Tax Exemption
If the State of Connecticut were to adopt a resident homeowner tax
exemption – like those authorized in many other states, including
Massachusetts, Texas, Illinois and Georgia – it would reduce the burden of
the real property tax and increase housing affordability. In most cases, a
homeowner exemption is a fixed amount that is deducted from the
assessment of every eligible property before the tax is calculated. Eligible
properties are usually defined as those occupied on a full-time basis by
residents of the town.
The initial effect of a resident homeowner tax exemption in a Connecticut
town would be to reduce the town’s Grand List by the total amount of the
exemptions. Because exemptions don't reduce the total amount of property
taxes that the town must raise to support its budget, the property tax rate
would have to be raised enough to compensate.
Exemptions reduce the relative burden of property taxes on lower-valued
properties more because they are a fixed amount and thus account for a
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larger proportion of the tax on properties with lower assessments than on
those with higher assessments. Because the resident owners of lower-valued
properties also tend to have lower incomes, much of the benefit from a
homeowner tax exemption goes directly to lower income homeowners,
increasing affordability where it is most needed.
Targeting The Homeowner Exemption
This effect can be increased even more by targeting -- limiting exemptions
only to those residents whose incomes are below a certain level. This would
be especially appropriate because Connecticut’s Income Tax Law already
provides a tax credit of $300 to $500 to anyone who now pays at least that
much in local property taxes. But to benefit from the income tax credit, a
taxpayer must also owe income taxes amounting to at least as much as the
credit. Under Connecticut’s tax law, most families with incomes below
$24,000 don’t pay any income taxes, and therefore they cannot benefit from
this property tax credit. A homeowner property tax credit would help
compensate for this situation.
To extend the benefit of a resident homeowner tax exemption to all low
income residents -- including those who rent as well as those who own the
house they live in -- some states that have adopted it extend the exemption to
houses occupied by renters who are legal residents of the town.
The Need For State Action
Before rural Connecticut communities could adopt a resident homeowner tax
exemption, it would be necessary for the State to enact enabling legislation.
There are many forms that such legislation might take, but perhaps the most
desirable would be a law that allowed “home rule”. This means that a town
could offer a resident homeowner tax exemption only if its town meeting so
voted. Ideally, the law should also some flexibility as to how the exemption
was structured or targeted.
How might a homeowner tax exemption work in Connecticut? To test the
idea, I have applied it to the Town of Cornwall using data from the town’s
current Grand List (last revised in 2001) and the mill rate voted by the
Finance Board to support the town budget for 2005-06.
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• Column A in the table shows the property tax on the median property
among the lowest-valued one-fourth of all resident-occupied properties.
To clarify: the lowest one-fourth of resident-occupied properties contains
the 153 lowest-valued resident-occupied residences in Cornwall – onequarter of all of the town’s resident-occupied properties. It can
reasonably be assumed that the residents of these houses also include
most of the Cornwall households with incomes below the $24,000 level
below which no State income tax is due and thus no State property tax
credit is offered.
• Column B in the table shows the effect of applying a $25,000 home
owner exemption to the assessment of the 153 lowest-valued residentoccupied properties. It shows that the median resident-occupied property
in the lowest quartile would see its tax bill reduced by $514, or about
25%. To compensate for this reduction, the tax on all other properties in
the community would rise by 1.5%.
• Column C shows the effect of applying a $50,000 resident home owner
exemption to the lowest-valued resident-occupied properties. The table
shows that with a $50,000 exemption, the median resident-occupied
property would see its tax bill reduced by $1,042, or cut nearly in half.
To compensate for this reduction, all other properties would have to pay
a 3% higher tax bill.
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Table 1
Estimates Of The Effect Of Targeted Homeowner
Tax Exemptions Of $25,000 Or $50,000 For The
Lowest-Valued Quartile of Resident Home Owners in Cornwall
(A)
Current
Property Tax
(NO Exemption)
(B)
Property Tax
After A
$25,000
Ex emption
(C)
Property Tax
After A
$50,000
Ex emption
$2,049
$1,535
$1,007
Tax Reduction Compared To Current
0
$514
$1,042
Percent Change in Property Taxes On All
Other Taxable Property In Cornwall
0
1.5%
3%
Property Tax on the Median of the 153
Lowest-Valued Residential Properties
Occupied By Full-Time Residents
Notes: All estimates based on valuations in the 1991 Grand List and assume the same
tax rate (2.14 m ills) as in 2005-06 as a starting point. The lowest-valued properties were
defined as the 25% with the lowest AV's whose owners had Cornwall addresses on the
Grand List.
What seems clear from the example is that (1) a targeted resident
homeowner tax exemption would be highly effective in aiding full-time
residents with low incomes and (2) would impose only modest tax increases
on other properties. Most towns experience tax increases of 2% to 3% each
tear without objections from taxpayers.
Of course, whether other property owners would be willing to accept even a
very modest increase in their taxes rate in order to benefit their community’s
lower income families is, of course, open to question. In a number of other
states, the benefit of lowering the tax burden on resident homeowners has
been found to outweigh the costs. From the point of view of trying to ease
the impact of rising costs on lower-income residents, the potential merits of
exploring a targeted homeowner tax exemption seem clear.
The Effect In Other Communities
The example of the Town of Cornwall is used here because I was able to
obtain the data on assessments and tax rates needed for the calculations for
that town. Calculating the precise effects on other towns with different
housing patterns and income distributions than those of Cornwall would
require obtaining such data. However, as a rough test of how the data in
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other towns might compare to that of Cornwall, Table 2 shows a comparison
of income and housing patterns from the Census for nine other towns in the
Northwest Corner of Litchfield County. As can be seen, the proportions of
lower-income residents and lower-valued housing for these nine towns are
generally quite similar to those for Cornwall.
Table 2
Comparable Data On Incomes and Housing Values
In Ten Litchfield County Towns
Town
Falls Village
Cornwall
Goshen
Kent
Litchfield
Norfolk
N. Canaan
Salisbury
Sharon
Warren
Totals
Resident
Population
1,081
1,434
2,697
2,858
8,316
1,660
3,350
3,977
2,968
1,254
29,595
Percent Of
Households
with Incomes
Underr $25,000
20%
19%
14%
19%
18%
15%
30%
25%
18%
14%
20%
Percent Of
Owner-Occupied
Housing Units
Valued Under
$150,000
24%
16%
14%
10%
20%
22%
38%
16%
18%
13%
20%
Source: US Census, 2000.
In large measure, the variables that seem likely to determine the impact will
be:
• The degree of targeting. The more the homeowner exemption is
targeted on those most in need, the more positive the impact will be and
the lower the cost that must be shared by other taxpayers.
• The capacity of other taxpayers. There may be other taxpayers in a
community whose response to even a modest increase may be sensitive,
such as manufacturing plants already heavily burdened by economic
pressures. Such factors should be taken into account by any town
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considering adoption of a homeowner tax exemption.
• Political acceptability. For a community to be willing to accept an
effective redistribution of its property tax burden so as to benefit hardpressed low income residents, there will have to be a willingness to share
the extra tax burden by other taxpayers and voters. This is a test that not
all communities may pass.
Overall, a targeted resident homeowner tax exemption appears to offer great
potential benefits in increasing housing affordability for rural Connecticut
towns. I believe the idea is worthy of consideration both by local citizens
and their elected representatives.
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