Property tax relief falls short in 2013, major policy changes still needed

The amount of property tax relief Maine residents claimed under a new state tax credit will fall $9-12 million short of the $34 million forecast, according to the most recent monthly revenue update from Acting Finance Commissioner Richard Rosen.

In 2013, the legislature created the Property Tax Fairness Credit (PTFC) to replace the longstanding Maine Residents Property Tax and Rent Relief Program (also known as the “Circuit Breaker”). This change, buried in Part L on Page 578 of the state budget, was mostly bad news for low- and middle-income working Mainers. The $22-25 million in property tax relief provided by the PTFC in 2013 pales in comparison to the $57 million the Circuit Breaker would have made available, and the 2013 law also turned 2012 into a gap year where no targeted property tax relief was available at all.

In addition, the 2013 PTFC featured a narrow definition of income in the eligibility formula that excluded nontaxable income like Social Security and interest on government bonds. As a result, it treated wealthy retirees with large amounts of nontaxable income and no wage and salary income as if they had no income at all for the purposes of the credit. This had serious consequences and demonstrates why last-minute policymaking, done hastily during late-night budget negotiations may not always yield the best results. Working families struggling to pay property taxes got much smaller credits than they would have under the broader definition of income used by the Circuit Breaker’s eligibility formula while more affluent retirees with tax-exempt income received much more generous tax relief.

A bipartisan group of lawmakers in 2014 repaired at least some of the damage, although much more still needs to be done. LD 1751—a bill sponsored by Speaker of the House Mark Eves (D-North Berwick), amended by Senator Richard Woodbury (U-Yarmouth), and voted out of the Taxation Committee unanimously— broadened the definition of income in the eligibility formula to include the nontaxable sources of income that used to be counted under the Circuit Breaker program. In doing so, the bill redirects most of the benefits of the credit to working Mainers who need it most. Nevertheless, it did not increase the total amount of the credit. In total, eligible Maine residents will get no more than $35 million from the PTFC in 2014, compared to the $60 million they would have received under Circuit Breaker.[1]

Targeted property tax relief under the Circuit Breaker/PTFC is one of the major areas where state lawmakers have made cuts in recent years to help balance the budget in the wake of a historically large collapse in revenue brought on by the recession and exacerbated by large income and estate tax cuts that mostly benefited high-income and net-worth Mainers.

While annual statewide property tax collections increased by more than 20% from $1.876 billion in 2007 to $2.267 billion in 2013, the governor and legislature cut in half property tax relief targeted at low- and middle-income Mainers struggling with high property tax bills.

Lawmakers have a long way to go to restore their commitment to low- and middle-income Maine residents. The good news is that the PTFC is, in some respects, an improvement over the Circuit Breaker. It’s a credit that taxpayers can claim on their annual income tax returns, instead of a standalone refund application that taxpayers have to wait to file in the fall. Now lawmakers need to increase it to ensure that it delivers the same amount of relief as the Circuit Breaker did before the recession.

[1] The credit under the new 2014 version of the PTFC is equal to 50% of the amount by which a household’s tax bill exceeds 6% of their income, up to a maximum of $600 for non-elderly households and $900 for elderly households. Eligibility is capped at $33,333 of annual income for single-person households, $43,333 to two-person households, and $53,333 for households with 3 or more people.

If the Circuit Breaker were still in place, the credit would equal 50% of the amount by which a household’s tax bill exceeds 4% of their income plus 100% of the amount by which a household’s tax bill exceeds 8% of their income, up to a maximum of $2,000. The income limit would be more than $64,000 for single-person households and more than $86,000 for multiple-person households.

For example, a family of three with an income of $30,000 and a property tax bill of $2,000 will get a $100 credit under the PTFC in 2014, but they would have received a $400 benefit if the Circuit Breaker were still in effect.