As economists Michael Allen and Dick Woodbury wrote in their 2006 evaluation of Maine’s “Circuit Breaker” property tax relief program, “[the circuit breaker] does more than any other form of property tax policy to assure that people can afford the out-of-pocket burden of paying their property taxes.”
Unfortunately, despite increasing upward pressure on property taxes in recent years, the legislature has cut the circuit breaker by 20% annually for four straight years, from 2008 through 2011, and then completely eliminated it in 2012. The combined impact of these five years of cuts was over $85 million.
The good news is that the legislature created the Property Tax Fairness Credit in 2013. Taxpayers can claim this credit by filing an income tax return and attaching Schedule PTFC. The bad news is that the PTFC provides too little relief and is poorly targeted.
The current PTFC provides too little relief.
Households that qualified for the Circuit Breaker could get up to $1,600 in property tax relief annually, and the average refund was about $475, even after accounting for the annual 20% cut to refunds that began in 2008. Under the Property Tax Fairness Credit, the maximum refund is only $300 for taxpayers under 70 years old and $400 for taxpayers over 70.
In addition, many more households qualified for relief under the old Circuit Breaker than do under the new Property Tax Fairness Credit. The circuit breaker refunded 50% of the amount an applicant’s property tax bill (or 20% of rent) exceeded 4% of income. It further refunded 100% of the amount an applicant’s property tax bill (or 20% of rent) exceeded 8% of income. Allen and Woodbury wrote in 2006:
“Applying the circuit breaker provisions to data on Maine resident taxpayers, the study finds that two-thirds of the households in Maine with a gross property tax burden of more than 6% of income – could reduce their net burden to 6% of income or less through circuit breaker refunds.”
Unfortunately, there is simply no way the Property Tax Fairness Credit, as currently formulated, could achieve anywhere close to that kind of impact on the financial lives of low- and middle-income Mainers.
The current PTFC is poorly targeted.
As currently written, the property tax fairness credit uses Maine adjusted gross income (MAGI) to calculate eligibility for the credit. MAGI does not include nontaxable income such as interest on government bonds and distributions from Roth IRAs. This means that many Maine households with significant amounts of nontaxable income and very little taxable income (wages and salaries, etc.) can qualify for the credit while many low-income working households whose income consists entirely of taxable income cannot. This contradicts the objective of the credit, which is to provide property tax relief to those who have the highest tax bills and least means to pay.
The old Maine Residents Property and Rent Refund Program (a.k.a. “Circuit Breaker”) used a definition of income that employed MAGI as a starting point, but then required applicants to add and subtract a variety of income sources. Additions to MAGI included contributions to retirement plans, distributions from Roth IRAs, capital gains (to the extent they weren’t reflected in MAGI), pensions and annuities, etc. Subtractions included the first $5,000 of proceeds from a life insurance policy, rollovers of retirement accounts, gifts, and in-kind forms of public assistance like Supplemental Nutrition Assistance Program (SNAP) benefits.
Improving the PTFC would help deflect the 1-2 punch of rising property taxes and stagnant income for low- and middle-income Mainers.
Property tax relief for low- and middle-income families has never been more important. The share of Maine families living in poverty is rising. Property taxes continue to rise due to increasing costs for services and reduced state aid for municipal budgets. Income for the typical Maine household is still lower than it was before the recession and shows no signs of growth.
In short, MECEP strongly supports increase property tax relief for those who need it most: low- and middle-income Maine families struggling to afford to live in their homes in the wake of the worst recession since the Great Depression.
Thank you for your time and service on behalf of Maine people.
Joel Johnson, economist, testifying before the Joint Standing Committee on Taxation.