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Review of homestead property tax exemption proposals

By Jason Mercier,
Director, Center for Government Reform
February, 2008

Introduction

On November 8, 2007 the state Supreme Court struck down the voter-approved 1% limit on increases in annual property tax collections.  The legislature quickly overturned the court and re-enacted the 1% limit, but the court’s action put property tax relief center stage in the policy debate in Olympia.

The public is concerned about the rising property tax burden, and one way lawmakers are responding is with proposals to create a limited homestead tax exemption for homeowners.  Several kinds of homestead exemption have been proposed.  This paper examines two proposals, SJR 8210 and SJR 8226, that are being debated in the current legislative session.

Homestead exemption proposals

A homestead exemption provides a certain dollar credit against the property taxes owed.  For example, a $100,000 exemption would remove that amount of assessed value from the calculation of a homeowner’s yearly property tax bill, reducing the dollar amount of the tax.

These two proposed homestead exemptions, SJR 8210 and SJR 8226, would apply only to homeowners, not to businesses.  However, the state constitution contains a uniformity clause that requires all classes of taxpayers, such as property owners, to be treated the same.  For that reason, the two proposed exemptions have been introduced as amendments to the constitution which, after approval by the legislature, would have to be forwarded to voters for final approval.

This is explained in a staff report on one of the proposed bills:

“Article 7, section 1 of the State Constitution provides that all taxes must be uniform on the same class of property.  This means that taxes must be the same on property of the same value and requires both an equal rate and equality in valuing the property taxed.  Further, assessed value must be equal to 100 percent of the fair market value of the property, unless the property qualifies under a special tax relief program.”[1]

Removing the uniformity principle treats taxpayers differently and potentially creates a shift in the tax burden among property owners.  This effect was noted in a handout prepared by the House Finance Committee staff for a January 29, 2008 work session on property taxes.  The staff paper noted that homestead exemptions that allow tax shifts among property owners create “winners” and “losers” when it comes to property tax relief.

Comparison of SJR 8210 and SJR 8226

Both proposals would create a homestead exemption that would provide property tax relief only for residential property, thus creating a distinction in the constitution between residential and commercial property.

However, only SJR 8226 is a true universal tax cut for homeowners, in the sense that it would prohibit the state from shifting taxes reduced by the homestead exemption onto other property owners.

SJR 8226 would accomplish this through the following provision:

“The homestead exemption [of $100,000] may not shift property taxes levied for state purposes.  The state levy shall be reduced as necessary to prevent the value exempted under the homestead exemption from resulting in a higher tax rate than would have occurred in the absence of the homestead exemption.”[2] 

By including this provision, enacting SJR 8226 would not create losers among homeowners.  All homeowners would benefit because all would receive the same exemption.  While the measure does not include property tax relief for commercial properties, neither would it result in a shift of the property tax burden from homeowners to business owners.

In contrast, SJR 8210 is not a universal tax cut.  Its homestead provision would shift part of the tax burden from lower-value residential properties to higher-value homes and to businesses, so overall property tax revenues going to the state would remain the same. 

Although total property tax revenues would remain the same, for many homeowners and business owners the tax shift under SJR 8210 would result in a tax increase.

Reducing or eliminating the state property tax levy

A fairer and more direct way to accomplish the same policy goal of a homestead exemption would be for the legislature to cut the state portion of the property tax, or to gradually phase it out over a period of years.

This is not a new idea.  A proposal was introduced in 2003 to phase out the state portion of property taxes over ten years.  A fiscal analysis of this bill (SB 5127) notes:

“The state levy is approximately 25% of the property tax bill.  Taxpayers may see their bill reduced by this much over the span of the bill depending on the increases in local levies . . . The state portion of property tax is distributed to the general fund, not to local governments.  Therefore, local governments will not directly lose revenue on state property tax collections.”[3]

Although this phase-out would not have impacted local property tax levies, the proposal also would have amended RCW 84.52.050 (limitation of levies) to prohibit local governments from adopting any levy expansion due to the gap left by the state levy reduction.

According to the Department of Revenue, a five-year phase out of the state property tax, if adopted today, would save taxpayers $2 billion by 2013.  The year-by-year tax savings are shown in the table below.

State Property Tax Five-Year Phase Out

Tax Rate

Fiscal Year

Savings

1.97329

2008

N/A

1.65493

2009

$190,224,000

1.01869

2010

$685,967,000

0.41364

2011

$1,292,013,000

0.08398

2012

$1,768,550,000

0.00000

2013

$2,021,625,000

Source: Calculations by the state Department of Revenue, December 13, 2007.

Phasing out the state property tax would not limit or reduce tax revenues collected by county and local governments.  It would, however, induce state elected officials to set clear priorities in state spending.  State revenues would still increase, as they do every year because of natural expansion in the economy, but the amount of money flowing into the treasury would not increase at the same pace.  The state budget would still grow, but at a more reasonable rate.

The two tables below illustrate this point.  From the 1995-97 through the 2007-09 budget cycle, General Fund State revenues increased 64%.  Inflation over the same period increased only 28% (based on the Implicit Price Deflator).

State Revenue Growth, 1995-97 through 2007-09

(General Fund State – figures in millions)

Tax

1995-97

1997-99

1999-01

2001-03

2003-05

2005-07

2007-09*

Retail

$8,541.8

$9,609.8

$10,903.4

$10,987.0

$11,916.7

$14,233.4

$15,785.4

B&O

$3,300.1

$3,603.6

$3,772.9

$3,790.6

$4,202.5

$5,047.5

$5,554.1

Use

$626.1

$662.0

$779.5

$753.1

$825.4

$969.7

$1,110.2

Property

$2,211.7

$2,452.8

$2,652.0

$2,613.5

$2,743.1

$2,788.6

$3,007.4

All other

$2,958.0

$3,291.9

$3,154.2

$2,996.5

$3,700.8

$4,732.7

$3,547.9

Total

$17,637.7

$19,620.1

$21,262.1

$21,140.7

$23,388.5

$27,772.0

$29,005.0

*November 2007 Revenue Forecast
Source: Department of Revenue, November 21, 2007.

Tax

Total Increase

% Increase

Retail

$7,243.6

85%

B&O

$2,254.1

68%

Use

$484.1

77%

Property

$795.7

36%

All other

$589.9

20%

Total

$11,367.3

64%

Conclusion

Efforts to provide property tax relief to Washingtonians should maintain the longstanding constitutional principle of treating the same class of taxpayers equally and uniformly.  Lawmakers should avoid proposals that are promoted as tax relief, but instead merely shift the tax burden from one group of citizens to another, thus using tax policy to create winners and losers in society.

The simplest way lawmakers can ease the financial burden they place on citizens is to phase out permanently the state property tax levy.  Short of this, any homestead exemption should represent a truly uniform and universal tax cut, not simply shift the existing financial burden among taxpayers.