Property Tax Circuit Breaker Relief

Pros and Cons

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Inequality in Residential Property Taxes

Nationwide, lower-income taxpayers pay a larger percentage of their income in property taxes than higher-income taxpayers. This is because property taxes are based on the value of a home and not on income, so they are disconnected from "ability to pay." Income taxes are, of course, completely connected to income - a taxpayer who loses their job will find that their income taxes go down, but their property taxes remain the same even though their ability to pay those taxes has decreased.

Thus, residential property taxes are said to be "regressive."

The Institution of Taxation and Economic Policy (ITEP) assesses the fairness of state and local tax systems. Their 2015 study finds that "virtually every state tax system is fundamentally unfair, taking a much greater share of income from low- and middle-income families than from wealthy families." They find that state and local taxes are the inverse of income - that the lower one's income, the higher one's overall effective state and local tax rate.  The absence of a graduated personal income tax and over-reliance on consumption taxes exacerbate this problem.

2 Options for Tax Relief

When each state's elected officials look to enact property tax relief for low- and middle-income families they have two basic and broad-based choices:

  1. An across-the-board tax cut for taxpayers of all income levels (e.g., a homestead exemption, which usually exempts a flat dollar amount or flat percentage of home value from property tax, or a tax cap)
  1. Targeted tax breaks are given only to low- and middle-income families.

The Property Tax Circuit Breaker

One increasingly popular type of targeted tax break is the circuit breaker.

A property tax circuit breaker program can be broadly defined as any property tax relief that limits or reduces property taxes for certain individuals.

Usually, circuit breaker programs are property tax exemptions or credits for low-income, elderly, or disabled property owners. The term derives its name from an electrical circuit breaker which shuts off the electrical current when a system is overloaded.  Similarly, circuit breaker programs kick in when too much of a taxpayer's income would be spent on property taxes. The circuit breaker reduces the overload.

Advantages of Circuit Breakers

Because circuit breaker programs are designed to reduce the property tax burden only of low- and middle-income families they are much less expensive to the state than the across-the-board cuts. Plus, the families targeted by these programs usually do not itemize their income tax, so the property tax cut is not offset by a rise in federal income tax. Additionally, because these programs respond to income level, they introduce the "ability to pay" criteria, reducing property taxes for these groups to a manageable level.

Disadvantages of Circuit Breakers

The biggest disadvantage of these programs is that you have to know about them to get the tax relief - the circuit breaker is only given to taxpayers who apply (vs. across-the-board tax cuts such as homestead exemptions, which are automatic).