It’s Not That Simple: Is progressive real estate tax possible?

[view original post]

If the solutions were easy, there wouldn’t be problems. Join us as we look at issues facing Great Barrington and discuss the complexities, the competing interests, the less obvious costs or consequences, and the missing information that explains why It’s Not That Simple

We both serve on elected boards in Great Barrington, but we are not representing those boards or the town. 

This column is a companion to the WSBS (860 AM, 94.1 FM) radio show, It’s Not That Simple, on the air every other Friday at 9:05 a.m. Listen to the podcast here.

*     *     *

Federal income taxes are supposed to be progressive. Simply put, that means people who make more money are supposed to pay a higher percent of their income in taxes. The assumption is that as one makes more money, one is more able to part with a larger portion of it to fund the common good. (The fact that most of us actually pay a higher rate than Jeff Bezos and Warren Buffet is a subject for another column by other writers).

Real estate taxes are not progressive. In Massachusetts we all pay the same rate no matter how much our homes are worth. But the state offers a tool, called the Residential Exemption, which can help make real estate taxes somewhat progressive. Whether or not a town uses it is a decision the selectboard makes every year. It’s a complex tool, with pros and cons. It may lower your taxes or it may raise your taxes. That’s why we thought it would be an ideal topic for It’s Not That Simple, but first, a quick tutorial.

The Tax Rate Explained
(If you are math-phobic, don’t panic; the math will only last a minute.)

Step 1: When you and your fellow voters were at Town Meeting last Spring, a majority of you decided what services and infrastructure improvements you wanted in town. You were told how much that would cost, and you agreed to pay for it. The money to pay for it comes from several sources but by far the largest source is real estate taxes.

Step 2: The town assessor figured out the total value of all property in town. That changes from year to year as home prices change and as new construction brings additional value to town.

Step 3: After a public hearing, the selectboard sets the tax rate using very simple math: the tax rate (R) times the total value of all real property in town (V) must equal the amount of money we need ($). More succinctly, R x V = $. In this case, $ has to be constant since the voters have dictated that number. So if V is smaller, R has to be larger, and vice versa. That will be important in just a moment.

When the selectboard sets the tax rate they also make a few decisions about how to apply that rate. One of those options is to adopt the Residential Exemption. We invited our favorite lawyer, Michael Wise, to explain. “The Residential Exemption is a way to reduce the tax payment for people who own and live in less expensive houses,” said Wise. “These are likely to be people with lower incomes.”

The Residential Exemption Explained

Step 1: A fixed amount of money — the Residential Exemption — is subtracted from the assessed value of all homes that are the primary residence of the owner before applying the tax rate. For example, if the residential exemption amount is $100,000 and your home is valued at $300,000, you will only pay taxes on $200,000. That exemption is not available to second homeowners or commercial real estate owners.

Step 2: Remember our equation R x V = $. By exempting the first $100,000 in value from all primary residences, we have reduced the overall value of the town’s taxable real estate, or V. As you remember from high school algebra, if V is smaller and $ isn’t allowed to change, then R, the tax rate, must increase.

Step 3: Since the tax rate increases, you will be paying a higher rate for your assessed value. But if you are eligible for the residential exemption your assessed value is smaller. In other words, you are paying a higher percent of a smaller number. Depending on the value of your house, your taxes are now lower (for less expensive homes) or higher (for more expensive homes).

One more time for the math-weary, using very hypothetical numbers. If the tax rate is $16 per thousand dollars of assessed value without the $100,000 residential exemption, it could go up to $20 after. Here are the hypothetical changes to residents’ taxes:

Taxable value without residential exemption Tax owed at $16 Taxable value with residential exemption Tax owed at $20 % change in tax bill
250,000 4,000 150,000 3,000 25% decrease
500,000 8,000 Ω400,000 8,000 No change
750,000 12,000 650,000 13,000 8.3% increase
1,00,0000 16,000 900,000 18,000 12.5% increase

Here’s the same chart for a residential exemption of $150,000.

Taxable value without residential exemption Tax owed at $16 Taxable value with residential exemption Tax owed at $20 % change in tax bill
250,000 4,000 100,000 2,000 50% decrease
500,000 8,000 350,000 7,000 12.5% decrease
750,000 12,000 600,000 12,000 No change
1,000,000 16,000 850,000 17,000 6.25% increase

The admirable goal of the residential exemption is to help people who are housing-cost burdened, and the Residential Exemption does that. But when you lower the taxes for one class of taxpayers, you must raise the taxes for other classes. The money has to come from somewhere.

The table above shows that there is a break even value, in the case of the $100,000 exemption that is $500,000, for $150,000 it’s $750,000. Owner-occupying taxpayers whose homes are assessed higher than that will see a tax increase. The more expensive the home, the larger the increase.

In addition, part-time residents will not get the exemption so they will be paying the higher rate on the entire value of their property and they will see a significant increase in their tax bill. So despite supporting the goal, the people who will have to pay for it, may not support the Residential Exemption.

Businesses will also not get the exemption but the increase in commercial property tax can be offset by a split rate: charging businesses a slightly lower rate than residential.

Here’s what happens to the tax bill of property owners who are not eligible for the exemption.

Taxable value Tax owed at 16% Tax owed at 20% if residential exemption is offered to others % change in tax bill
250,000 4,000 5,000 25% increase
500,000 8,000 10,000 25% increase
1,000,000 16,000 20,000 25% increase

We invited Patrick White, a member of the Stockbridge Selectboard, to join Mr. Wise and discuss the benefits and concerns of the residential exemption. Recently at the Stockbridge tax-rate hearing, Mr. White made a motion to adopt the residential exemption. The motion failed for lack of a second.

It’s Not That Simple: Why did you propose the residential exemption?

Patrick White: We have about 600 homes that are occupied by residential owners in Stockbridge out of about 1,665 total parcels. Between 50% and 70% of the homes are owned by second homeowners. They are an important part of our community, but a town also needs a robust year-round community that includes a diverse mix of folks: young families and seniors, working class and wealthy. The state doesn’t give us many options [for tax relief] but one option we have to invest in our communities is to make homes a little more affordable for young people and for old people. This can play a part in mitigating the market distortions we are seeing due to the influx of second homeowners and short-term rental investors.

This is about workforce housing, about making our community affordable to people who live and work here. We have very few town employees who live in Stockbridge now.

Michael Wise: The effect of this in Great Barrington would be to make the taxes on a modest home here the same as they are on a similar home in Pittsfield.

INTS: Not everyone is happy about this. Let’s discuss some of the arguments against this idea. The biggest problem pointed out is that rents will go up because apartments aren’t eligible.

MW: It doesn’t apply directly to rentals, however, it’s not that simple. One third of the rental properties in GB are duplexes and triplexes where the owner lives there. These properties are eligible for the program. As for the others, we can look at how Provincetown solved this problem by getting special legislation from Boston allowing the exemption on rentals as long as the tenant is a full-time resident.

INTS: Another issue is seniors who have lived in their homes for 50 years whose incomes have not kept up with home values. They may be in an expensive home which will have taxes increased.

MW: The state already has several programs to help seniors in that position, all of which have already been adopted in Great Barrington except the deferred payment program which the Finance Committee is considering now. That solves it completely.

INTS: Won’t second homeowners avoid GB and look to towns without this, like Alford? Won’t that reduce home values in GB?

MW: Any second homeowner who cares mostly about taxes is already in Alford.

PW: I disagree. Many second homeowners care more about infrastructure and services than they do about taxes. Only residents vote at Town Meeting. These are more likely the folks for whom a few hundred dollars a month is a big deal, as compared to second homeowners or property investors. So that will skew votes away from investing in services and infrastructure that second homeowners want and can afford. With the residential exemption, voters will be better able to afford to vote in favor of those things.

INTS: As we stated, if someone pays less, someone else pays more.

PW: We have to work with the tools we have. This is obviously an imperfect tool. The state could do a better job, for example, of giving that Provincetown rental option to all of us. But for a blue state we have a pretty regressive set of taxes.

INTS: Only 13 towns have adopted this out of 351 in the 35 years it’s been available. What do the other 338 towns know that you don’t?

MW: My theory is that this was part of a soup to nuts reform of the entire property tax system about 40 years ago. The problem then was that deals were being given out property by property, and the system was corrupt. So, among other things, the legislature created this possibility of giving a benefit to an entire class of properties. Several jurisdictions leapt on it immediately.

Since that time it has come up in a dozen or so jurisdictions, most of which decided not to do it. The people who don’t like it because they’re going to pay more get organized and show up at meetings. The people who would benefit are busy working two jobs and don’t come to the meetings.

PW: The communities that adopted it experienced a distortion in their real estate markets much earlier than we did. This distortion is now in full view in Stockbridge. I wish our town leaders had considered this 20 years ago. The voters of Great Barrington shouldn’t be worried about the wealthy fleeing to Alford. They should be concerned that its sons and daughters, its teachers and police officers, will choose to raise their families in Lee, Pittsfield or North Adams because they can’t afford to live in their hometown. The residential exemption does a little to level the playing field.

INTS: Growth is another way to drive down the tax rate. Won’t this discourage development which increases the total assessed value in town and thus reduces taxes. We talked about second homeowners, but what about development in general?

MW: It depends on what kind of development you want. This reduces the cost of modest sized housing. If that’s the kind of growth you want to encourage, this encourages it.

PW: Our secret sauce in the Berkshires is the beauty. That’s why there’s such demand for our housing. We want to be careful with development to make sure there’s a balance. If you overbuild you reduce everyone’s house value.

INTS: What about the cost to implement this. GB has two people in the assessors office. This means hiring people and investing in software.

MW: There’s a one-time transition cost of about one full-time equivalent. After that it becomes routine.

PW: Folks need this. To talk about bureaucracy as a justification for not doing it is a ridiculous argument.

INTS: Is there anything else either of you want to bring up?

PW: One criticism I’ve heard is that this is a soak the rich scheme. It is absolutely not that. This is about defending the sense of community we have and ensuring that folks of diverse resources, and folks who work for a living, can afford to raise their children in this community like they’ve done for hundreds of years.

We state in the introduction to our column that we try not to give opinions. Once everyone agrees on facts, and everyone is considering the same facts, there may still be legitimate disagreements. The residential exemption will help lower-income homeowners. That’s a fact. Another fact is that it will increase the tax burden of others, not all of whom are wealthy.

Is it fair to ask some real estate taxpayers to pay more so that others can pay less like we do for income taxes? The answer to that is opinion, and reasonable people will disagree.

Although both of our guests are in favor of a residential exemption, we asked them to present facts. It’s a complicated issue but worth considering. If we’ve missed something, please let us know.

 *     *     *

Is there an issue you’d like us to discuss on the show? Do you have comments about this or previous shows? We invite your suggestions of topics that may be of interest and that might seem simple to address. Maybe there IS an obvious solution we haven’t thought of, or maybe It’s Not That Simple.

Email your suggestions or questions to NotThatSimple528@gmail.com, or find us on Facebook.

Listen to our show on WSBS (860AM, 94.1FM) every other Friday at 9:05 a.m. Our next show will be Friday, Nov. 12.