Cook County Assessor’s Office Page 1 October 8, 2009
Targeting Property Tax Relief:
A Design to Expand Illinois’ Circuit Breaker
This paper proposes to expand the current Illinois Circuit Breaker Program and provide property tax credits to up to 4.7 million households in Illinois. Under the model proposed in this paper, most households with an income below $91,244 (adjusted up or down by household size) will not have to pay more than 5 percent or 3.5 percent for seniors of their income in property taxes. Eligible renters as well as homeowners would receive relief. Introduction The strength of the property tax is that it is a stable, reliable source of local revenue under the auspices of local control. Although it does have its advantages, unlike the income tax, it does not reflect a person’s ability to pay. The issue of ability‐to‐pay is significant in Illinois where there is an overreliance on the property tax. Consequently, low and moderate income homeowners may become overburdened with property taxes if the value of their home rapidly increases or for homeowners who suddenly take a pay cut or becomes unemployed. Current exemption programs in Illinois are not as targeted as they could be and their scope is only decreasing over time. Moreover, existing assessment relief exemption options are unfunded in the sense that other local taxpayers, not the state government, must foot the bill for any revenue lost through the relief/exemption1. Property tax circuit breakers, like the electrical devices that shut off electric power to prevent circuits from overloading, prevent property taxes from “overloading” a family’s budget by “shutting off” property taxes once they exceed a certain share of the family’s income2. Circuit breakers serve as a viable alternative to the vast array of exemption programs currently available in Illinois. Overreliance of the Property Tax in Illinois In Cook County the 2006 median property taxes on owner occupied housing were $3,334 on a median home value of $273,3003. The median income was $67,204 of which 5.0% was paid in property taxes. In regard to property taxes as a percent of income, Cook County is ranked at 57 out of 3,077 total counties in the United States4. The five collar counties surrounding Cook (DuPage, Kane, Lake, McHenry and Will) also pay relatively high percentages of income in property taxes – 5.6%, 6.2%, 6.3%, 6.0% and 5.6% and are ranked at 39, 25, 20, 30 and 40, respectively, of the total 3,077 counties 1 Property Taxation in Illinois: A Framework for Reform, Nathan B. Anderson and Therese J. McGuire, State Tax Notes, April 21, 2008. 2 http://www.cbpp.org/3-21-07sfp.pdf 3 http://www.taxfoundation.org/research/show/1888.html 4 http://www.taxfoundation.org/research/show/1888.htmlCook County Assessor’s Office Page 2 October 8, 2009 nationwide5. As with Cook County, homeowners in the five collar counties are also paying a large portion of their incomes in property taxes relative to the rest of the nation. Statewide, the median property tax bill for Illinois’ homeowners was $3,061 representing 4.74% of their median income of $64,598 ranking Illinois 5th nationally. Comparing Illinois to the median ranked state of North Dakota illustrates the high tax burden; a property tax bill of $1,438 represents only 2.68% of income6. This exemplifies the concept that the high percentage of income spent on property taxes is not just a Cook or collar county occurrence. It is a statewide problem necessitating the expansion of the current circuit breaker program. Assessment Relief Programs Legislative efforts to ameliorate the heavy property tax burden in Illinois have resulted in eight existing Illinois exemptions covering everyone from homeowners to seniors to disabled and returning veterans. In 2003, Cook County Assessor Jim Houlihan developed the 7% Expanded Homeowner Exemption (EHE) in an effort to provide immediate relief to homeowners facing assessment increases and the resulting increases on their property tax bills. The 7% EHE that passed the state legislature in 2004 provided additional savings to homeowners by slowing the impact of a home’s reassessment and giving taxpayers more stable and predictable tax bills. The Illinois legislature placed a sunset provision on the original version of the 7% EHE causing it to expire in 2006. The Illinois legislature in 2007 renewed an altered 7% EHE designed to sunset in 2011 with decreasing maximum exemption amounts. The 2007 legislation also produced the Longtime Homeowner Exemption (LTHE) as an alternative to EHE. LTHE does not contain a sunset provision and caps taxable value to 7% or 10% depending on income requirements. Also, to qualify for the LTHE, homeowners must have owned their home for at least ten years. After the 7% EHE sunsets in 2011, the only available relief for homeowners will be a flat $6,000 and the LTHE. The requirements for LTHE are too exclusive to reach many homeowners who are in need of tax relief. In fact, at least 40% of homeowners in the city of Chicago are ineligible based on the ten‐year requirement alone. Circuit Breakers in Other States In sixteen of the eighteen states that offer circuit breakers, they are available to both homeowners and renters (see Appendix 2). In eight of those states, property tax circuit breakers are available only to senior citizens and disabled people. In the other ten states, they are available to households regardless of age or disability. The differing circuit breaker programs result in a varying range of costs incurred by the state toward funding the programs through the general revenue fund (GRF). For example, in states such as Michigan, Minnesota and Vermont, circuit breakers represent over six 5 http://www.taxfoundation.org/research/show/1888.html 6 http://www.taxfoundation.org/files/propertytax_state%20_owneroccupied_2006-20070912.pdf
Cook County Assessor’s Office Page 3 October 8, 2009 percent of total property tax collections whereas in Oklahoma, Oregon and New York circuit breakers represent as little as .10 percent of property tax collections7. Every state with a circuit breaker program limits the dollar amount on the credit. The limits range from $250 in New Mexico to $1,850 in Minnesota (Ibid.). In Illinois, the limit is $700. Income limits range from very low incomes – less than $20,000 in Pennsylvania, Oklahoma, Oregon, New York, New Mexico ‐ up to $200,000 in New Jersey and more recently in Minnesota. Accordingly, the maximum benefits vary widely from $200 in Oklahoma to $2,000 in Maine and $2,100 in Oregon’s rental only assistance program (Ibid.). Beginning in tax year 2009, Minnesota’s existing circuit breaker, the Property Tax Refund, will be restructured and greatly expanded into the Homestead Credit State Refund. The revenue currently going to the Property Tax Refund for homeowners (the existing circuit breaker), the Market Value Credit and the income tax deduction for property taxes will be put into the Homestead Credit State Refund8. Eligible households are those whose property taxes exceed 2% of their incomes with a maximum income limit of $200,000. Illinois’ Existing Circuit Breaker Illinois has a circuit breaker known as the Senior Citizens and Disabled Persons Property Tax Relief and Pharmaceutical Assistance Act (320 ILCS 25), that assists seniors and disabled individuals in Illinois with paying property taxes. To qualify, one must be an Illinois resident 65 years of age or older (or a disabled Illinois resident age 16 or older). Property taxes must exceed 3.5 percent of the household income. The income limits are as follows: $22,218 for a one‐person household $29,480 for a two‐person household $36,740 for a three‐ or more person household The circuit breaker provides grants for property taxes or rent up to $700 per year. It assumes that 25 percent of annual rent is property tax and allows low‐income renters to claim the credit when 25 percent of annual rent exceeds 3.5 percent of income. Only seniors – both homeowners and renters – are eligible for a property tax grant. Illinois’ Circuit Breaker Expanded Design A well designed circuit breaker for Illinois is one that would be tailored to the state’s situation, i.e. it reflects the state’s median income and property taxes paid in Illinois ‐ and targets relief to low‐ and middle‐ income taxpayers, includes renters, and would not shift the local tax burden to non‐residential property. 7 The Property Tax Circuit Breaker: An Introduction and Survey of Current Programs, Center on Budget and Policy Priorities, March 21, 2007. 8 http://minnesotabudgetbites.org/2008/05/08/house‐property‐tax‐reform‐proposal‐sees‐changes
Cook County Assessor’s Office Page 4 October 8, 2009 The proposed Illinois expanded circuit breaker uses these measures as guidelines: It removes the age requirement and expands the income limits. It targets low‐ to moderate‐ income homeowners and renters by raising income ceilings and adjusting for family size. It maintains 3.5% as the trigger point for qualifying seniors thereby making eligible more seniors. It ameliorates horizontal equity by using the existing 3.5% of income standard for senior (age 65+) households and 5% of income for all other households. It is not a zero‐sum game. State funding would allow the local tax base to remain intact and would not cause a local tax burden shift. Under the proposed design, homeowners and renters would be able to pay property taxes without spending more than 5% (or 3.5% for seniors) of their incomes toward property taxes (see Appendix 1 for examples). One‐and‐one‐half times the Illinois median household income (MHI) of $53,7459 ($53,745 x 1.5 = $80,618) is used as the base income limit for a four‐person household. Income limits are adjusted up or down as household size fluctuates. Proposed Income Limits:
Household Size Family Size Factor Income Limit
1 .70 $56,433 2 .80 $64,494 3 .90 $72,556 4 1.0 $80,618 5 1.1 $88,680 6 1.2 $96,742 7 1.3 $104,803 8 1.4 $112,865 Source of Revenue The largest form of property tax relief that Illinois provides to homeowners is the 5 percent property tax credit, which is less useful for low‐income homeowners than it is for high‐ income homeowners because it is applied as a credit against personal income taxes10. Also, taxpayers who rent, rather than own, their home, are completely ineligible for the property tax credit11. Therefore, the revenue currently used to fund the Illinois Property Tax Credit is a sensible revenue source to fund an expanded circuit breaker. In 2006, 2.4 million filers received 9
U.S. Census Bureau, American FactFinder, (2005-2007 three-year inflation adjusted MHI).
10
http://www.ctj.org/itep/ilpr.pdf
11
Cook County Assessor’s Office Page 5 October 8, 2009 $478 million12 in credits on their individual income tax from the credit. Redirecting that funding to taxing agencies, especially school districts, in areas with qualifying circuit breaker credit recipients will maximize the efficacy of property tax relief through an expanded circuit breaker. Impact and Cost Estimates In 2006, Cook County had a total of 145,488 households – both homeowners and renters – that were approved for relief through the circuit breaker program13. Of those, 32,624 were homeowners and 103,968 were renters. In addition, a total of about 8,800 grants were made to residents of nursing homes and other life care facilities. The total amount of property tax relief granted through the program in Cook County was approximately $28 million. Statewide, the total number of approved claims for tax relief was 312,478. Of those, 100,068 were homeowners and 196,193 were renters; the rest were in nursing homes and other life care facilities. The total amount of property tax relief was about $45.3 million. In Illinois, there are 4.7 million households who would potentially qualify for the expanded circuit breaker design, approximately 3.3 million of which are owner‐occupied and 1.4 million of which are renters. The cost estimates under the expanded circuit breaker proposal outlined in this paper would be14: With no limit on the credit, less than $6.0 billion a year (assuming all 4.7 million homeowners and renters qualify). o With a $2,000 limit the cost is approximately $874 million a year. o With a $1,500 limit the cost is approximately $474 million a year. o With a $1,200 limit the cost is approximately $315 million a year. o With a $1,000 limit the cost is approximately $195 million a year. Conclusion The existing assessment relief options available in Illinois are not adequate forms of property tax relief. The 7% EHE is scheduled to sunset in 2010 leaving behind the Long Time Homeowner Exemption whose provisions are too narrow in scope to provide broad‐ based, targeted relief. At least 40% of homeowners in the city of Chicago will not receive the maximum exemption amount nor will they be eligible to receive additional property tax relief based on a ten‐year requirement alone. 12 As reported in Illinois Department of Revenue (DOR). 13As reported by the Illinois Department of Revenue (DOR). 14 Cost assumptions: every household qualifies and all households are considered non‐seniors (the circuit breaker “kicks‐in” at >5% of income).
Cook County Assessor’s Office Page 6 October 8, 2009 In Illinois, under the existing circuit breaker, only homeowners and renters who are age 65 or older with a maximum income of $36,740 (for head of household, a spouse and one qualified additional resident) and whose property taxes exceed 3.5% of household income qualify. Under the expanded design outlined in this paper, more households and families – including seniors ‐ would be able to take advantage of the circuit breaker. Increasing the trigger point to 5% of income spent on property taxes for non‐senior households and retaining the trigger point at 3.5% for seniors provides well‐targeted, cost effective relief.
Cook County Assessor’s Office Page 7 October 8, 2009 Appendix 1 – Circuit Breaker Hypothetical Examples Example 1: SinglePerson Condominium Household in Des Plaines Catherine usually makes $65,000 per year and typically pays $1,800 in property taxes (2.8% of her income) on her condominium in Des Plaines, but she was laid off from her job in March. Currently, her only income is unemployment insurance, reducing her total income for the year to $19,500. Although she would not have been eligible for the Circuit Breaker before she lost her job, due to the single‐person household income limit of $56,433, she now qualifies for an $825 credit. 2007 Taxes Income 2007 2007 Taxes as a % of Income 2007 Taxes w/Circuit
Breaker Credit Circuit Breaker Credit
$1,800 $19,500 9.2 $975 $825
Cook County Assessor’s Office Page 8 October 8, 2009 Example 2: Circuit Breaker with a maximum credit of $1,500 SixPerson Single Family Household in Ford Heights The Johnson’s are a family of six who live in a home in the south suburb of Ford Heights. They earn the median household income there ‐ $18,75015 and owe $4,845 in property taxes on a home valued at $161,390. They are well below the $96,742 income limit under the Circuit Breaker and their property taxes are well above 5% of their household income. In fact, their property taxes are 26% of household income and the family would therefore receive the maximum credit of $1,500. 2007 Taxes 2007 Median Income 2007 Taxes as a % of Income 2007 Taxes w/Circuit
Breaker Credit Circuit Breaker Credit
$4,845 $18,750 26% $3,345 $1,500
Cook County Assessor’s Office Page 9 October 8, 2009 Example 3: TwoPerson Senior Condominium Household in Cicero Harold and Maude, a senior couple, earn a total income of $48,000 a year and own a condominium in the suburb of Cicero. They received a substantial increase on their condo’s value after the recent reassessment, and their tax bill is $2,710. They do not qualify for the senior freeze exemption because their income exceeds the $45,000 maximum income limit. However, the couple does qualify for the Circuit Breaker: 3.5 percent of their income is $1,680, so they will pay that amount and be credited $1,030. 2007 Taxes Income 2007 2007 Taxes as a % of Income 2007 Taxes w/Circuit
Breaker Credit Circuit Breaker Credit
$2,710 $48,000 5.6 $1,680 $1,030
Cook County Assessor’s Office Page 10 October 8, 2009 Example 4: Circuit Breaker with a maximum credit of $1,500 TwoPerson Single Family Household in Chicago Fernando and Pilar, a married couple raising their grandson, earn a total income of $62,000 a year. They own a single family home in the Chicago neighborhood of Avondale. Their tax bill is $5,257. Their tax bill is greater than 5% of their income ($3,100), so they are eligible for the Circuit Breaker. They would receive the maximum credit of $1,500 and would then pay $3,757 in taxes instead of the full $5,257. 2007 Taxes 2007 Income 2007 Taxes as a % of Income 2007 Taxes w/Circuit Breaker Credit Circuit Breaker Credit $5,257 $62,000 8.5 $3,757 $1,500
Cook County Assessor’s Office Page 11 October 8, 2009 Example 5: Circuit Breaker credit with no limit SevenPerson Single Family Household in Chicago The Williams family is a family of seven living in a home in the Chicago neighborhood of Jackson Park and earning $100,000 a year. Mr. and Mrs. Williams are saving to pay college tuition for two of their children; one will be a freshman next year and the other is a junior. Their property tax bill is $6,765, which exceeds 5% of their income by $1,765. They would receive a credit for the full $1,765. 2007 Taxes 2007 Income 2007 Taxes as a % of Income 2007 Taxes w/Circuit Breaker Credit Circuit Breaker Credit $6,765 $100,000 6.8 $5,265 $1,765
Cook County Assessor’s Office Page 12 October 8, 2009 Appendix 2 – State Circuit Breaker Programs State Program Name Household Income Limit (single/joint filer) Maximum Benefit Renters Eligible? Eligibility Type of Rebate Credit & % of Income IL Circuit Breaker $21,218 (1 person household); $28,480 (2 person household); $35,740 (3 person household) $700 Yes/ 25% of rent paid Age 65+, 16+ and disabled, or surviving spouse 63+ Rebate Check 3.5% of Income/Rent DC Individual Income Property Tax Credit $20,000 $750 15% of rent Yes/ paid All Income tax credit (filers) or rebate check (nonfilers) Credit equals 75% to 95% of amount by which property taxes exceed 1.0% to 4.0% of income. ▪ Credit =.75*(property tax ‐ .035*income) ME Maine Residents Property Tax & Rent “Circuit Breaker” Refund $77,000/$102,000 $2,000 Yes/ 20% of rent paid All Rebate Check Credit equals 50% of the amount by which property taxes exceed 4% to 8% of income. Credit equals 100% of the amount by which property taxes exceed 8% of income. ▪ If paying 5% of income in property tax, credit=.50*(property tax‐ .04*income) ▪ If paying 9% of income in property tax, credit = .50*(.08*income ‐ .04*income) + (property tax ‐ .08* income) MD Homeowners’ Property Tax Credit Program/Renter s’ Tax Credit Program $60,000 & $200,000 net worth (excluding home) (h); $38,659 (renters under 60 in 9 person household): $30,000 (renters 60+) Amount by which property taxes (based on no more than $300,000 of assessment) exceed established “Tax Limits” (h); $600 (r) Yes‐ applicants under age 60 must have at least one dependent under 18 living with them/ 15% of rent paid All Property tax credit (h); rebate check (r) Credit equals the total amount by which property taxes exceed 0‐9% of income, according to the following formula: 0% of the first $8,000 of the combined household income; 4% of the next $4,000 of income; 6.5% of the next $4,000 of income; and 9% of all income above $16,000. ▪ Credit = property tax ‐ ((4,000*.04) + (4,000*.065) + ((income ‐16,000)*.09)) MA Real Estate Tax Credit for Persons 65 and Older (Circuit Breaker Credit) $45,000 ($58,000 if head of household)/$67,000; assessed value of principal residence cannot exceed $600,000 $840 Yes/ 25% of rent paid Age 65+ Income Tax Credit
Cook County Assessor’s Office Page 13 October 8, 2009 State Program Name Household Income Limit (single/joint filer) Maximum Benefit Renters Eligible? Eligibility Type of Rebate Credit & % of Income MI Homestead Property Tax Credit $82,650 $1,200 Yes/ 20% of rent paid All Income tax credit (filers) or rebate check (nonfilers)
Credit equals 60% of the amount by which property taxes exceed 3.5% of income. The credit is reduced by 10% for every $1,000 that income exceeds $73,650. Credit = .60*(property tax ‐ .035*income) MN Property Tax Refund $87,780 (h); $47,350 ( r ) $1,640 (h); $1,350 ( r ) Yes/ 19% of rent paid All Rebate Check Credit equals 50% to 90% of the amount by which property taxes exceed 1% to 4% of income. Credit= .65* (property tax ‐ .022*income) MO Property Tax Credit Claim $25,000/$27,000 $750 (h); lesser of 20% rent paid or $750 (r) Yes/ 20% of rent paid Age 65+, disabled, or age 60+ and receiving surviving spousal Social Security Rebate Check MT Elderly Homeowner/ Renter Credit $45,000 $1,000 Yes/ 15% of rent paid Age 62+ Income tax credit (filers) or rebate check (nonfilers) NJ 2005 FAIR Rebate (old) 2006 Homestead Credit/Rebate (supersedes above 2005 FAIR Rebate) Property Tax Deduct/Credit $200,000 (h); $100,000 ( r ) $100,000 or $70,000 (if 65+ or disabled) $100,000 $1,200 (h); $825 (r) $2,000 (h); $1,200 (65+ or disabled) $2,000 (The lesser of 100% of property taxes or $10,000) Yes/ 18% of rent paid No Yes/ 18% of rent paid All (h); age 65+ or disabled(r) Homeowners All (even if they are not eligible for above homestead rebate) Rebate Check Credit / Rebate Check Income tax deduction or refundable credit Credit equals amount by which property taxes exceed 5% of income. Credit = property tax ‐ .05*income Credit equals the amount of property taxes paid minus 5% of gross income, but limited to maximum amount per income level Deduction/credit equals the lesser of 100% of property taxes paid or $10,000
Cook County Assessor’s Office Page 14 October 8, 2009 State Program Name Household Income Limit (single/joint filer) Maximum Benefit Renters Eligible? Eligibility Type of Rebate Credit & % of Income NY Real Property Tax Credit for Homeowners and Renters $18,000; market value of home must not exceed $85,000 $375 (age 65+); $75 (under 65) Yes – average monthly rent must be $450 or less/ 25% of rent paid All Income tax credit (filers) or rebate check (nonfilers) Credit equals 25% to 50% of the amount by which property taxes exceed 3.5% to 6.5% of income. Credit = .50* (property tax ‐ .065*income) OK Property Tax Refund $12,000 $200 No Age 65+ or disabled Rebate Check OR Elderly Rental Assistance Program $10,000; asset limit of $25,000 if under age 65, no limit if 65+ $2,100 Yes – must have paid /none specified more than 20% of income for rent, fuel, and utilities Renters only, age 58+ Rebate Check PA Property Tax/Rent Rebate Program $15,000 $500 Yes/ Varies; amount of rent refunded ranges from 20% for incomes below $5,500 to 2% for incomes between $13,000 and $15,000 Age 65+, spouse age 65+, disabled, or widow age 50+ Rebate Check RI Property Tax Relief Credit $30,000 $250 20% of rent Yes/ paid All Income tax credit (filers) or rebate check (nonfilers)
Cook County Assessor’s Office Page 15 October 8, 2009 Note: The above table is recreated from the following source: The Property Tax Circuit Breaker: An Introduction and Survey of Current Programs, Center on Budget and Policy Priorities, March 21, 2007. State Program Name Household Income Limit (single/joint filer) Maximum Benefit Renters Eligible? Eligibility Type of Rebate Credit & % of Income VT Education Property Tax Payment (“Prebate”) $110,000 None – state rebates difference between maximum percentage of income claimant is expected to pay in school property taxes (2.0‐ 4.5%, depending on income) and the projected amount of school property taxes owed (State provides $15,000 homestead exemption for lowest income) No All Rebate Check Credit equals the total amount by which property taxes exceed 3.5% to 5% of income. ▪Credit = property tax ‐ .035*income WI Homestead Credit $24,500 $1,160 Yes/ 25% of rent paid All Income tax credit (filers) or rebate check (nonfilers) For taxpayers with income <$8,000, credit equals 80% of property taxes. For taxpayers with income>$8,000, credit equals 80% of the amount by which property taxes exceed 8.788% of income over $8,000. Credit = .80* (property tax ‐ .08788*(income‐$8,000))
