Let’s focus on real property tax reform

Last June a King County Superior Court judge overturned Initiative 747, the Tim Eyman-sponsored 1 percent growth cap on property taxes. Partly as a result, during the just completed session the Legislature was swamped with unsuccessful bills attempting to reform our property tax system. Now both the defenders of government and anti-tax forces have fixed their attention on the state Supreme Court, which just last week heard the appeal of the lower court ruling.

The thorny – and complicated – issue of property tax reform is very much back on the political radar screen. Not that it ever left, so far as much of the public was concerned. Despite six years in which the growth in property tax levies was constrained by the cap, public complaints about too-high property taxes have continued unabated.

In truth, the public is onto something. Our research shows that even with the 1 percent cap in place, many lower and middle income families do pay too much in property taxes, to the point that they strain to make ends meet or even are discouraged from home ownership.

Elected leaders in our state need to take action to make the system more responsive to stressed homeowners. Unfortunately, so far most attention has focused on whether reimposing an arbitrary cap is a good idea.

That is a mistake. The most effective reform of all is one that has not yet received the serious consideration it deserves. By adopting here in Washington a well-tested policy reform that has proven successful in other places around the country, we can finally begin to offer real tax help to those who need it most.

It’s called a circuit breaker. Just as a circuit breaker in your home protects against a current that is too large for your electrical system to handle, a property tax circuit breaker protects homeowners against a tax bill that is too large relative to their income.

Here’s how it works: When a lower- or middle-income homeowner receives a property tax bill that exceeds a certain percentage of their income – perhaps 5 percent – the state would offer that family a tax credit of up to $1,000.

It is simple and effective. Broad property tax caps seriously curtail the ability of local governments to provide the core services – police, fire, schools, etc. – that the public demands. But they do little or nothing to fix the root problem: our current property tax system spreads the cost of taxation unfairly, falling disproportionately on lower- and middle-class families.

In Washington, the 40 percent of homeowners at the lower end of the income scale pay more than 6 percent of their income on average in property taxes, well over twice the percentage that the wealthiest fifth of Washingtonians pay. The net effect is that when it comes to the provision of basic government services the middle class has more tax responsibility (relative to their ability to pay) than the wealthy. That is not right.

What we need is a policy reform that targets help to the many middle and lower income families faced with property tax bills they cannot easily afford. A circuit breaker would accomplish this. We know it works, because the idea is neither new nor untested: 18 states already have successfully adopted some form of it.

Our calculations show that a circuit breaker along the lines we propose would cut taxes by nearly 15 percent for lower-earning homeowners, while leading to only a modest 2 percent increase in taxes for the wealthy. Moreover, such a reform would be revenue-neutral, meaning that local governments would not be further harmed in their ability to provide services, and would involve only a relatively small shift in taxes from homes to commercial property.

And it could be extended to renters as well, as Oregon and host of other states already do. Economists tell us that as a rough rule of thumb, renters indirectly pay about half of the property taxes on their residences in the form of higher rent. With a circuit breaker, renters who are paying too high a percentage of their income in rents could qualify for the tax rebate, just as homeowners do.

It is time to refocus our attention away from the failed reform attempts of the past.

Our legislative leaders in Olympia ought to look beyond I-747. They need to seriously consider forward-looking reforms, like a property tax circuit breaker, that will actually make a difference in reducing property taxes for the thousands of families across the state who currently are asked to pay more than their fair share.

Remy Trupin is executive director of the Washington State Budget &Policy Center, an independent, non-partisan think tank that works to make fiscal and taxation policy more responsive to the needs of lower- and middle-income families.