Property Taxes vs. Income Taxes
A taxpayer who loses their job will find that their income taxes go down, because they’re earning less. However, their property taxes will remain the same, even though their ability to pay those taxes has decreased. Residential taxes are said to be “regressive” for this reason. The Institute on Taxation and Economic Policy (ITEP) assessed the fairness of state and local property tax systems. It found that they’re fundamentally inequitable, because they take a much greater percentage of income from low- and middle-income families. ITEP found that the less someone earns in annual income, the more they’re likely to pay in effective state and local tax rates.
Homestead Exemption vs. Property Tax Circuit Breaker
States have, in general, two ways to give property tax relief for low- and middle-income families. These are known as “property tax circuit breakers” and “homestead exemptions.” A homestead exemption is a broad, across-the-board tax cut for taxpayers of all income levels. It usually exempts a flat dollar amount or flat percentage of home value from the tax. A tax circuit breaker is any property tax relief that limits or reduces taxes for certain individuals. Circuit breaker programs are often specifically enacted for property owners who have disabilities or low income, or those who are older. The term gets its name from an electrical circuit breaker that shuts off the current when a system is overloaded. Similarly, circuit breaker programs kick in when too much of a taxpayer’s income must go to property taxes. The circuit breaker reduces or eliminates the overload.
Types of Circuit Breaker Tax Relief
There are different types of circuit breaker programs that states can use. The most common are threshold circuit breakers. These are based on your income. Once property taxes exceed more than a set percentage of your income, the tax relief goes into effect. There are different types of threshold circuit breakers:
Single-threshold circuit breakers apply the same percentage to all people equally.Multiple-threshold circuit breakers apply different percentages to different income levels.
There are also sliding-scale circuit breakers, which create income brackets for taxpayers. Within each bracket, taxpayers qualify for the same amount of tax relief, regardless of how high or low their property taxes are. In this system, the lowest income bracket receives the highest relief from property taxes. The relief percentages decrease as income rises.
States With Circuit Breaker Tax Relief
Eighteen states and the District of Columbia have adopted this form of tax relief. Many states also offer assistance only to people who are older and/or to people with disabilities, based on the theory that these individuals tend to earn less. Circuit breaker income eligibility limits range from a high of $147,000 in Vermont to a negligible $5,500 in Arizona. An additional 13 states offer other forms of property tax relief based on income, age, and disability. The following homeowners qualify in each state offering at least one of these types of tax relief:
Arizona: An income-based program for homeowners age 65 and older and those receiving Supplemental Security Income (SSI); a homestead exemption; property tax exemption for property that is owned and operated by a federally recognized Native American tribe; no circuit breaker tax relief. Colorado: An income-based program for homeowners age 65 and older, surviving spouses age 58 and older, and people with disabilities; no circuit breaker tax relief. Connecticut: An income-based program for homeowners age 65 and older, surviving spouses age 50 and older, and people with disabilities; no circuit breaker tax relief. District of Columbia: Circuit breaker tax relief with no age requirements; offers a separate program for people who are older or with disabilities. Hawaii: An income-based program with no age requirements; no circuit breaker tax relief. Iowa: An income-based program for homeowners age 65 and older and those with disabilities; no circuit breaker tax relief. Idaho: An income-based program for homeowners age 65 and older, surviving spouses, people with disabilities, former prisoners of war, veterans with disabilities, and orphaned minors; no circuit breaker tax relief. Kansas: An income-based program for homeowners age 55 and older, those with disabilities, and guardians of dependent children under age 18; no circuit breaker tax relief. Massachusetts: Circuit breaker tax relief for homeowners age 65 and older. Maine: Circuit breaker tax relief with no age requirements; offers a separate program for people who are older. Maryland: Circuit breaker tax relief with no age requirements. Michigan: Circuit breaker tax relief with no age requirements; offers a separate program for those who are older. Minnesota: Circuit breaker tax relief with no age requirements. Montana: Circuit breaker tax relief with no age requirements. Missouri: Circuit breaker tax relief for homeowners age 65 and older and people with disabilities. New Hampshire: An income-based program for all ages; no circuit breaker tax relief. New Jersey: Property tax deduction or credit available for all ages; no circuit breaker tax relief. New Mexico: Circuit breaker tax relief for homeowners age 65 and older. New York: An income-based program for all ages; no circuit breaker tax relief. North Dakota: Circuit breaker tax relief for renters age 65 and older and people with disabilities. Oklahoma: Circuit breaker tax relief for homeowners age 65 and older and people with disabilities. Oregon: Circuit breaker tax relief for homeowners age 58 and older. Pennsylvania: An income-based program for homeowners age 65 and older, surviving spouses age 50 and older, and people with disabilities; no circuit breaker tax relief. Rhode Island: Circuit breaker tax relief for homeowners age 65 and older and those with disabilities. South Dakota: An income-based program for homeowners age 65 and older and those with disabilities; no circuit breaker tax relief. Utah: Circuit breaker tax relief for homeowners age 65 and older. Vermont: Circuit breaker tax relief with no age requirements. Wisconsin: Circuit breaker tax relief with no age requirements. West Virginia: Circuit breaker tax relief with no age requirements. Wyoming: An income-based program with no age restrictions; offers a separate program for older people; no circuit breaker tax relief.
Pros and Cons of Circuit Breakers
Circuit breaker programs are designed to reduce the tax burden of only low- and middle-income families, so they’re much less expensive for the state than across-the-board tax cuts. Additionally, they introduce the “ability to pay” criteria, because they respond to income level. They reduce property taxes for these groups to a manageable level. Circuit breakers and other programs reduce the likelihood that people will be forced out of their homes if they can’t pay property taxes. The biggest disadvantage of these programs is that you have to know about them to get the tax relief they offer. A circuit breaker is generally only granted to taxpayers who apply. Homestead exemptions, on the other hand, are often automatic, across-the-board tax cuts. The Center on Budget and Policy Priorities (CBPP) found that some programs miss two-thirds of those who qualify, because they don’t know they qualify or how to apply. Some states get rather creative with their property tax breaks, so you might find that other help is available even if yours doesn’t offer a circuit breaker program—but you have to ask.
