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Monday, December 12, 2011

Questions & Answers on the Homestead Tax Credit

So what’s up with this $1000 Tax Cut deal?
By Will Collette

At the November Town Council meeting, the Charlestown Democratic Town Committee (CDTC) placed a proposal before the Council to give homeowners who make Charlestown their home a $1000 tax credit off their property tax bills next year. This kind of tax break is called a Homestead Tax Credit.

Who would be eligible? Under the CDTC proposal, ALL homeowners who make Charlestown their permanent residence, have lived here at least one year and live in their own home would be eligible to have the $1000 Homestead Tax Credit applied to their property tax bill.

This proposal is on the agenda for discussion at tonight's Town Council meeting.

How much will it cost? The CDTC estimates there may be up to 2600 Charlestown households that will qualify for the $1000 tax credit. Multiply 2600 x $1000 = $2.6 million in reduced tax payments to the town. This $2.6 million will have to be made up for in some way. The simplest option is to bump up the tax rate by $1.10. While some of the $2.6 million could be made up by taking it out of the town’s surplus or by further cutting our already lean town operations, those options are less practical than adjusting the tax rate to keep our budget in healthy balance.

Will everyone get the same $1000 tax credit? Yes, every permanent resident gets $1000 off the bottom line of their tax bill. But no, the practical effect will be different, depending on the valuation of the house. While Charlestown’s tax rate is the same for everyone, we all pay a different tax bill because our homes are assessed at different values. So a $200,000 house is taxed at the same rate but at a lesser amount than a $2 million house. Click here to find out what the $1000 Homestead Tax Credit will mean to you.

Is that fair? That's the way property tax works - you pay according to the value of your property. ALL of Charlestown's property tax credits work the same way - they have the greatest effect on homes with lower assessments. The only difference with the Democrats' proposed $1000 Homestead Credit is more broad-based so its effects are more visible. But it works the same way as our existing tax credits. 

Last spring, Tax Assessor Ken Swain published a table showing that Charlestown's new property assessment numbers affected different groups of property owners differently. On average, assessments for $1+ million plus properties were reduced by 20%. By contrast, properties in the $200-800,000 range only dropped 13%.

That difference - 20% for high-priced properties versus 13% for mid-range properties (where the vast majority of Charlestown residents live) - meant that owners of  $1+ million properties paid 7% less taxes than the rest of us. Did anybody stand up at a Town Council meeting and complain about the 7% tax bonus we gave to millionaire property owners (80% of whom are non-residents)?

Under the $1000 Homestead Tax Credit plan, we estimate only 55 Charlestown residents with $1+ million homes will end up paying $200 or more than what they paid this year while more than 2000 Charlestown households will receive a substantial tax cut.

Is this kind of tax break legal? Yes. Charlestown already has targeted tax credits for veterans, the elderly, the blind and the disabledCharlestown gives out around 1300 of these tax credits every year. We also give special tax breaks to property owners who use their land for farming, forest, open space or religious purposes. The state of Rhode Island allows cities and towns to set up Homestead tax exemption programs. Every state in the union except Delaware allows Homestead tax exemption programs. Florida, where many of Charlestown’s non-resident properties owners make their home, has one of the most extensive system of Homestead tax breaks.

Is the proposed $1000 Homestead Tax Credit going to do away with these other credits? No. Charlestown allows eligible residents to receive more than one tax credit. There are some Charlestown residents who qualify for several - e.g. two or three of the different veterans' credits plus the disabled credit.) The CDTC proposes no change to that policy so that the Homestead Credit is given to all permanent residents regardless of whether they receive another credit.

How will this Homestead Tax Credit affect Charlestown businesses? The CDTC proposed the property tax rate on Charlestown businesses be frozen at the current $9.06 level in the upcoming tax year so they will not be affected by this proposal. 

Does a tax break for Charlestown residents discriminate against non-residents? No more so than Charlestown’s existing tax breaks discriminate against non-veterans, non-elderly, non-blind, non-disabled, non-farms, non-forest, non-open space and non-churches - AND non-residents (you must be a permanent resident to qualify for Charlestown's existing tax credits)..

I checked through our property logs and found only one Charlestown property owner whose primary residence is in  Delaware, the only state in the union without some form of Homestead tax exemption. Every other state allows Homestead Tax exemptions, so the chances are that our non-resident property owners already get a Homestead Tax break back home.

Is the $1000 Homestead Tax Credit good for Charlestown? Earlier this year, we all received our new property assessments and it was no surprise that values dropped. Charlestown home prices are down. Sales are down. It’s hard to buy or sell.

When the new assessments came out, average priced homes took an average 13% reduction. Surprisingly, million dollar properties went down an average of 20%., even though sales of big-ticket homes in this area are very healthy. When the tax rate was raised to make up for the losses to our town tax base, the bottom line was a big jump in taxes paid by middle-income Charlestown residents while the owners of properties worth $1 million or more either fell or went up a lot less. This $1000 Homestead Tax Credit makes up for the disproportionate way taxes changed last July.

We just went through a gut-wrenching debate over affordable housing in Charlestown and while the debate will continue, there is consensus that most Charlestown homeowners have been hurt by the bad economy in general and the real estate market crash in particular. We think that the $1000 Homestead Tax cut is a necessary tonic to pep up our town’s economy. It puts the money in the hands of the people who live here year round and who need it the most.

Why set it up as a Tax Credit instead of a “Valuation Adjustment” (a percentage reduction in the assessment)? The first reason is that Charlestown’s other tax break programs are set up this way. It’s a system we’ve used for many years and it has withstood the test of time. We also believe the Tax Credit approach provides the greatest good for the greatest number. Under Charlestown’s commonly used Tax Credit approach, the greatest benefit goes to homeowners with homes assessed below $500,000. Under the “Valuation Adjustment” approach, the greatest benefit goes to homeowners with assessments at $1 million or more.

Huh? Come again! OK, look at it like this. Let’s say we used the Valuation Adjustment approach and gave every permanent resident a 20% reduction in their assessment. 20% is a common amount used in places where they use the Valuation Adjustment method.

So, let’s say you have a $300,000 house. Take 20% off the assessment by subtracting $60,000. Multiply 60 times the expected tax rate per $1000 of $10.16 and that gives you a tax savings of $609.60.

Now, let’s take a $3 million house. Take 20% off (-$600,000). 600 x $10.16 = tax savings of $6,096.

Instead of a Tax Credit taken off the bottom of the tax bill, you take 20% off the top – off the assessment on which the tax is based. That’s what produces such a lop-sided benefit to the higher priced properties.

This kind of arithmetic may be why Charlestown chose the Tax Credit approach over the Valuation Adjustment approach many years ago.

OK, I’m the Average Charlestown Homeowner and I want my property tax cut by several hundred dollars – what needs to happen? The first step is the Town Council needs to pass a resolution – SOON – to direct our State Representatives to introduce state legislation giving Charlestown permission to set up a Homestead Tax program.

Our state Representatives Donna Walsh and Larry Valencia will make sure this bill gets passed and signed by the Governor. This is a “municipal bill” and such bills are handled pretty routinely at the General Assembly.

When the state “enabling” legislation is passed, then the Town Council, working with the Budget Commission, Town Treasurer, Tax Assessor and concerned citizens may design a program that can be enacted by ordinance. This could be done in time to have the $1000 Homestead Tax Credit show up in your 2012 tax bill.

What’s the catch? First, this is not a freebie. Like any other tax change, whatever we cut we have to make up for. And that’s where politics comes in. 

To have a Homestead Tax Credit that, by definition, benefits permanent residents, non-residents’ taxes will go up. In Charlestown, our non-resident property owners have a lot of influence with our Town Council majority. Non-residents donate heavily to the two most likely political opposition groups – the Charlestown Citizens Alliance and the RI Statewide Coalition. 

Non-resident money has bought non-residents a lot of power.