This Simple Policy Tool Can Make Property Taxes Fairer and Ease Homeowner Hardship

Home values catapulted upward during the COVID-19 pandemic, with the median price of an existing single-family home rising an astonishing 44.3 percent between the third quarter of 2019 and the same period this year, according to the National Association of Realtors.  

While fast-rising mortgage rates have helped slow that runaway price growth, home values in many areas have plateaued at new heights.

As communities update their assessment rolls to reflect higher home values, they can adjust their tax rates downward to avoid increasing residents’ tax bills. But even when those tax bills do rise, various forms of property tax relief can help communities ease the burden, especially for seniors and low-income homeowners.

“It’s so important that the property tax be stable and affordable,” says Joan Youngman, senior fellow at the Lincoln Institute of Land Policy, author of A Good Tax, and coauthor of the Policy Focus Report Property Tax Relief for Homeowners.  

Making a Good Tax Better 

The property tax is an essential—and relatively efficient—way to fund local government. Unlike income and sales taxes, the property tax remains fairly steady through the booms and busts of the business cycle. Its high visibility and tangible trade-offs promote civic engagement and transparency around local spending decisions. And the property tax can actually be a fairly progressive revenue raiser, taking a smaller share of homeowners’ incomes as earnings fall.  

This is especially true in areas that provide some form of property tax relief—such as Boston, which has offered residents a generous homestead exemption for decades.  

Such an exemption reduces the property tax owed on a principal residence, either by protecting a portion of the property’s value from taxation, or by offering a partial credit against the tax bill. It’s a fairly broad and simple policy tool—but it’s also a powerful one that can make the property tax more equitable. 

That’s important, because research has found that low-priced properties can be overassessed—and thus unfairly overtaxed compared with more expensive homes, potentially creating a regressive and inequitable tax structure that punishes poorer homeowners. 

“It’s inherently difficult to assess really low-priced properties,” says Daniel McMillen, professor of finance at the University of Illinois at Chicago. “A small mistake translates into a high percentage.” On a $900,000 home, McMillen explains, an assessment that misses the mark by a few thousand dollars is almost negligible. “But at $90,000, then $5,000 or $10,000 is a pretty serious error.” 

In a new working paper, Lincoln Institute fellow Ron Rakow shows how a homestead exemption can easily and completely compensate for such errors.  

When analyzing assessment data in the Boston area, Rakow found that, despite a tendency for low-priced properties to be overassessed, the effective property tax rate wasn’t regressive at all. In fact, because the homestead exemption offers proportionally more relief for lower-priced homes, Boston’s property tax was actually significantly progressive.  

“We’ve done a little bit more research into some of the concerns about assessment equity,” Rakow says, “and it’s really revealed how effective homestead exemptions can be.”  

A Progressive Tax Tool at Work in Boston 

Different types of homestead exemptions exist, but here’s how Boston’s program works: The taxable value of a homeowner’s principal residence gets reduced by a flat dollar amount, equivalent to 35 percent of the average assessed home value in the city that year. In 2021, that meant the first $295,503 of a primary residence’s value was exempt from property taxes.   

So if a Boston resident’s condo was assessed at $395,000 that year, the owner would only have to pay property taxes on the last $100,000 or so of the home’s value—a discount of roughly 75 percent. The resident-owner of a $1 million property would get a more modest discount of 30 percent, while owners of second homes and investment properties pay full freight.  

The flat dollar amount, which automatically adjusts annually, is an important feature. Some programs exempt a set percentage of a property’s value—the first 10 percent, for example—but that doesn’t add any progressivity to the tax, since high-priced homes benefit at the same rate. (Flat dollar homestead credits—which allow all residents to receive, say, $200 off their property tax bill—also offer progressively more relief for lower-value homes.)  

The simplicity of Boston’s program makes life easier for residents and city officials alike.  

“One of the big advantages for a flat dollar homestead exemption or credit over other types of property tax relief is that it can be very easy to administer, and for taxpayers to participate in,” says Adam Langley, associate director of tax policy at the Lincoln Institute and coauthor of the report Property Tax Relief for Homeowners. While other policies target relief more narrowly to lower-income homeowners or seniors, and are thus more cost-effective, Langley says, they’re also more complicated to operate and to apply for, bringing down participation rates.  

Boston’s exemption program requires homeowners to apply only once, after which they’re automatically enrolled until they move, sell the home, or die. The city has partnered with the Massachusetts Department of Revenue so it can use income tax records to verify residency status. “Before, in order to establish residency, we used to have people bring in copies of utility bills and all kinds of other documentation,” says Rakow, Boston’s former assessing commissioner. “Now we can establish residency just by doing a quick check against the income tax records, so that made the administration of the exemption much easier—and it also made it a lot more difficult to cheat.”  

Notably, Boston’s exemption doesn’t cost the city any revenue, or shift the tax burden to businesses; it just rebalances the same total residential tax levy toward higher-value homes.  

It’s also optional for the city. Massachusetts law doesn’t require communities to offer a homestead exemption; each city and town has the option of providing an exemption of up to 35 percent of its average property value. But even if a home’s total value falls under the local exemption threshold, state law does require homeowners to pay something: the exemption tops out at 90 percent of a property’s value. That helps keep homeowners involved and invested in local spending decisions.  

The Need for Equity and Relief 

Whether they pay their property taxes directly or through a mortgage escrow service, most homeowners are aware of increases to their tax bill. So with property values skyrocketing, local governments should be reducing their tax rates accordingly, Youngman says, despite the temptation not to.  

“It’s very hard for local governments to turn away what we call ‘silent tax increases’—where you never change anything on the books, but suddenly the revenue is raised,” Youngman says. But it was fast-rising property tax bills that inspired twentieth-century tax revolts like California’s Proposition 13, which limited assessment increases to 2 percent annually—and led to erratic and inequitable taxation.  

By essentially decoupling assessments from market values, policies like Proposition 13 create inequity on multiple levels. First, two families that own identical properties can end up with wildly different tax bills depending on when they purchased the home, putting new homebuyers at a disadvantage. At the same time, owners of homes that are rising in value the fastest receive a larger tax break than those whose home values are appreciating more slowly, even though the latter often have lower incomes and less wealth. “That is an example of a solution that can raise unanticipated problems,” Youngman says.  

A homestead exemption is a much more fiscally sound and equitable way to ease the property tax burden on residents. And that equity is sorely needed in places where low-priced homes are being overassessed. Even a relatively small homestead exemption—a fraction of the size of Boston’s—can essentially erase such unfairness, McMillen has found. He analyzed data for almost 10,000 municipalities and found the highest concentration of tax regressivity and inconsistency in homes assessed below $100,000. “And what that means is that a fairly modest homestead exemption can just take care of all the regressivity,” he says.  

How modest? In Chicago, the first $30,000 or so of a home’s value is exempt from the property tax, McMillen says—and that seems to be enough to overcome any assessment inequities.   

“It’s a really reasonable, logical approach,” McMillen says. “It’s not that much different from saying, ‘We’re not going to charge an income tax on people who make $10,000 a year, but by the time you get up to median income, you’re going to pay a healthy income tax.’”  

“It does mean the tax burden will get transferred to higher-income people,” McMillen adds. “But you can make an argument right now that it’s being transferred to lower-income people, because they’re being taxed at higher rates than they ought to be.” 

Jon Gorey is a staff writer for the Lincoln Institute of Land Policy.

Image: Jon Gorey