MARYLAND BUDGET & TAX POLICY INSTITUTE
STATEMENT IN SUPPORT OF
SENATE BILL 618
PROPERTY TAX - HOMEOWNERS' PROPERTY TAX CREDIT AND RENTERS' PROPERTY TAX RELIEF
March 13, 2008
The Maryland Budget and Tax Policy Institute supports Senate Bill 618 - Property Tax - Homeowners' Property Tax Credit and Renters' Property Tax Relief. The bill will mitigate the regressive effect of sales tax increases enacted during the November 2007 special session in a targeted and meaningful manner.
Background
- The revenue package enacted at the special session of the General Assembly included a number of features to improve the progressivity of Maryland’s tax structure: an increase in the Refundable Earned Income Credit; an expansion in eligibility for the credit and an increase in the personal exemption.
- Despite these protections, the package hits low-income families the hardest. According to Institute for Taxation and Economic Policy (ITEP) the package will increase taxes on the poorest fifth of state residents (those with income under $20,300) by 0.8% of their income, compared with 0.5% for earners in middle quintile, and 0.33% for the highest-income Marylanders.
Moreover, neither the Earned Income Credit expansion nor the personal exemption increase helps low-income families without earned income, a group that includes many elderly and disabled residents, though these families will pay significantly more in sales tax and other taxes.
- Even before this, low- and moderate-income families in Maryland faced high state and local taxes — higher, relative to their income, than high-income Marylanders. Instead of improving the overall tax system, the special session’s final product made it more regressive.
- The sales tax — especially a sales tax like Maryland's that exempts most services — is an extremely regressive tax, meaning that low-income families pay more than wealthier families as a share of their income. By far the largest revenue raiser in the legislation that passed during the special session is an increase in the sales tax rate from 5 percent to 6 percent; it is predicted to raise about $700 million per year. This heavy reliance on the sales tax is the primary reason for the regressivity of the package overall.
SB 618 Expands Maryland's Property Tax Circuit Breakers
Governor O’Malley’s original proposal called for a property tax cut in the form of a reduction in the state property tax rate. This provision did not become part of the final package approved by the General Assembly. Expanding the existing “circuit breaker” tax credits would help to provide a measure of property tax relief that would be targeted to the low-income segments most adversely affected by the sales tax rate increase.
The Homeowners' Property Tax Credit and the Renters' Tax Credit reduce property tax liability for Marylanders with high property taxes relative to their incomes. An eligible family receives a credit equal to the amount by which its property tax liability exceeds a certain percentage of its income. (For renters, it is assumed that fifteen percent of their rent goes toward property taxes.) High housing costs can be a major factor in making it difficult for families to make ends meet, and property taxes are a contributor to housing costs. Some 48,000 Maryland homeowners and 10,600 Maryland renters received the credits in the most recent year.
Unfortunately, the benefit provided by the existing circuit-breaker programs is limited by their narrow eligibility requirements and low value. Eligibility for the renters' credit, in particular, is very restrictive. Renters who are senior citizens or disabled must have income below $30,000. For non-elderly, non-disabled renters with dependent children, the income limit is the poverty line, which is about $20,000 for a family of four. Non-elderly, non-disabled renters without children are not eligible at all, regardless of income. The income ceiling for homeowners is significantly higher — $60,000 — but the homeowners' credit's other parameters are quite restrictive. For example, a homeowner with income of $29,000 and a $750 property tax bill receives no credit. As a result of these tight eligibility rules, many families who need help with their property taxes do not receive it. Census data shows that over 200,000 Maryland households pay over 36% of their income in rent. The Maryland Budget and Tax Policy Institute estimates that at least 60,000 of them have incomes under $40,000, placing them in the bottom 40% of the state’s earners. Yet only about 10,000 households currently claim renters’ credits.
A second problem with the credits is that, even for those who are eligible, they frequently provide insufficient help. Under current law, a homeowner with income of $16,000 and property tax liability of $500 receives a credit worth just $290. The credit for renters is even less generous. A family with income of $20,000 and paying $10,000 of annual rent — of which $1,500 would be assumed to cover property taxes — would receive a credit worth just $520. The average renters’ credit is only $265, compared to $976 for homeowners.
SB 618 would improve the credits for low- and moderate-income families in the following ways:
- Make the credits larger. SB 618 would increase the value of the credits by reducing the percentage of income that is paid in property taxes before the credit kicks in. Limiting property tax liability to 5% of income would increase credits for a $20,000-income household by $220 for homeowners and $280 for renters.
Under the bill, the credit for a typical low-income family of four might increase by $200 for home-owners and $400 for renters (the homeowner’s existing credit would have been larger to begin with).
- Expand eligibility. SB 618 would also expend eligibility, especially for renters. The income limit for renters would be doubled to twice the poverty level (about $40,000 for a family of four). Non-elderly, non-disabled renters without children would be eligible. For homeowners, lowering the percentage of income at which the credit kicks in would make the credit available more broadly.
The tax increases enacted in the November special session – especially the sales tax rate increase – hit low-income people harder that the middle class and the well-off. SB 618 would do a lot to help. The Maryland Budget and Tax Policy Institute respectfully requests the Budget and Taxation Committee make a favorable report on Senate Bill 618.
Contact: Neil L. Bergsman, Director
410-727-6367 x17
nbergsman@mdnonprofit.org