D.C. Property Tax Proposals Should Be Mindful of Base Erosion, Target Simplicity, and Transparency

The Council of the District of Columbia is considering multiple property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. proposals with the stated goal of reducing the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. burden of homeowners who have seen their property taxes rise as home values have grown.

The most efficient, economically neutral, and transparent way to provide tax relief is to simply reduce the millage rate across all taxable property. Reducing the millage rate would lower the tax burden proportionately across all properties, thereby distributing broad tax relief while preserving the property tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. and maintaining efficiency in the tax code.

Some D.C. lawmakers are focused on ensuring that any property tax relief is done in a way that increases the progressivity of the property tax code. Two Council proposals reflect that focus, but also raise concerns about tax base erosion and a loss of neutrality, simplicity, transparency, and stability. Between the two competing proposals described below, the better route is to simply increase the homestead deduction. This proposal could be further improved by achieving a portion of the tax savings through reducing the millage rate.

Council member Brandon Todd (D-Ward 4) proposed a bill to raise D.C.’s homestead deduction from $74,850 to $125,000. That means that D.C. homeowners would be able to deduct an additional $50,150 from their taxable home value, reducing their tax liability. This is one way to provide property tax relief for homeowners while making the tax code more progressive, though it faces the downside of eroding the property tax base, thus reducing the stability of the tax code and having a nonneutral effect across homes of different values.

Todd’s proposal, however, raised concerns in the D.C. Council regarding the distributional and revenue impact of an increase in the homeowner deduction. Specifically, some argued that the homestead deduction increase would give tax cuts for wealthy homeowners. Others argued that the city would lose a large chunk of revenue, $38 million in total, for needed public services.

Council member Robert White (D-At Large) introduced an amendment aimed at replacing the increased homestead deduction with a refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit (EITC). for lower-income residents that could be claimed against income taxes. This is done by creating higher caps and income eligibility for Schedule H, a refundable tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. that offers property tax relief for low- and moderate-income renters and owners.

The new amendment would increase the maximum credit from $1,000 to $1,500 and income eligibility from $50,000 to $65,000 (from $60,000 to $75,000 for seniors). Compared with an increase in the homestead deduction, this proposal would address property tax relief through the income tax code, with the actual tax changes being income tax changes. This would increase the complexity and compliance cost of the tax code, while reducing tax transparency. The net effect would also be progressive, though with higher compliance costs, less transparency, and more complexity.

Increasing the homestead deduction is the better approach, and contrary to the concerns of opponents, would not disproportionally benefit the wealthy. In fact, a flat value exemption would disproportionately benefit lower-valued homes, and thus would increase the progressivity of the tax code.

For example, take two properties (A and B) that have property values of $100,000 and $1 million respectively. A flat exemption of $74,850 would reduce the taxable value of property A by about 75 percent, while the taxable value of property B would be reduced by about 7.5 percent. Given that higher-income earners tend to own more valuable homes and lower-income earners tend to own less valuable homes, an increased homestead deduction will disproportionately though not exclusively benefit lower-income households. It will be a simpler change and provide broader tax relief.

However, a large homestead deduction narrows the property tax base, which can reduce the stability and neutrality of the tax code as home values fluctuate. Given the District’s median home value of just over $600,000 in 2017, the proposed increase in the homeowner’s deduction would mean that 20 percent of the value of the median D.C. home would be removed from the tax base.

The most efficient approach for tax relief would be to focus more on reducing the millage rate, which is currently at $0.85 per $100 in assessed value. This would provide broad property tax reductions without a loss in tax efficiency. It could be coupled with a smaller boost in the homestead deduction that would still increase the progressivity of the property tax code.

The ideal magnitude of property tax relief should align with the city’s ability to control its spending and be provided while keeping the tax code as simple and transparent as possible, while preserving the property tax base from undue erosion.

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