A Close Look at Maine’s Property Tax “Work-Off” Program
July 16, 2009
A few retired homeowners in Saco, Maine have been given a special opportunity recently. The city of 18,000 is the first municipality in Maine to take advantage of a bill signed by Gov. Baldacci on April 6, 2008 that allows local governments to implement a property tax “work-off” abatement program. Under the rules the program, an individual over the age of 60 can do “volunteer” work for his or her local government in exchange for a reduced property tax bill. The benefit is capped at $750 per year per person, is non-refundable (meaning it can’t reduce the individual’s liability below zero), and must be related to amount of volunteer service provided, that is, the worker’s benefit must be calculated at an hour rate (it seems the going rate is the state minimum wage, $7.25).
The state agrees not to count the tax abatement as income for purposes of the state income tax or other benefit programs like Medicare, but no matter the name the state gives it, in economic terms the tax abatement is income. Here is why. If the senior citizens were working at any other job they would get paid their $7.25 an hour, pay state income taxes on that income, and use what is left over for whatever purpose they saw fit (in this case they would use that income to pay off their property tax bill). But under the property tax work-off program the “volunteers” are effectively paid the same hourly rate, but owe no state income tax on the income, and must use all of the income to pay down their property tax bill. To say that the workers are volunteers or are not getting paid is really just an exercise in creative semantics. Essentially, the state is allowing the “volunteers” to get paid tax-free (at least as far as the state income tax is concerned).
According to a local news source, the City Assessor of Saco, Dan Sanborn,
noted that at full participation, the total cost of 20 people reducing their tax bill by $750, in terms of revenues not being remitted to the city, would be $15,000. That amount, he said, is so small that it would only add about 1/10th of a cent to the average homeowner’s tax bill.
This statement seems to be based on the false idea that the seniors are not being compensated for their work. His statement might be true if the government was just wiping out their tax liability without the taxpayer having to do anything, but that is not how the program is designed. The taxpayer must work off their liability, essentially paying off the liability in work performed. In exchange for wiping out the tax liability, the government is getting labor.
Assuming the work being performed is worth what the government is paying (the amount of tax they are wiping out), there is no loss to the local government. The municipality is not doing the seniors a favor: In exchange for wiping out $750 of tax liability they get $750 worth of labor. The worker does not have to pay income tax, and the local government is not liable for state unemployment taxes. The only loser in the deal is the state, who does not get to collect income or unemployment tax on the phantom wages, although the loss is small, much smaller even than the $15,000 figure quoted by Sanborn, which is just the amount of income that will go untaxed.
If you are not convinced that the property tax abatement is really income, consider the federal government’s position. The IRS rightly considers the property tax abatement to be income for income tax purposes (except for volunteer emergency respenders) plus the workers owe payroll taxes (Medicare, unemployment, etc.) on the amount. And since the IRS also considers the seniors employees of the local government, the locality also owes its half of the payroll taxes. Many of these seniors will be low income and may end up with no income tax liability even when the income is included in the calculation, but they will always owe payroll taxes. And if the local government tries to give the workers another break and pay the worker’s federal payroll tax liability for them, that benefit is also considered income and is subject to the federal income tax.
So the program does provide a tax benefit to participating seniors, but only to the extent that the income earned would have been subject to the state income tax and unemployment taxes in the absence of the work-off program. The tax savings for the individual would depend on whether they have any other income, their filing status, their deductions and exemptions, etc. But assuming the whole $750 maximum benefit would be taxed at the maximum income tax rate of 8.5%, the maximum income tax savings for the senior would be $64. Assuming the local government pays the 1.8% state unemployment tax rate (the rate for new businesses), they would save $14. For the 20 people involved in the program the maximum total cost to the state government in uncollected revenue is roughly $1560.
Is this sound tax policy? No. Essentially the state government is subsidizing the property taxes of seniors in Saco by making it cheaper to pay their tax bill. The rest of the taxpayers in Maine must pick up the (admittedly miniscule) tab by paying more in taxes or accepting cuts in state spending. We favor broader bases and lower rates, meaning that when possible all income should be taxable, even income earned by senior citizens, so that the tax rate can be as low as possible to minimize economic distortions. While we stand by these principles, the actual impact on state revenues and other taxpayers from this policy is probably not significant enough to warrant a blog post even half as lengthy.