Lower Merion Citizens for Responsible Budgeting
Commissioners Toss out Homestead Exemption Scheme
November 11, 2009
During the Finance Committee meeting of November 11, a motion was made to terminate any consideration for a Homestead exemption as proposed in The 2010 Budget. The motion was approved by eight of the twelve Commissioners in attendance. Four Commissioners, Delhiem, Gordon, Manos, and Rogan, voted no on the motion, stating that they would like to keep it available for discussion and consideration.
In the proposed 2010 Lower Merion budget message, Town Manager Cleland included the proposal to institute a Homestead Exemption on municipal property taxes. The following is a discussion of why the implementation of the Homestead Act as envisioned by TM Cleland was a bad idea.
The Homestead Act provides a taxing authority with the means to exempt taxation on some portion of a property’s assessment. Every property is exempted from taxation on exactly the same amount of assessment. For this discussion, let us call this the Assessment Exemption (AE). The AE can never exceed ½ of the assessment of the average assessed home in the taxing district. In Lower Merion the average full assessment is $365,000.
When the PA legislature enacted the most recent version allowing Homestead Exemptions, they did so with the expectation that school districts would obtain funds from the gambling revenues which would REPLACE the need for an equal amount of property taxes; that is to say it was a method of tax relief shared equally by all homeowners because no homeowner’s property taxes were increasing to fund the AE of another property. The law further explicitly says that the AE can only be instituted when there is a NEW source of funding other than property taxes. The new source, rather than being additive revenue, becomes replacement revenue.
What TM Cleland proposed was very different. He interpreted the Solid Waste Collection fee as a “new source” of revenue. However, the shift to the fee from an equal amount formerly being part of the property tax was revenue neutral. Since this was not ADDITIONAL revenue to the Township, but merely a shifting of income source, the AE would have been an unfunded rebate to the taxpayers. The irony was that a tax rebate required a property tax hike to pay for it, exactly what the law didn’t envision!
The following is an example of how the Homestead exemption works:
A taxpayer in Taxing District X with a property assessed at $50,000 will owe $1,000 in property tax if the tax rate is 20 mills (2 percent).
Assessed value X tax rate = tax owed
$50,000 X 20 mills (2 percent) = $1,000
The same taxpayer receives a $20,000 homestead exclusion on his or her property.
(Assessed value – AE) X tax rate = tax owed
($50,000 – $20,000) X 20 mills (2 percent) = $600
The homestead exclusion gives the taxpayer a $400 tax savings.
What would have happened in Lower Merion was that for some homeowners the AE would have offset a tax increase, effectively a 0% tax increase. For other owners, those with the higher assessed homes on which the AE is a smaller percentage (though the same absolute amount) the effective rate of increase necessary to cover those with an effective 0% was projected to climb as high as 9%.
Because the Homestead Exemption is designed to provide tax relief to those properties that are owner occupied, commercial properties and rental properties would have received no tax relief. It is probable that renters would have borne the brunt of the increased tax burden to their landlords. Further, since the AE creates a tax burden shift to higher assessed properties, in Lower Merion it could have had the unfortunate effect of pitting the western half of the township (which has fairly uniformly higher assessments) against the eastern neighborhoods.
Finally, there was a somewhat specious argument put forth that this “‘redistribution’ of tax burden among property owners in the Township is worth considering for 2010 if a central goal is to seek tax relief for those possible least able to afford tax increases; those with lower valued homes such as young families, lower income wage earners, senior citizens on fixed income, etc.” The problem with this rationale is that in these tough economic times there is no evidence of a correlation between “those least able to afford tax increases” and the size of the property assessment.
Tax relief is a laudable goal. There are better ways to achieve this than those proposed in the 2010 Budget.
Audrey Romasco