by Idara Nickelson
In January 2004, the DC Council enacted legislation to address rising property tax burdens on DC homeowners. The new law caps annual increases in property tax bills at 12 percent, regardless of the size of the assessment increase. The cap previously had been set at 25 percent. In addition, the homestead deduction ‘ the amount of home value excluded from tax ‘ was increased from $30,000 to $38,000. These changes will reduce the city’s revenues from projected levels by $28 million in 2004 and $31 million in 2005.
The enacted legislation represents a compromise among several leading proposals. One proposal, introduced by Councilmembers Evans and Catania, would have set the property tax cap at 10 percent. A second proposal, offered by Councilmember Mendelson, would have lowered the 25 percent cap to 20 percent and increased the homestead deduction from $30,000 to $50,000.
Previous analyses of these two plans conducted by DCFPI showed that a 10 percent cap would have provided most of its relief to owners of DC’s most valuable homes and to homes in higher-income neighborhoods. By contrast, a 20 percent cap combined with an increase in the homestead deduction would have spread relief more broadly among DC homeowners.
This analysis finds that the enacted legislation ‘ a 12 percent tax cap with an increase in the homestead deduction to $38,000 ‘ provides broader tax relief than the proposed 10 percent cap though not as broad as the relief that would have been provided by a $50,000 homestead deduction combined with a 20 percent cap.
As shown in Table 1, homeowners in Wards 5, 7, and 8 would have received eight percent of the benefit of the 10 percent cap even though they represent about 30 percent of all eligible DC homeowners. Under the enacted legislation, these homeowners will receive 16 percent of the city-wide tax relief, double the amount compared to the 10 percent cap. Under the Mendelson proposal, however, the homeowners in these three wards would have received about 23 percent of the relief. [1]
Table 2 shows that owners of lower-value homes ‘ who are likely to include most of DC’s low-income households ‘ will receive some benefit from the enacted legislation, but not as much as under the Mendelson proposal.
- Under the proposed 20 percent cap and $50,000 homestead deduction, 48 percent of the relief would have gone to the 55 percent of DC homes that are assessed at $250,000 or less.
- In contrast, homes in this range would have received just 24 percent of the benefit from the 10 percent cap.
- Under the 12 percent cap and $38,000 homestead deduction, owners of homes assessed at $250,000 or less will receive 36 percent of the tax relief.
Similarly, the share of tax relief going to owners of high-value homes under the enacted legislation is smaller than the share they would have received under a 10 percent cap but higher than the proposal to increase the homestead deduction and set the cap at 20 percent.
- Some 48 percent of the relief from the 10 percent cap would have gone to homes worth $500,000 or more, even though they represent just 20 percent of DC homes.
- Under the proposed $50,000 deduction and 20 percent cap, homes worth $500,000 or more would have received 26 percent of total tax relief.
- Under the enacted legislation, homes valued at over $500,000 will receive 38 percent of the city-wide tax relief.
A straight tax cap, such as the proposed 10 percent cap, targets its relief on homes increasing the most in value. While home values have risen throughout the District, the greatest increases have been in higher-income areas with the highest value homes. The Mendelson proposal would have distributed relief most broadly because an increase in the homestead deduction provides the same dollar benefit to all homeowners. As such, it targets the greatest amount of tax relief, as a share of home value, to owners of the lowest value homes. The proposal to cap tax increases at 20 percent combined with a $20,000 increase in the homestead deduction thus would have targeted more relief to low-income homeowners ‘ those for whom property tax burdens are likely to be most problematic ‘ as well as to homeowners facing the largest assessment increases.
End Notes:
[1] The benefits represent the difference between what homeowners would have received under the former 25 percent tax cap and what homeowners would receive under each proposal.