If you are a DC homeowner, you probably just received a new assessment notice from the tax office. While many of you will find your home’s value has risen again, you may not have noticed that your property tax bill actually has gone down or remained pretty flat in recent years. This is a pattern across the city. While assessments have skyrocketed, half of all DC homeowners are paying less in property taxes today than they did in 2005.

This may sound like voodoo economics, but it really reflects aggressive efforts by the DC Council and mayor to provide property tax relief. They have increased the Homestead Deduction, cut the property tax rate, and established a 10 percent cap on annual increases in taxable assessments. As a result of these policies, DC homeowners now enjoy the lowest property taxes in the region. (Read on below if you don’t believe us.)

The tax rate for DC homeowners probably will drop again this fall due to a DC law that automatically triggers a cut under certain conditions. The policy of continually cutting the tax rate for homeowners doesn’t make sense, though, if we’ve already succeeded in having the lowest taxes, especially if that means we can’t provide tax relief to renters and others who have not benefited from property tax cuts.

A Pretty Good Deal for DC’s Homeowners
To find out how DC property taxes rank, the DC Fiscal Policy Institute compared property tax bills of homes in DC and surrounding suburban counties at several different sales levels. It turns out the DC homeowners get the best property tax deal at each sales price. Among homes with an average sales price of $500,000, for example, DC homeowners paid an average tax of $2,170 in 2007, compared with $3,110 in Montgomery County, $3,690 in Prince George’s County, and over $4,200 in Arlington and Fairfax counties.

In the realm of homeowner taxes, this means that the District can declare victory — not only have we reached property tax parity with Maryland and Virginia, we’ve surpassed it.

Yet our tax law contains a provision — known eloquently as the “calculated rate” — that automatically triggers a cut in the residential property tax rate every year that property tax collections grow more than a certain amount. Given DC’s success in lowering property taxes and the fact that the economic slowdown is likely to lower the city’s revenue collections, further across-the-board property tax cuts for homeowners do not seem warranted — or wise — at this time.

As hard as it may be to do, the mayor and council should eliminate the “calculated rate” — or at least suspend it for now.

Who Needs Property Tax Relief?
We all know that low-income households — most of whom rent — are the most likely to feel the squeeze economically from DC’s high and rising housing costs. Moreover, a recent analysis by the District’s chief financial officer finds that low-income households face the highest property tax burden as a share of income.

Yet DC’s property tax relief measures have not specifically targeted low-income homeowners, and they have done nothing to help renters, who represent a majority of DC households. If DC’s leaders are in the mood for tax relief, these are the people who need help.
               
Targeting Property Tax Relief
Targeted low-income property tax relief for homeowners and renters can help families and individuals with high housing cost burdens, especially the large majority of low-income households that don’t receive any housing subsidies.

Luckily, the District already has a tool to accomplish this goal. It’s called the Homeowner and Rental Property Tax Relief Credit, more commonly known as Schedule H. It targets low-income households and is available to renters as well as owners under the assumption renters pay property taxes indirectly through their rent. All the council and the mayor need to do is update and simplify it.

Schedule H, however, has several shortcomings. For one, the income eligibility limit of $20,000 and the maximum credit amount of $750 have not been updated for inflation since 1979. If both were adjusted for inflation, the income ceiling would increase to about $53,000, and the maximum credit would be $2,000.

Unnecessarily restrictive and complex rules also limit the ability of Schedule H to reach those who need it. For example, families and individuals sharing a home, but not other expenses, must apply for Schedule H as one household. If two unrelated families or individuals rent an apartment together, only one of them can claim the Schedule H credit, and the family claiming the credit must include the other family’s income.

Not surprisingly, Schedule H is terribly underutilized. Last year, only 8,600 households claimed it, just 19 percent of the eligible population. And Schedule H participation has fallen 60 percent since the mid 1990s.

The cost of fixing Schedule H is not cheap — $28 million or so. One way to pay for it, though, is to repeal the homeowner’s calculated rate, which resulted in $17 million in projected tax reductions in 2008.

Getting rid of a popular tax break for all homeowners in order to target relief on low-income households is politically challenging. But good tax policy should mean targeting relief where it is needed the most. If overall property taxes in DC are the lowest in the region — while low-income DC households face the highest tax liabilities — then this swap makes perfect sense.