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Summary of the Omnibus Bill Circuit Breaker

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8/15/08: Frank Mauro speaks about tax reform and the Omnibus Bill at Mohonk Mountain House.
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SUMMARY OF OMNIBUS BILL CIRCUIT BREAKER

BACKGROUND:

The circuit breaker concept, used in several states, caps a residential homeowner’s property tax at a certain portion of his household income. It has been traditionally used for homeowners with very low incomes and low assessments. A circuit breaker provision has existed in New York State for decades, but the maximum eligible household income is $18,000 and the maximum eligible home value is $85,000.

Meanwhile the formula of the STAR program, used for the last decade as New York State’s primary property tax relief mechanism, is inequitable to thousands of middle income homeowners because it does not draw a connection between a taxpayer’s household income and the amount of his tax bill. In fact, in any given school taxing district, where two families have the same income, STAR actually provides a LOWER percentage benefit to the family with the HIGHER tax bill. (Example: Two families each have $80,000 household income, each get the same $500 STAR benefit, one family has a $2,000 school tax bill – i.e., STAR benefit worth 25% , the other family has a $10,000 school tax bill – i.e., STAR benefit worth 5%). Obviously the family with the $10,000 tax bill is left with a far higher burden. Homeowners with five figure incomes are often paying five figure property taxes, i.e.,10% of their household income and sometimes 20% and more -- just to pay the property tax and remain in their home. Many of these are long time homeowners, often on fixed incomes, whose assessment increases have simply outstripped their ability to pay.

Homeowners bearing this kind of financial burden are arguably at greatest risk of being forced from their homes. They simply cannot wait for more fundamental property tax reform, such as a change in the school funding system that would substantially remove it from the property tax. While such reform will remain essential, they need MEANINGFUL RELIEF NOW.

Coalition members have been seeking to enact a variation of the circuit breaker that would apply to middle income families and provide a more meaningful benefit to homeowners forced to pay high portions of their income in property tax on their home. Such a bill was introduced in 2007 on a bi-partisan basis in the Assembly as A1575 by Assemblywoman Sandy Galef (D-Ossining) and in the Senate as S1053 by Senator Elizabeth Little (R-Queensbury). That excellent bill gained considerable attention during 2008. The Omnibus Circuit Breaker builds on that model with some important modifications.

BILL DESCRIPTION:

The bill is phased in over four years in order to take the state’s fiscal situation into consideration while ensuring that the most overburdened property taxpayers – based on the percentage of income they are paying in property tax on their home – will get relief quickly.

During the first year, 2009, resident homeowners with household income of $100,000 or less who have lived in their homes for at least five years will be eligible for an income tax credit equal to 70% of the amount by which the total ad valorem taxes on their home exceeds 9% of their household income.

Ad valorem taxes, in this case, are any taxes based on the value of one's home. These include all taxes levied by school districts, counties, towns, villages, and fire districts, as well as any special districts, as long as the tax is based on the assessed value of the home. Taxes levied on everyone in equal amounts (such as those for water and sewer in most cases) are “non ad valorem” and are not included.

EXAMPLE:

Household income = $50,000
Taxes paid on home = $7000
$50,000 x 9% = $4500
Difference (i.e., the excess over the 9%) = $2500
70% of Difference = $1750, the amount of the income tax credit

During the second year, 2010, eligibility is still limited to those with household income of $100,000 or less, but the applicable income percentage drops from 9% to 8.5%, thereby increasing the benefit.

EXAMPLE:

Household income = $50,000
Taxes paid on home = $7000
$50,000 x 8.5% = $4250
Difference (i.e., the excess over the 8.5%) = $2750
70% of Difference = $1925, the amount of the income tax credit

During the third year, 2011, for those with household income of $100,000 or less the applicable income percentage drops from 8.5% to 7.5%.

EXAMPLE:

Household income = $50,000
Taxes paid on home = $7000
$50,000 x 7.5% = $3750
Difference (i.e., the excess over 7.5%) = $3250
70% of Difference = $2275, the amount of the income tax credit

Also during the third year, 2011, those with household incomes of $150,000 or less also become eligible. For those taxpayers, the applicable percentage for their first $100,000 is 7.5%. The applicable percentage for income above $100,000 is 8.5%.

EXAMPLE:

Household income = $120,000
Taxes paid on home = $12,000
$100,000 x 7.5% = $7500
$ 20,000 x 8.5% = $1700
Total $7500 + $1700 = $9200
Difference (i.e. the excess over $9200) = $2800
70% of Difference = $1960, the amount of the income tax credit

In the fourth year, 2012, the circuit breaker is fully phased in. For those with household incomes of $100,000 or less, the applicable percentage drops from 7.5% to 6%.

EXAMPLE:

Household income = $50,000
Taxes paid on home = $7000
$50,000 x 6% = $3000
Difference (i.e. the excess over 6%) = $4000
70% of Difference = $2800, the amount of the income tax credit

TO SUMMARIZE THE SITUATION FOR THE $50,000 HOUSEHOLD PAYING $7000 IN TAXES (14% OF THEIR INCOME): THE CREDIT RISES FROM $1750 IN THE FIRST YEAR OF THE PHASE-IN TO $2800 IN THE FOURTH YEAR WHEN THE PLAN IS FULLY PHASED IN. AT THAT POINT THAT HOUSEHOLD WILL BE PAYING A NET PROPERTY TAX OF $4200, A REDUCTION OF 40%, AND IT WILL CONSTITUTE 8.4% OF THEIR INCOME.

Also in the fourth year, 2012, for those with incomes of $150,000 or less, the applicable percentages drop from 7.5% and 8.5% to 6% and 7%, respectively.

EXAMPLE:

Household income = $120,000
Taxes paid on home = $12,000
6% of first $100,000 = $6000
7% on next $20,000 = $1400
Total $6000 + $1400 = $7400
Difference (i.e., the excess over $7400) = $4600
70% of Difference = $3220, the amount of the income tax credit

TO SUMMARIZE THE SITUATION FOR THE $120,000 HOUSEHOLD PAYING $12,000 IN PROPERTY TAXES ON THEIR HOME (10% OF THEIR INCOME): THE CREDIT RISES FROM $1960 IN THE FIRST YEAR OF THE PHASE-IN TO $3220 IN THE FOURTH YEAR WHEN THE PLAN IS FULLY PHASED IN. AT THAT POINT THAT HOUSEHOLD WILL BE PAYING A NET PROPERTY TAX OF $8780, A REDUCTION OF 29%, AND IT WILL CONSTITUTE 7.3% OF THEIR INCOME.

And finally, in this fourth year, 2012, those with household income of $250,000 or less also become eligible. Their applicable percentages are 6% for the first $100,000 of income, 7% for the next $50,000 of income, and 8.5% for the next $100,000 of income.

EXAMPLE:

Household income = $180,000
Taxes paid on home = $15,000
6% of first $100,000 = $6000
7% on next $50,000 = $3500
8.5% on next $30,000 = $2550
Total $6000 + $3500 + $2550 = $12050
Difference (i.e., excess over $12050) = $2950
70% of Difference = $2065, the amount of the income tax credit

TO SUMMARIZE THE SITUATION FOR THE $180,000 HOUSEHOLD PAYING $15,000 IN PROPERTY TAXES ON THEIR HOME (8.3% OF THEIR INCOME) : THE CREDIT WILL REDUCE THEIR NET PROPERTY TAX TO $12935, A REDUCTION OF 13.7%, AND IT WILL CONSTITUTE 7.2% OF THEIR INCOME.

THOSE THOUSANDS OF HOUSEHOLDS PAYING EVEN HIGHER PERCENTAGES IN PROPERTY TAX ON THEIR HOMES WILL QUALIFY FOR EVEN HIGHER CREDITS.