Circuit Breakers Are a Better Option for Property Tax Relief

This op-ed originally appeared in Tax Notes State

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Property taxes are the backbone of state and local government budgets because they support public programs that keep communities educated, safe, and healthy. But as housing prices continue to rise across the country, a growing number of families are struggling with their property tax bills. States like North Dakota, Iowa, Indiana, and Kansas, among a dozen other states, are looking at ways to alter property taxes. But too often, their proposals threaten to lose a lot of revenue without really reaching the people who most need help. These proposals focus on addressing the amount of property taxes levied, rather than ensuring families can afford their property tax bills. There is a better way.

To curb the impact of property taxes on working families, lawmakers should improve or implement a property tax circuit breaker program. The program works like this: when families are overloaded with their property taxes, the circuit breaker kicks in and helps alleviate the pressure these taxes put on family budgets.

A circuit breaker is the best form of property tax reduction because it addresses the main flaw of the system: the disconnect between property tax bills and ability to pay. If you lose a job, your income tax payments decrease accordingly – but your property tax bill does not change. Similarly, if you live on a fixed income, your property tax does not stop rising as your home’s value increases. But a circuit breaker can protect you by making your income a factor in how much you pay in property taxes.

A circuit breaker ensures that your property tax bill does not exceed a certain percentage of your income. When that does happen, the circuit breaker refunds you that amount, usually up to a certain cap. Ideally, programs should be open to both homeowners and renters of all ages with benefits and maximum income levels indexed to inflation. But the actual design can be negotiated between legislators and their constituents.

This is a fairly popular solution across the country, with 29 states and Washington, D.C. all having some form of a circuit breaker. These programs can help make a state’s overall tax system more equitable. A regressive tax code is where households with lower incomes pay a larger share of their income in taxes than higher income families. According to our Who Pays? report, of the states with the 10 most regressive tax codes, all fail to provide working-age taxpayers with a circuit breaker option.

While many lawmakers look to property tax policies like tax caps or homestead exemptions, these are not well-targeted to those least able to pay. Homestead exemptions are across-the-board cuts that provide tax cuts to everyone, but their universal nature helps wealthier residents and others who are not struggling to pay their property tax bill, failing to address the ability-to-pay issue that plagues the property tax system. These exemptions, unlike circuit breakers, also exclude renters; this is a big problem because landlords typically pass property tax increases along to their tenants, many of whom are low- and moderate-income families and are disproportionately people of color.

Tax caps are deeply problematic because they deliver the biggest benefits to the highest-value homes. That means they deprive governments of needed revenue, hurting their ability to invest in schools, first responders, and other services, while doing very little to help those whose family finances are most strained.

A circuit breaker addresses both of today’s biggest problems with the property tax – fairness and financial security – which makes it a better policy choice than homestead exemptions and tax caps.

Designed properly, a circuit breaker provides low- and moderate-income families of all ages, both homeowners and renters, with the ability to stay in their homes, while also providing governments with the revenue to invest in vital services.

While the housing market keeps booming and property taxes continue to rise accordingly, states and localities will continue to consider changes to their property tax systems. Using circuit breaker programs will provide the financial stability their communities and budgets need.

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