HomeMy WebLinkAbout2005-TDES-Residential Exemption Report (draft), November 2005The Residential Exemption
Report by the Selectmen's Tax Exemption and Deferral Study Committee
November , 2005
Taylor Draft #5 12/13/05
Table of Contents
Introduction
1 What is the residential exemption?
2. How does it work?
3. Who benefits from the residential exemption?
4. Who pays?
5.. How is it implemented?
6. The experience of other towns and cities with the residential exemption
7 The pros and cons of adopting the residential exemption
8. Other help available to seniors and moderate income taxpayers
9 Conclusion
Appendix A —Number of Homes by Assessments
Appendix B — Summary of Interviews with Town Officials
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Introduction
This report discusses the mechanics of the residential exemption authorized by M.
G. L. Ch.59 Sec. 5C. Those groups of taxpayers who will benefit and those who will lose
from the exemption are identified. The experience of cities and towns which have
adopted the exemption will be discussed. Some of the pros and cons of adoption will be
identified.
1. What is the Residential Exemption?
The residential exemption is a taxation option available to municipalities in
Massachusetts that allows a shift in taxes from homes valued below the average
residential assessed value to those above the average. Adoption is done by the Board of
Selectmen on an annual basis ar.the classification public hearing.
Currently eleven municipafitiesin Massachusetts have ado�the residential
exemption: Bo��sto��,- Broo , C bridge, Chelsea, Marlboro, N cket, Somerset,
Somerville, Tis,,bury, Walam and Watertown.
2. How does it work?
A. Finding the average residential value
In order to find the average residential value, you determine the total value
and the total number of Class One properties. Class One parcels include all
single family residences, two and three family houses, apartment buildings
and residentially zoned vacant land. As shown on the Assessor's LA- orm,
the total Class One value for Fiscal 2005 was $6,275,351,000 and the total
number of Class One parcels was 10,570. Thus the average Class One parcel
value was $593,695.
B. Determining the exemption amount.
The law allows an exemption of up to 20% of the average Class One parcel
value. A 10% exemption, based on fiscal 2005 values, would be $59,500; a
20% exemption would be $119,000.
C. Establishing the number of primary residences.
Only principal residences, as used for income tax purposes, are eligible for
the exemption. This excludes apartment buildings, rental housing, vacant
land, and non -principal residences. - .: The
Assessors estimate that there are approximately 9500 principal residences in
Lexington.
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D Calculating the tax rate with exemption
With the adoption of a residential exemption, the tax rate for all residential
nronerties goes un. In Fiscal 2005, the Class One total value was
$6,275,351,000. The tax levy to be raised by Class One was $71,162,480.
Therefore, the tax rate for FY 2005 is the quotient of (A) the number of
residences and (B) the Class One total value, or $11.34 per thousand.
If a residential exemption of 10% were in effect, the Class One total value
would have been reduced by the product of (A) the number of principal
residences and (B) 10% exemption of the average Class One property, or,
9500 x $59,369, which equals $564,005,500. Therefore, under a 10%
residential exemption the FY 2005 tax rate would have been
$71,162,480/$5,711,345,450 or $12.45 per thousand.
A 20% the residential exemption would have caused the tax rate to go up to
$13.83 per thousand.
E. Determining the tax with the exemption
As shown above, at 10% in FY 2005 the residential exemption would have
resulted in a Class One rate of $12.45; a 20% exemption would have resulted
in a rate of $13.83. In order to determine the tax under the exemption it is
necessary to subtract the exemption amount (at 10% = $59,500; at 20% =
$119,000) from the eligible property's assessment and then multiply by the
applicable tax rate. The following table illustrates the effect in 2005 of: 1) no
exemption; 2) a 10% exemption; 3) a 20% exemption on four assessment
levels:
Assessment
(1) $500,000
(2) $1,000,000
(3) $1,500,000
(3) $2,000,000
Exemption
0%
10%
20%
0%
10%
20%
0%
10%
20%
0%
10%
20%
Assessment
after exemption
500,000
440,500
381,000
1,000,000
940,500
881,000
1,500,000
1,440,500
1,381,000
2,000,000
1,940,500
1,881,000
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Tax Rate Tax
11.34 5670
12.45 5484
13.83 5269
11.34 11,340
12.45 11 709
13.83 12,184
11.34 17,010
12.45 17.934
13.83 19,099
11.34 22,680
12.45 24.159
13.83 26,014
With a residential exemption in effect, non -owner occupied apartments, vacant land and
non -principal residences would be taxed at the higher rate without the reduced
assessment, resulting in a 22% increase in taxes for these properties.
3. Who benefits from the residential exemption?
A. How many residences will be affected and how much will the savings be?
Anyone whose principal residence is assessed for less than $593,695 661.000
would receive a lower tax bill. According to the Assessors about principal
residences out of a total of 10,570 Class One properties would receive reductions of up to
$ with a 20% exemption; as-mueh as -up to $ with a 10% exemption.
B. Who comprises this group?
The main argument for adopting the residential exemption is that it benefits the taxpayer
with moderate means, but there is no objective way to prove this. It can be assumed that
the principal residences valued under $661.000 in Lexington contain at least three
groups:
1) People of limited means such as people with low incomes,
handicapped people, elderly living on modest retirement or savings.
2) First time home buyers. A tax cut of $ to $ would help them but
the mortgage payment is the real obstacle to ownership of entry level
homes.
3) People of ample means. The value of a home does not always
correlate with wealth. Some quite wealthy people, elderly for example,
choose to live in smaller homes and condominiums.
Attempts have been made to correlate income with home value using
census data. There is undoubtedly some value in this comparison, but one
must remember that income and wealth are not the same thing. People
reporting low income may, in fact, be very wealthy This is probably true
of many elderly taxpayers in Lexington. The committee believes,
however, that there is some correlation between income and home value
and that adoption of the residential exemption would benefit many of our
moderate -income residents to varying extents.
4. Who pays?
According to the Assessors records there are about properties that would face
increased taxes if the residential exemption were adopted. These properties consist of:
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A. Homes with values above the average.
People whose homes are valued above $661.000 would see increases if the residential
exemption were adopted. There are about such residences owned by three broad
categories of people.
1) People with wealth or increasing incomes that can afford
expensive houses and for whom higher taxes are not a burden,
although they may feel they are overtaxed.
2) Elderly who own large homes and may or may not be wealthy In
some cases this group is feeling pressure from higher real estate
taxes.
3) People raising families looking for larger homes with more
bedrooms. Higher taxes could hurt this group.
The range of tax increases for those above $661,000 up to $3,000,000 would be $1 to
$5824, or a percentage increase range from 0% to 17%. See Appendix A for a
breakdown of the number of houses in each category by increments of $100,000
assessment.
B. Apartment dwellers.
There are about rental units in Lexington: 661 are in eight apartment
complexes and the rest are in single family homes or in the 92 two-family
and 14 three-family homes. In the eight major apartment buildings in
Lexington there are people over age 65. Many of this group are retired
and on a fixed income. Apartment dwellers are often moderate income
residents, unable to afford a house or condo, and unable to control costs as
rents increase. Since apartments and non -owner occupied two- and three-
family homes are excluded from the residential exemption they would
receive higher tax bills. (Insert example or create an appendix.) If the
owners pass the tax increase on to tenants, rents would increase. In years
where there is a glut of rental properties and rents can't be increased there
would be pressure on owners to convert to condos. In years where there is
a scarcity of rental properties, landlords will pass the tax increases onto
the tenants, making the units less affordable. (Town -owned apartments
such as Greeley Village are not subject to property tax and would not be
affected.)
C. Vacant and Underused Residential Parcels. The Planning Board's 2002
Comprehensive Plan identifies about 600 acres of vacant developable
land, less than 10% of which is in commercial zones. The Planning Board
has identified close to 400 sites on which there is significant potential for
building. Thirty-five of the larger private sites that are considered to be
most vulnerable to development were studied in detail. These parcels
range from the most environmentally fragile ones that should be acquired
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by the Town to those that can accommodate development, but only with
protective controls. The residential exemption would create two essures
on vacant land. One would be the incentive to develop the land other
would be the incentive to clarify the status of accessory land (si a ots)
that are part of a residential parcel but receive their own tax bill as vacant
land. The process to consolidate these side lots into one parcel will cost
the homeowner between $100 and $500 in Town fees, plus the cost of a
survey and registry fees. It will require staff time in both the Building and
Planning offices.
5. How is it implemented?
There are no state -mandated procedures for first time implementation of the
residential exemption. Each town is on its own when it comes to establishing who is
entitled to the exemption. Some towns sent out questionnaires requiring submission of
evidence of legal residency Others appeared to rely on town census data. But all towns
we talked to have a continuing program to update their records. Many assessors cited
issues of manpower required to administer the exemption.
6. The experience of other cities and towns with the residential exemption.
The committee interviewed either the assessor or another official of most of the cities
and towns which have adopted the residential exemption. Currently eleven communities
in Massachusetts use the residential exemption: Boston (30%), Brookline (20%),
Cambridge (20%), Chelsea (20%), Marlborough (9%), Nantucket (20%), Somerset
(10%), Somerville (30%), Tisbury (20%), Waltham (20%), and Watertown (20%). In
Nantucket and Tisbury there is a large second home population. Somerset is �anoinIy
where the residential exemption creates little shift in property taxes. In the other
communities there are large apartment populations. All of these communities adopted the
residential exemption in the early 1980's; there have been no communities adopting it in
recent years. Weymouth gave it up in 1986 in response to complaints about higher tax
bills. A summary of what we learned in our interviews is contained in Appendix B.
7. The pros and cons of adopting the residential exemption.
A. Pros
a. Adoption of the residential exemption lessens the burden of the real estate
tax on the lower valued homes in the community, which in many cases
will be occupied by persons of lower income and less wealth. This is a
way to make the real estate tax more progressive.
B. Cons
a. Since the residential exemption shifts the tax burden in the community
from the lower priced houses to the more expensive houses, opposition
can be expected from owners of higher valued properties. The primary
characteristic of almost all cities and towns that have adopted the
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residential exemption is that they have a substantial amount of rental
housing or vacation property In those cities and towns it is readily
acknowledged that adoption was a political decision. It let those in power
give a break to the homeowners by shifting some of the tax to renters, who
in most cases were not aware of it and generally were not politically
active, or to absentee owners who did not vote in the community Those
situations do not prevail in Lexington, so the decision to adopt the
residential exemption can be expected to be controversial, especially with
overrides coming every two or three years, an anticipated CPA increase
(from which the lower valued houses will have exemptions), and the effect
of the state required CIP reverting,
b. Rents will increase in Lexington as a result of adoption of the residential
exemption. It is impossible to quantify the amount. It will depend on
economic conditions to determine how much of their tax increase
landlords feel they can pass on to tenants.
c. Owners of Class One vacant land will see their taxes increase by up to
21.97%, creating pressure for them to develop the land.
d. From our interviews with other assessors, it is clear that adoption will
require additional staff in the assessing department. The procedure for
implementing the residential exemption requires determining whether a
property is a principal residence either by sending out forms or by
comparing voting and census records, and examining utility bills and other
evidence. And this must be done on an ongoing basis.
e. There is some indication that lowered taxes cause a rise in house prices.
The amount of taxes figures in the calculation the size of a mortgage a
buyer can get. Lower taxes mean a bigger mortgage which lets the
prospective buyer pay more.
£ The committee was initially concerned that the residential exemption
might reduce the so-called "circuit breaker" credit in the Massachusetts
income tax law. This credit is available to certain low-income elderly
whose real estate taxes (including one-half of water and sewer charges)
exceed 10% of their income. It was thought that reducing the real estate
tax might cause a partial loss of this credit. We calculated the credit based
on several scenarios and it is clear that any slight reduction in the income
tax credit is more than offset by the substantial reduction in real estate
taxes resulting from the residential exemption.
g. Once the residential exemption is adopted it is very hard to go back, since
abandoning it will cause a lot of people to have their taxes increased
substantially
h. It will require an increase in the Overlay Account, at least in the early
years after it is adopted.
8. Other help available to seniors and moderate income taxpayers.
At present there are a number of statutory real estate tax exemptions available to
Massachusetts taxpayers. These exemptions aappiy'o poverty, blindness, disability, age, Gt a
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veteran status. By way of illustration, here are some of the tax relief provisions currently
available to the Lexington elderly-
A.
lderly
A. Tax Deferral. Ch. 59, Sec. 5, Clause 41A. Allows deferral of real estate taxes
up to half the value of the house for taxpayer 65 or over with income below
approximately $44,000. No asset test. Interest on deferred payments at can now be set
by the town. Balance deferred with interest collected when house is sold or on death of
taxpayer.
B. Tax Exemption. Ch. 59, Sec. 5, Clause 41C. Allows exemption of $750 for
taxpayer 65 or older who meets certain asset and income tests
C. Voluntary Work Off Program. Ch. 59, Sec.5K. Allows certain taxpayers to do
voluntary work for the town in exchange for tax reduction.
There are several bills currently in the Legislature to give communities power to
liberalize these programs.
9. Conclusion
The residential exemption, if adopted by the Selectmen this year, would provide
some relief to about homeowners whose primary residences are valued below $
661.000. About half of the Class One parcels would receive tax reductions of up to $
with a 10% exemption; up to $ with a 20% exemption. On the other hand, about
parcels, including primary residences, apartments, vacant land, and non -primary
residences would see increases of as much as $ at 10%, as much as $ at 20%.
All of the rental units in town would be at risk for rent increases. It is estimated that
about % of the people who live in apartments are over age 65.
In the long run the adoption of the residential exemption will furnish a respite
from tax in es to epf tlyie residents but as.taxes-Continue tolncrease these savings
will eve ly b od
The adoption of the residential exemption will require additional manpower in the
assessors' office. And its rescission in the future would certainly have some political
consequences.
Finally, there are a number of statutory measures on the books that give tax relief
to low income and elderly taxpayers.
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Appendix A
Number of Rouses in Various Assessment Categories
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Appendix B
Summary of Interviews with Town Offieials
The effects of the residential exemption, as reported by town assessors offices and town
officials are varied:
1. Absentee landlords are penalized.
2. Low priced houses and condos benefit.
3. High priced properties bear more of the town's tax burden under this program. This
effect causes more residential in -filling gutless mansionizing.
r — •..4: Owner oeoupicd-lower•pricedproperties are encouraged.
5. Property taxes are seen to be more progressive in these towns.
6. Ownership of rental property is less attractive unless the owner lives in town. As long
as an owner of rental property lives within the dwelling, a duplex or three family gets
exemption if the owner occupies one unit; even a 50 unit apartment qualifies if the owner
resides there.
7 Conversion of rental properties to condominiums is encouraged.
8. Higher taxes are passed on to renters.
9 Politically difficult to rescind the program once established because tax payers like
seeing the exemption amount on their tax bill.
10. The Assessor's office is burdened significantly by implementing and administrating
this program. It takes a year to adopt the program. Post cards are sent to all property
owners to explain the program and to urge them to fill out the exemption application.
The assessors must check voting lists, etc. After the data base is established the program
can be implemented. The Assessor's office must keep track of property transfers,
including trusts. (Trusts must include life tenancy for the owner occupier to maintain the
exemption.) Assessors develop their own methods of verifying principal residence status.
Assessors must continually cross check voting lists and tax bill addresses to prevent
fraud.
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