Property tax credits offer inefficient tax relief, study says

Two Wisconsin property tax credits are not only expensive — nearly $900 million per year out of a $13 billion general fund budget — but they are a highly inefficient means of delivering property tax relief to the Wisconsin homeowners and renters for whom the property tax creates the greatest economic hardships, according to a new analysis from the University of Wisconsin–Madison.

The study by Andrew Reschovsky, an economist and school finance expert with UW–Madison’s La Follette School of Public Affairs, is the first ever conducted of the two credits. The study will be published in State Tax Notes, a national journal on state tax issues.

Based his findings, Reschovsky suggests “the Wisconsin Legislature may want to phase out the school levy credit and the first dollar credit and use the resulting budgetary savings to help finance the reform of education funding and to expand the existing homestead credit.”

Reschovsky’s analysis comes amid a renewed debate about how the state can best offer property tax relief to homeowners. In his State of the State speech on Jan. 26, Gov. Jim Doyle called on the Legislature to eliminate what’s known as the “uniformity clause” in the state constitution, which requires the state to consider homes and businesses the same when it comes to property taxes. Doyle said getting rid of it would allow the state to better direct property tax relief to homeowners, but businesses have resisted the move.

“By proposing to eliminate the ‘uniformity clause,’ Gov. Doyle recognizes the need to target property tax relief to homeowners,” Reschovsky says. “Phasing out the school levy credit, as I suggest in my paper, offers a practical way to pay for homeowner property tax relief in this period of extraordinarily tight state budgets.”

In his analysis, Reschovsky finds that government spending on the two property tax relief programs — the school levy credit and the first dollar credit — has nearly doubled since 2005.

“A substantial proportion of the credits goes to non-residents, to high-income individuals, and to others not in serious need of property tax relief,” he says. “Conversely, only a small share of the credits end up benefiting those whose property taxes are high relative to their incomes.”

Reschovsky finds that on a per-student basis, property owners in school districts with the highest property values receive school levy credits that are nearly seven times larger than those going to property owners in districts with the lowest property values.

Created by the Legislature in 2007, the first dollar credit results in larger percentage reductions in property taxes for owners of less valuable properties, Reschovsky says. Nevertheless, using data from the Wisconsin Department of Revenue, he finds that the first dollar credit results in above-average property tax relief on a per student basis in school districts with the highest property values and below-average property tax relief in the state’s poorest school districts.

The homestead credit provides limited property tax relief to owners and renters who have low incomes and whose property tax liabilities are high relative to their incomes. Reschovsky argues that with money freed up by phasing out the school levy and first dollar credits, the state could expand the number of families eligible for the homestead credit and the amount of property tax relief provided to these families.

The school levy tax credit is based on funding the state passes on to municipal governments, basing each municipality’s amount on a three-year average of the municipality’s proportion of the statewide school property tax levy. The municipality in turn passes the credit on to taxpayers via a reduction in the school property tax mill rate. The size of the individual school levy credit depends on the value of the property. The more expensive a property, the greater the credit the taxpayer receives.

All owners of property in Wisconsin receive the credit, whether they are Wisconsin residents or not. Reschovsky finds that only 51 percent of the total school levy credit reduces property taxes of Wisconsin homeowners on their primary residences.

Reschovsky’s study is available online as La Follette School Working Paper No. 2010-003 at http://www.lafollette.wisc.edu/publications/workingpapers/#2010-003