The School Property Tax and Homestead Credits:

Accuracy, Equity, and Contribution to Overall Fiscal Relief

Presented by

Vanessa Allen Danielle Fumia

Kelly Krupa Rifelj Matthew Steinberg

Prepared for the Wisconsin Department of Revenue

May 4, 2007

Workshop in Public Affairs, Domestic Issues Public Affairs 869

Spring 2007

Robert M. La Follette School of Public Affairs University of Wisconsin-Madison

©2007 Board of Regents of the University of Wisconsin System All rights reserved.

Foreword revised May 11, 2007

For additional copies: Publications Office

La Follette School of Public Affairs 1225 Observatory Drive, Madison, WI 53706

www.lafollette.wisc.edu/publications/workshops.html

The Robert M. La Follette School of Public Affairs is a nonpartisan teaching and research department of the University of Wisconsin–Madison. The school takes no stand on policy issues; opinions expressed in these pages reflect the views of the authors.

iii

Table of Contents List of Figures....................................................................................................... iv List of Tables ........................................................................................................ iv Foreword................................................................................................................ v Acknowledgments ............................................................................................... vii Key Terms............................................................................................................. ix Executive Summary ............................................................................................. xi I. Introduction ....................................................................................................... 1 II. Property Tax Relief in the United States ....................................................... 3

Local Government Reliance on Property Taxes .............................................. 3 Property Tax Incidence ..................................................................................... 3 Property Tax Relief Programs .......................................................................... 4 Individual Property Tax Relief in Wisconsin................................................... 5

School Property Tax Credit........................................................................... 5 Homestead Credit.......................................................................................... 5

III. Accuracy of Credit Formulations ................................................................. 7 Property Tax Equivalent ................................................................................... 7 Property Tax Equivalent Analysis .................................................................... 8 Formulaic Heat Differential........................................................................... 11 Formulaic Heat Differential Analysis............................................................ 12

IV. Analysis of Equity......................................................................................... 13 Analysis of the Distribution of Individual Property Tax Relief .................... 14

Distribution of the School Property Tax Credit .......................................... 14 Distribution of the Homestead Credit ......................................................... 19

V. Contribution to Overall Fiscal Relief ........................................................... 21 Assistance to Local Governments ................................................................... 21 Composition of Fiscal Relief .......................................................................... 22

VI. Conclusion ..................................................................................................... 28 VII. Recommendations ....................................................................................... 29 References ............................................................................................................ 31 Appendix A: Property Tax Relief: “Circuit-Breaker” Programs........................ 35 Appendix B: History and Development of the Homestead Credit ..................... 41 Appendix C: Methodology for Estimating the Property Tax Equivalent........... 43 Appendix D: The Assumption behind the Heat Differential .............................. 44 Appendix E: Wisconsin Adjusted Gross Income............................................... 46 Appendix F: Distribution of the School Property Tax Credit

and Homestead Credit by Claimant Location............................... 49 Appendix G: Local Assistance Realized by a Median-Valued Home................ 52

iv

List of Figures Figure 1: Distribution of Total Credit Dollars Claimed

and Total Credit Dollars Used by Income, 2005 ............................... 15 Figure 2: Total Amount of Used Credit as a Percentage of Property Taxes

Paid or Property Tax Equivalent by Income, 2005............................ 19 List of Tables Table 1: Estimate of the Property Tax Equivalent, 2005................................ 10 Table 2: Cost of Heat Generated by 20/25 Percent Differential ..................... 11 Table 3: Possible Outcomes of Analyzing the Cost of Heat............................ 12 Table 4: Distribution of Credit Claimants and Credits by Income, 2005 ........ 16 Table 5: Distribution of the School Property Tax Credit

by Tenure and Income, 2005 ............................................................. 18 Table 6: Homestead Credit Distribution by Tenure Status, 2005................... 20 Table 7: Local Assistance Realized by a Median-Valued Home .................... 23 Table 8: Total Individual Property Tax Relief

for the Median-Valued Home............................................................ 25 Table 9: Annual Overall Fiscal Relief for Owner of Median-Valued

Home–Local Assistance and Individual Relief Combined................ 26 Table 10: Local Assistance and Individual Property Tax Relief

as Percentages of Overall Fiscal Relief for Median- and Low-Income Homeowners.......................................................... 27

Table A-1: Property Tax Circuit-Breaker Programs in the United States (Tax Year 2005) ................................................ 36

Table F-1: Number of SPTC Claimants by Geographic Location ...................... 49 Table F-2: Average SPTC Credit Claimed

and Used by Geographic Location .................................................... 50 Table F-3: Average Homestead Credit and Number of Claimants

by Geographic Location .................................................................... 51 Table G-1: Local Assistance Provided to Counties, Municipalities, and School

Districts from 1992 to 2006............................................................... 53 Table G-2: Rate of Aid Calculation for All Taxable Real Estate Property.......... 54 Table G-3: Total Local Assistance Provided to Median-Valued Home ............. 55

v

Foreword This report analyzing the accuracy of underlying assumptions and the equity in fiscal relief provided through the Wisconsin’s School Property Tax Credit (SPTC) and Homestead Credits is the product of collaboration between the Robert M. La Follette School of Public Affairs at the University of Wisconsin–Madison and the Wisconsin Department of Revenue (DOR). This partnership gives graduate students at La Follette the opportunity to practice their policy analysis skills while contributing to the capacity of the Department of Revenue to analyze and develop policies on issues of concern to the residents of the State. The La Follette School of Public Affairs offers a two-year graduate program leading to a master’s degree in public affairs. Students study policy analysis and public management, and pursue a concentration in a public policy area of their choice. They spend the first year and a half taking courses that incorporate the tools needed to analyze public policies. The authors of this report are all enrolled in Public Affairs 869, Workshop in Public Affairs, Domestic Issues. Although acquiring a set of policy analysis skills is important, there is no substitute for doing policy analysis as a means of learning policy analysis. Public Affairs 869 provides graduate students that opportunity during the final semester in the program. The students were assigned to one of several project teams. One team worked on this project for the Department of Revenue, while the others worked with the Wisconsin Joint Legislative Council, and the Wisconsin Department of Health and Family Services. The topic of this report—an investigation of the accuracy of the assumptions of the SPTC and the Homestead Credit about the share of rent that represents the property tax paid by owners but passed on to renters—was chosen by the research staff of DOR. Wisconsin has a long history of providing its local governments with fiscal assistance. In collaboration with the Wisconsin DOR, the La Follette School’s spring 2006 workshop class analyzed the state’s Shared Revenue Program, which gives fiscal relief for municipalities, counties, and districts. The STPC and Homestead Credit are means of providing individual fiscal relief. These programs distribute assistance to people through the individual tax system. The first provides a nonrefundable credit; the latter is a refundable credit against property taxes paid. The mechanism for offsetting income taxes by a credit for property taxes paid is straightforward in the case of homeowners. It is not so clear in the case of renters who, of course, do not receive and directly pay property tax bills but do pay property taxes as part of their rent. The question of how to provide a credit to renters has been resolved by an assumption that 20 percent of rent represents property taxes if rent includes heat and 25 percent if heat is not included in the rent. The DOR asked for an investigation of how close these assumptions were to the percentage of rent that actually covers property taxes in Wisconsin. The authors of this report have compiled data that allowed them to address this question for Milwaukee and Madison,

vi

the state’s two largest cities. They also analyzed the distribution of credits across income groups, and between renters and homeowners. The first distribution question is important on income distribution grounds. The latter is important in determining whether property tax credits are provided equally across taxpayers, including renters whose rents are determined in part by the property taxes landlords pay. Finally the authors examine the extent to which these credits provided relief during the last decade to a homeowner with the population’s median income and, alternatively, with the median income among actual Homestead Credit claimers. The authors suggest further study and outline a methodology for doing so. This report cannot give the final word on the complex issues the authors address. The authors are graduate students constrained by the semester time frame, and the topic they have addressed is large and complex. Nevertheless, much has been accomplished, and I trust that the students have learned a great deal, and that the Secretary and staff of the Department of Revenue will profit from this analysis of the individual property tax credit programs. This report would not have been possible without the enthusiasm and continual support and encouragement of Paul Ziegler, leader of DOR’s Sales and Property Tax Policy Team who first suggested the topic and wrote the draft project proposal. Additional advice and guidance were provided by Rebecca Boldt, leader of the Income Tax Policy and Economic Team; Brad Caruth, Division of Research and Policy; and Maureen Richards of the city of Madison’s assessor’s office. We are extremely grateful to DOR Secretary Robert Ervin for his support in allowing his staff to collaborate so fully and expertly with the La Follette School of Public Affairs. The report also benefited greatly from the support of faculty and the staff of the La Follette School of Public Affairs. Professor Andrew Reschovsky kindly helped in making contact with DOR, met with the authors several times to refine their research goals and methodology, and reviewed a draft of the report. Karen Faster, La Follette publications director, edited the report and shouldered the task of producing the final bound document. I am very grateful to Wilbur R. Voigt whose generous gift to the La Follette School supports our public affairs workshop projects. With his support, we are able to finance the production of the final reports, plus other expenses associated with the projects. By involving La Follette students in the tough issues that state government faces, I hope they not only have learned a great deal about doing policy analysis but have gained an appreciation of the complexities and challenges facing state and local governments in Wisconsin. I also hope that this report will contribute to the work of the Department of Revenue and to the ongoing public discussions of state policies to provide financial assistance to local governments and property tax relief to Wisconsin’s residents.

Karen Holden May 4, 2007

vii

Acknowledgments Many individuals provided guidance throughout the completion of our project. We would first like to thank the staff of the Wisconsin Department of Revenue, specifically Paul Ziegler, Rebecca Boldt, and Brad Caruth for providing helpful information and data for our analysis. We extend our gratitude to those individuals who took time out of their schedules to discuss ideas and clarify details in our draft reports. We would especially like to thank Professor Andrew Reschovsky for offering a wealth of knowledge, guidance, and motivation. We would also like to thank John Koskinen of the Wisconsin Department of Administration, Rick Olin and Al Runde of the Legislative Fiscal Bureau, and Maureen Richards at the Madison assessor’s office for all their contributions along the way. We also would like to thank our student colleagues Samuel Hall, Patrick Mueller, Michael Pancook, and Carrie Schneck, who provided editorial feedback on earlier drafts. In addition, we thank Karen Faster for her patience and assistance in the production of our final report. Last, we extend a tremendous thank you to Professor Karen Holden of the Robert M. La Follette School of Public Affairs at the University of Wisconsin-Madison for her guidance and discussion throughout the progression of our work.

viii

ix

Key Terms Contract rent Contract rent is the monthly rent agreed to or contracted for, excluding any furnishings, utilities, fees, meals, or services that may be included (U.S. Census Bureau, 2007a). Fiscal relief The combination of state aid provided to local governments and individual residents. This relief gives local governments the ability to finance public services and lowers their need to generate revenue through higher taxes. Fiscal relief also includes property tax relief the state directs to individuals, lessening their property tax burdens. (See definitions of local assistance and individual aid.) Gross rent Gross rent (total rent) is the contract rent (the monthly rent agreed to or contracted for with or without utilities or other services) plus the estimated average monthly cost of utilities (electricity, gas, water and sewer) and fuels (oil, coal, kerosene, wood, etc.) (U.S. Census Bureau, 2007a). Individual aid Aid provided directly to individual residents through the income tax system with the goal of reducing or compensating individuals for their property tax liability. In Wisconsin, individual aid (also referred to as individual property tax relief) is provided through the Homestead Credit and the School Property Tax Credit. Local assistance State aid provided directly to counties, municipalities, and districts that can be used in supporting local public services or in lieu of collecting property taxes (e.g. shared revenue, general school aid, school levy credit, lottery and gaming credit, etc.) Aid can also take the form of fiscal controls that restrict per-pupil revenue growth for school districts and limit the growth in which local governments (i.e. counties and municipalities) are able to tax property. Nonrefundable tax credit A nonrefundable tax credit is paid only to the degree that it offsets an individual’s tax liability. If the credit amount exceeds the amount of tax liability, it generates a refund only up to the amount of tax liability. If the tax credit is an amount less than the tax liability, the individual receives the full credit amount.

x

Property tax equivalent The term “property tax equivalent” (PTE) is also referred to as the “property tax rent equivalent” or “rent constituting property taxes.” The PTE is the estimated amount of rent that constitutes property taxes for rental units. The PTE is estimated by multiplying the annual rent bill by the PTE percentage, which is the fraction of rent that goes to property taxes. The actual share of property tax that owners of real estate pass onto renters through higher rent is unknown. This property tax equivalent is usually expressed as the PTE percentage and ranges from 6 percent to 25 percent in states that provide property tax relief to renters (Lyons, et al., 2007). Refundable credit A tax credit whose award is not constrained by the amount of an individual’s tax liability. A nonrefundable tax credit can reduce an individual’s tax liability by no more than zero. Refundable credits award the full amount of the credit, regardless of income liability. If the refundable credit is larger than the individual’s tax liability, the individual would receive a payment. The earned income credit is an example of a widely received refundable credit in the United States. Tenure status Refers to the distinction between owner-occupied and renter-occupied housing units (U.S. Census Bureau, 2007a).

xi

Executive Summary States provide fiscal relief to their residents to reduce or compensate them for their property tax liability. Wisconsin provides fiscal relief to residents using two approaches, assistance to local governments and direct property tax relief to individuals. At the request of the Wisconsin Department of Revenue (DOR), we have focused our analysis on individual relief provided through the School Property Tax Credit and the Homestead Credit. We analyze these credits with respect to accuracy, equity, and contribution to overall fiscal relief. We first analyze the accuracy of the credit calculation; we then look at the equity of the relief between renters and homeowners, among renters, and between income classes; and we conclude with an analysis of how the composition of overall fiscal relief has changed over the last 15 years. Both credits use a property tax equivalent percentage to estimate the amount renters pay in property taxes. This amount, referred to as the property tax equivalent (PTE), affects the credit amount a claimant can receive. Using data from Milwaukee and Madison, we estimate a PTE percentage of 22 percent for Milwaukee and 13 percent for Madison. The percentage for Milwaukee is similar to the 20 percent or 25 percent used statewide, depending on whether a renter pays for heat. For Madison, however, the PTE percentage we found is much lower. This indicates that there may be geographic variance in the PTE percentages. Verification of the accuracy of the current PTE percentages requires further analysis with more comprehensive data. We also suggest a framework that could be used to analyze the accuracy of the heat differential and determine the actual percentage of rent that represents the cost of heat. The distribution of the School Property Tax and Homestead credits to different groups allows us to examine the equity of relief allocation. We have found that the non-refundability of the SPTC creates some inequities, with higher-income individuals receiving greater benefit. When tenure status is considered, homeowners receive a greater benefit from the SPTC in comparison to renters. However, as a percentage of property taxes or PTE, renters benefit more than homeowners. The distribution of the Homestead Credit by tenure status resembles that of the SPTC in that homeowners, on average, receive larger credits than renters. Also, renters receive more relief on their PTEs paid than homeowners receive on their property taxes paid. Unlike the SPTC, however, more renters than homeowners claim the Homestead Credit. Finally, we explore the contribution of these credits to overall fiscal relief. We examine how the proportions of local assistance and individual aid have changed. For a median-income homeowner with a median-valued home, we find that the makeup of overall fiscal relief has remained consistent since 1991(92).1

1 The notation 1991(92) indicates that tax was paid in 1991 and collected in 1992.

xii

Local assistance made up 90 percent of overall fiscal relief while individual relief provided 10 percent. For a low-income homeowner with a median-valued home, however, the composition of overall fiscal relief has changed, with a decline in individual aid as a percentage of overall fiscal relief, from 34 percent in 1991(92) to 26 percent in 2005(06). Individual aid to low-income homeowners has become more similar to that provided to median-income homeowners. Our analysis has produced findings that serve as a base for further study and suggests the need for credit adjustments. We recommend that the Wisconsin DOR employ a more systematic approach to gathering data on rental properties used as residences. To calculate more accurately the PTE percentages statewide and across municipalities, the Wisconsin DOR should institute a comprehensive data system. We recommend that the Wisconsin DOR collect data on the number of rental units in properties classified as residential and commercial, the propor-tion of rental units with heat included in their contract rent, and the share of prop-erty taxes associated with rental units. We also recommend that the Wisconsin DOR support legislation that adjusts the Homestead Credit formula for inflation, which will help maintain the extent and composition of fiscal relief provided to low-income households.

1

I. Introduction Property taxes are the primary source of funding in many states for municipal services and public schools. In fiscal year 2004, property taxes constituted approximately 94 percent of total local government tax revenue in Wisconsin (U.S. Census Bureau, 2007b). They represented about 89 percent of local revenue for public elementary and secondary schools (U.S. Census Bureau, 2007c). Although vital to local governments and public schools, property taxes are burdensome to Wisconsin residents, taking up approximately 4.3 percent of total income in 2004, the eighth highest ratio of property taxes to income in the country (Norman, 2007). Property acts as a source of cash income to the owner only when the property is rented or sold. Most property tax revenue; however, comes from residential property. The net property taxes paid on residential property as a percentage of the total collected in Wisconsin has increased from 51 percent in 1970 to 71 percent in 2005. (Wisconsin Legislative Fiscal Bureau [WLFB], 2007). Therefore, property taxes are levied against mostly non-revenue generating residential property. Because property taxes depend on property value and not on income, they can impose a burden on taxpayers, particularly those at lower income levels. To reduce this property tax burden, states can provide relief in various forms. Local assistance provides relief by giving state money directly to municipalities to use in lieu of collecting property taxes or by limiting the rate at which municipalities can tax property. States can give property tax relief directly to individuals through the income tax system. In Wisconsin, individual property tax relief is provided through the Homestead Credit and the School Property Tax Credit (SPTC) through the income tax system. Both credits are available to homeowners and renters; however, they differ in significant ways. The Homestead Credit is a refundable credit targeted at Wisconsin’s low-income residents. The SPTC is a nonrefundable credit that is universally available to residents at all income levels. On behalf of the Wisconsin Department of Revenue, we analyze these credits on the grounds of accuracy, equity, and their contribution to overall fiscal relief. An important aspect of individual property tax relief that we analyze involves the provision of relief through these credits to renters. Because renters do not pay property taxes directly, the legislature has estimated the property tax equivalent (PTE), which is the estimated amount of rent that constitutes property taxes paid by the rental property owners and shifted to their tenants through higher rents. The credit values are then calculated from this PTE amount in the same way they are calculated from the property tax bill paid by homeowners. The PTE is calculated similarly for the Homestead Credit and the SPTC. Wisconsin has structured credit formulas on the assumption that the PTE equals 20 percent of annual rent if heat is included in the rent and 25 percent if heat is not included.

2

Thus, the first piece of our analysis provides an estimate of whether the legislated percentages accurately reflect the fraction of rent that constitutes property taxes. Equity issues may occur between homeowners and renters, across renter groups, and across income levels. Horizontal equity refers to the equity between home-owners and renters in the same income category or with the same property value. Vertical equity, conversely, refers to groups at different income levels and holds that taxpayers with smaller disposable incomes should receive a larger credit. Horizontal equity depends on the accuracy of the current PTE percentages. If the percentages are inaccurate, claimants who pay similar property taxes may experience different levels of relief based solely on tenure status. The PTE percentage differential for those paying heat and those not paying heat may also affect horizontal equity if the heat differential inaccurately captures the cost of heat. Vertical equity concerns may arise among SPTC claimants across income levels, because the credit amounts depend on one’s income or because credit characteristics, such as non-refundability, differ. To assess the performance of individual property tax relief from the perspectives of accuracy, equity, and contribution to overall fiscal relief, we focus on these four research questions:

1. Does Wisconsin accurately estimate the PTE for renters? In other words, on average does 20 percent of annual rent paid go toward property taxes if heat is included and 25 percent if heat is not included?

2. Does the percentage differential seen in the PTE estimate accurately measure the cost of heat?

3. How is individual property tax relief distributed across income levels and tenure statuses?

4. What is the composition of total fiscal relief – local assistance plus individual relief – for a median-valued home?

By answering these four questions, we illustrate how well the SPTC and the Homestead Credit achieve their goals of relieving the property tax burden. This analysis demonstrates whether individual relief is provided accurately and fairly to all Wisconsin residents. Finally, we estimate how much of a role individual relief plays in the larger picture of overall fiscal relief to Wisconsin residents.

3

II. Property Tax Relief in the United States Local governments heavily rely on the property tax to function. States attempt to offset the burden that property taxes create through aid to jurisdictions with low revenue-raising capacity and through individual relief that lowers an individual’s income tax liability or provides a cash transfer payment.

Local Government Reliance on Property Taxes Property taxes are the principal funding source for local governments throughout the United States. These funds are used to provide many local public services, including street repair, police and fire protection, solid waste disposal, and public parks (Cico, et al., 2004). However, the most prominent use of local property taxes is the funding of K-12 education. The quality of a municipality’s local school district is generally reflected not only in property values, but also in the total property taxes municipal residents pay. In 2005, tax revenue from property taxes totaled $352 billion nationally. This represents more than a 77 percent increase in property tax revenue from ten years prior, far outpacing the 28 percent inflation rate during the same time period. In 2004, property taxes constituted approximately 46 percent of all local government revenues in the United States; furthermore, property taxes represented more than 73 percent of all local government tax revenue (U.S. Census, 2007d). Compared to the national average, property taxes in Wisconsin make up a much larger share of local revenues. In 2004, property taxes represented approximately 66 percent of all local government revenue.2 Moreover, property taxes represented approximately 94 percent of local government tax revenue (U.S. Census, 2007d).

Property Tax Incidence Given the share of local revenues that property taxes make up, this tax has not been popular with the general public. From 1972 to 1994, the U.S. Advisory Committee on Intergovernmental Relations conducted an annual survey on public attitudes toward governments and taxes. For 20 of those years, the survey asked respondents to identify the least fair tax among four common taxes: the property tax, the federal income tax, the state income tax, and the state sales tax. In eight of those 20 years, the local property tax was ranked the “least fair” among all the state and local taxes (Baer, 1998). As a result, all 50 states have instituted individual property tax relief programs, including homestead tax exemptions or credits, circuit-breaker programs,3 tax freezes for certain categories of taxpayers (such as senior citizens, war veterans, or disabled citizens), and deferral programs

2 Local government revenue also includes other sources of tax revenue, which include fees, fines, and intergovernmental aid. 3 Circuit-breaker programs include refunds, rebates, credits, or exemptions state governments give to reduce property tax liabilities for individuals whose property tax payments (or property tax equivalents, in the case of renters) are deemed too great. Several states offer these programs, which differ in scope and administration (Lyons, et al., 2007).

4

(such as those that allow senior citizens to defer paying taxes until their homes are sold or their estates are settled) (Mikhailov, 1998).

While many taxpayers see the property tax as an unfair burden, the rationale for property tax relief extends beyond this perception to the relationships among property value, family income, and the generation of cash flow. Individual prop-erty, particularly an individual’s residence, generates very little, if any, cash flow with which to pay property taxes (Cico, et al., 2004). High-income households have the financial solvency to pay the taxes to support the property they own. However, elderly residents and low-income families can face a disproportionately high property tax liability relative to their ability to pay. Therefore, property taxes are often considered regressive and can be the single most burdensome tax for many low-income and elder persons (Baer, 1998). Reschovsky (1994), for example, found that property tax liabilities for younger homeowners were essentially proportional across income classes but were regressive for older homeowners. Older homeowners had higher property tax liabilities than younger homeowners with identical average incomes. This is due to the fact that, on average, older homeowners live in higher-valued homes than younger homeowners with similar incomes.

Property Tax Relief Programs Property tax relief programs can be divided into two broad categories: local assistance and individual property tax relief. Local assistance includes intergov-ernmental aid programs that aim to diversify local government revenue sources and reduce the need for higher property tax levies. Individual property tax relief is targeted to individual homeowners and renters with the intent to directly reduce the tax bills for individual properties (Mikhailov, 1998). Individual property tax relief programs also may be classified by the type of relief that they provide to taxpayers. These programs include (a) tax exemptions; (b) credits, rebates or refunds; (c) tax freezes for certain categories of taxpayers; and (d) deferral programs.4 Property tax exemptions eliminate a portion of the tax liability prior to receipt of the tax bill. Programs that use state income tax credits, rebates or refunds require full payment of the tax liability but then return the amount of tax relief to the taxpayer. Property tax freezes require full payment of taxes but limit the growth of taxes through limiting the tax rate. Tax deferral programs eliminate part or all of the current tax liability of a qualified homeowner but attach a lien to the property and require repayment in full with interest when ownership changes hands (Cico, et al., 2004). If one objective of individual property tax relief is to reduce the burden on low-income families, we must consider renters as a separate category. Renters are a special case when considering property tax relief, because they do not directly pay property taxes and because a larger proportion of renters are low-income than are 4 For more on other states’ individual property tax relief programs, see Appendix A.

5

homeowners. Although landlords receive property tax relief that could be passed on to their tenants through lower rents, they are slow to do so; one study has shown that individual property tax relief is realized three to five years later (Advisory Commission on Intergovernmental Relations, 1973). When landlords are not eligible for property tax relief, property taxes may be passed on to renters. If these renters are not eligible for property tax relief, they will likely pay more in property taxes than they would with relief. In this report, we focus on income-based property tax relief delivered to the individual in the form of a tax credit, refund, or rebate. A tax credit is subtracted from the tax bill after an individual’s tax liability has been calculated. In this way, the tax credit is tied directly to individual income and not to the property value of a residence. According to Cico, et al. (2004), 19 states have a tax credit, refund, or rebate program in place.5 All of these states have income eligibility requirements, while ten of them also have age requirements.

Individual Property Tax Relief in Wisconsin Individual property tax relief programs in Wisconsin include income tax credits, classification laws (a different rate for taxing farmland), a freeze on local school property taxes, and deferral programs (Mikhailov, 1998, and Baer, 1998). Specifically, our analysis focuses on the School Property Tax Credit and the Homestead Credit.

School Property Tax Credit The School Property Tax Credit (SPTC) is a non-refundable tax credit designed to offer relief to all homeowners and renters at all income levels. It was originally enacted in 1989 and has been modified over the years. Initially, the SPTC equaled 10 percent of the first $2,000 in property taxes, or the PTE for renters, with a maximum credit of $200. In tax year 1998, the credit increased to 14 percent of the first $2,500 in property taxes or the PTE with a maximum credit of $350. After a brief elimination of the credit in 1999, the legislature reinstated the SPTC in 2000 with the current rate of 12 percent for the first $2,500 in property taxes or the PTE with a maximum credit of $300 (Wisconsin Legislative Fiscal Bureau, 2007a).

Homestead Credit Pioneered by Wisconsin in 1964, the Homestead Credit is a refundable tax credit targeted at low-income homeowners and renters who are 18 and older.6 In the credit’s current form, a claimant must have a household income below $24,500. A claimant with a household income at or below $8,000 receives a credit equal to 80 percent of the first $1,450 in property taxes or the PTE with a maximum credit of $1,160. For an individual with a household income between $8,000 and 5 These 19 states provide property tax relief in the form of a refund, similar to the manner in which Wisconsin provides individual property tax relief. For more information about such circuit-breaker property tax relief programs in particular, see Table A-1 in Appendix A for a comparison across states. This table provides information on circuit breakers in 17 states and the District of Columbia. 6 For information on the history of the Homestead Credit, see Appendix B.

6

$24,500, the credit is calculated differently (see below). All of a claimant’s income above $8,000 is multiplied by 8.788 percent, and the resulting amount is subtracted from the maximum allowed property taxes ($1,450). The final credit is 80 percent of this amount (WLFB, 2005).

Credit = 80 percent x [Property Taxes (or PTE) – {8.788 percent x (Household Income - $8,000)}]

Source: WLFB, 2005

The formula is designed to limit the credit a claimant can receive. When a claimant’s household income rises above $8,000, the credit phases out at a rate of 8.788 percent until his or her income reaches $24,500 and the credit is zero. As a consequence, if the legislature does not change the formula’s income limits, claimants will face a declining credit if their incomes are only rising with inflation.

7

III. Accuracy of Credit Formulations This section provides the analysis of the research questions pertinent to individual property tax relief. First, we estimate the property tax equivalent for renters. Then, we examine the accuracy of the different percentages used to calculate the PTE for renters who pay heat separately and for those who have heat included in their rent bills.

Property Tax Equivalent The calculation of the Homestead Credit contains the assumption that the PTE percentage equals 25 percent of rent if a renter pays heat separately and 20 percent if heat is included in rent. Additionally, our analysis assumes (as do the 20 and 25 percent figures) that landlords are able to shift all of their property taxes (100 percent tax incidence) to their renters by charging enough to cover property taxes. In reality, landlords may not be able to shift their entire property tax bills, especially in communities where the supply of available rental units exceeds demand. The rationale for choosing the specific percentage of rent that is considered equal to property taxes most likely reflects the vision of University of Wisconsin-Madison professor Harold Groves. First, the authors of the tax study commission he co-chaired in 1959 concluded that 25 percent was a rough estimate of the share of property taxes on gross rents (University of Wisconsin Tax Study Commission, 1959). Second, two later reports on property tax relief say Groves was the likely author of the original proposal for the Homestead Credit, which was adopted in 1963 (Stark, 1991-92, and Quindry & Cook, 1969). We examine whether the 20/25 differential accurately measures the PTE in Wisconsin. Our findings determine whether Wisconsin has chosen accurate PTE percentages for its Homestead Credit and SPTC calculations. Analyses of the PTE assumption are scarce; however, the Minnesota Department of Revenue’s consideration of this issue in 2005 uses its own property tax data and rent data from the American Community Survey, a nationwide survey of housing and economic characteristics. Analysts found that on average across Minnesota muni-cipalities, property taxes as a percentage of rent are 15 percent or less. Given that Minnesota uses 19 percent of rent as the PTE percentage, the authors of the report suggest changing the percentage to 15 or less. The authors further conclude that using 19 percent to estimate the PTE ends up subsidizing renters through Minne-sota’s version of the homestead credit (Minnesota Department of Revenue, 2005). Like Minnesota, if Wisconsin chose higher than necessary PTE percentages, then Wisconsin subsidizes rent through the property tax refund program. This is because renters receive higher refunds than they pay in property taxes. If these credits were intended, in part, to be redistributive in favor of those with lower incomes (renters typically being of lower incomes [Advisory Commission on Intergovernmental Relations, 1973]), the higher percentage could be justified as a subsidy to this group, though only for low-income renters but not low-income

8

homeowners. Additionally, because renters do not have the ability to rent their homestead (imputed rent7) and they cannot take advantage of the federal mortgage interest deduction and other property-related income tax deductions, larger PTE percentages might be justified.

Property Tax Equivalent Analysis To determine whether 20/25 percent of rent constitutes property taxes, we use data from Madison and Milwaukee, Wisconsin’s two largest cities.8 To estimate the accurate PTE percentage statewide, we obtained data on 2005 property values from Madison’s and Milwaukee’s assessor’s offices and 2005 rent data from the American Community Survey. Using these data, we estimate the total property taxes paid on apartments and residential non-homestead properties. We divide this aggregate number by the estimated annual rent paid plus rent asked for vacant units to obtain the average PTE percentage for each city. These data limit our analysis because we cannot observe the marginal effects on the PTE percentage for renters with and without heat included in their rent bills. Additionally, we cannot estimate the PTE percentages for those living in buildings with less than five units. These PTE percentages are not readily available and must be constructed from other data sources. First, the property value information we use to estimate total property taxes is limited to the rent data that are available from the American Community Survey. We use property values of buildings with five units or more. The American Community Survey breaks up the rent data based on buildings of one unit attached, one unit detached, two to four units, five to 19 units, 20 to 49 units, and 50 or more units. Because we could not obtain data on the property values for rental housing in Wisconsin for less than four units, we used rent data from the American Community Survey on buildings of five units or more.

7 Imputed rent refers to the possible revenue generated if a homeowner rents her or his property to another individual. This income is most often excluded from income measures and goes untaxed. 8 Our preference would have been to follow the 2005 Minnesota study and use data from the American Community Survey and the Wisconsin Department of Revenue (Wisconsin DOR); however, the manner in which Wisconsin classifies property considers some residential rental properties as residential property and others as commercial property. The Wisconsin DOR is unable to factor out residential rental properties from either classification to provide total property taxes paid on rental property in Wisconsin. Additionally, we considered obtaining addresses from the Wisconsin DOR for a sample of renters who claimed the SPTC and Homestead Credit. We would look up the property values for those properties and compute the property taxes paid on those buildings. We would also find the number of units within each building and divide property taxes by the number of units to obtain an average property tax amount per unit. However, addresses were not available due to confidentiality reasons.

Total Property Taxes Total Rent

= PTE Percentage

9

To estimate the total property taxes we use property values from the Milwaukee and Madison assessors’ offices and add all the property values for buildings with five or more units to obtain total property values. Finally, we multiply the net mill rate9 by the total property values to find total property taxes (Table 1). To obtain the estimate for the total rent we use American Community Survey data for rent for apartment buildings. This includes total rent paid by tenants and rent asked for on vacant units. The American Community Survey data includes total gross rent (rent plus utilities), total contract rent (rent without utilities), and rent asked for (rent on vacant units). To estimate the contract rent paid on buildings of five units or more we estimate the percentage of gross rent that is for buildings of five or more units by adding the gross rent for the buildings with five units or more and dividing that by total gross rent. For Milwaukee and Madison, we find that 37 and 61 percent of gross rent, respectively, comes from buildings with five or more units. We multiply that percentage by the contract rent to find the amount of contract rent collected on buildings with five or more units. We apply the percentage equivalently to the rent asked for on vacant units to arrive at the rent asked for on vacant units for buildings with five units or more. Finally, we add the amount of contract rent on to the rent asked for on units that are not rented for buildings of five units or more to obtain total rent asked for and paid on all units. For further clarification of the calculations, see Table 1 and Appendix C. We then divide the total property taxes by the total rent to estimate the accurate PTE percentage for Milwaukee and Madison. The percentage for Milwaukee is approximately 22 percent and 13 percent for Madison (Table 1).

9 The tax per dollar of assessed property value. The rate is expressed in “mills,” where one mill is one-tenth of a cent, $0.001.

10

Table 1: Estimate of the Property Tax Equivalent, 2005

Milwaukee Madison

Total Property Value (commercial apartments, five or more units) $2,568,824,600

$1,676,845,400 Net Mill Rate per Thousand 0.02586 0.0207845 Total Property Taxes $66,429,804.16 $37,630,337.25 Percentage of Gross Rent from buildings with five or more units

37

61

Estimated Contract Rent from buildings with five or more units

$281,931,679.97

$263,176,915.24

Estimated Rent Asked from buildings with five or more units

$24,905,490.79

$34,290,106.23

Total Estimated Rent Paid or Asked from buildings with five or more units

$306,837,170.76

$297,467,021.46

Property Tax Equivalent Percentage 22 13

Source: Created by authors using 2005 data from the Milwaukee and Madison assessors’ offices and the American Community Survey. See Appendix C for further clarification of these calculations. Note: We estimate the PTE percentage for all renters but are unable to estimate the percentage separately for tenants who pay heat and those who do not.

11

Formulaic Heat Differential Our analysis explores how to examine the extent to which the implied 20/25 percent differential (between renters) is an accurate estimate of the portion of rent representing the cost of heat. As noted, renters who pay heat as part of their monthly rent can claim only 20 percent of their rent as constituting property taxes, while renters who pay heat separately can claim 25 percent of their rent as constituting property taxes. The intent of this differential is to prevent the inclusion of heat in the estimation of property taxes paid by rental units. This differential attempts to correct for the fact that those who have heat included in their rent receive a credit based on their rent and heat payments. The differential attempts to prevent inequity by providing a larger credit to those who pay heat separately and thus do not receive a credit on their heat payments. Other states have found alternative mechanisms to correct for this. New York, for example, adjusts gross rent by subtracting out all utilities that claimants report as part of their rent (New York State Department of Taxation and Finance, 2003). When rent includes heat, New York assumes the cost of heat equals 15 percent of rent. Adjusted rent equals gross rent minus 15 percent of gross rent. This adjusted rent equals the rent paid by a renter of a similar unit who pays heat separately. Therefore, when New York applies its property tax equivalent of 25 percent of property taxes to the adjusted rent, the estimated property taxes paid are the same for both renters. The accuracy of Wisconsin’s 20/25 percent differential has implications for the distributional equity of property tax relief that individual renters claim. Implicit in the differential is the assumption that heat makes up 20 percent of the annual rent bills for renters who have heat included in their rents and 25 percent of the annual rent bill for those without heat included.10 Table 2 provides an example of how the 20/25 percent differential results in equivalent PTEs for those with and without heat included in their rent bills.

Table 2: Cost of Heat Generated by 20/25 Percent Differential

Renter A (heat included in rent)

Renter B (heat paid separately)

Rent Paid $14,250 $11,400 Cost of Heat 0 $2,850 Total Expenses (Rent Plus Heat) $14,250 $14,250

PTE Percentage 20% 25% Property Taxes Paid $2,850 $2,850

Source: Created by authors.

10 To see how we arrived at this implicit assumption, see Appendix D.

12

If the cost of heat deviates from the assumption that heat equals 20 percent of Renter A’s rent, or 25 percent of Renter B’s rent there is subsidization of one group over the other. Table 3 depicts the possible outcomes that may result from further analysis of the cost of heat as a percentage of rent.

Table 3: Possible Outcomes of Analyzing the Cost of Heat

Possibilities Beneficiary

Adjustment Needed to 20/25

Percent PTE Combination

A. Cost of Heat = 20% of X = 25% of Y Equitable None B. Cost of Heat

> 20% of X; and > 25% of Y

Renters who have heat included benefit more

Increase difference between property tax

equivalents used C. Cost of Heat

< 20% of X; and < 25% of Y

Renters who pay heat separately benefit more

Decrease difference between property tax

equivalents used X = the amount of rent paid by renters with heat included Y = the amount of rent paid by renters who pay heat separately

Source: Created by authors.

Formulaic Heat Differential Analysis To analyze the heat differential, we would need data that could not be obtained within the confines of this project. Instead we present a possible framework to analyze the differential:

• Estimate the average heat bill for renters who pay heat separately, and then • Calculate heat as a percentage of rent paid for those who pay heat separately.

o If the heat equals 25 percent, then estimate the heat paid by renters who have heat included in their bills.

o If heat constitutes 20 percent of their bill, then it is clear the heat differential results in equal treatments of renters.

In the event that heat does not equal 20 percent of the rent paid by renters with heat included or 25 percent of rent for those who pay heat separately, then there are three possible explanations:

(1) the differential is inaccurate; (2) renters who pay heat separately live in properties that are systematically

different from renters who have heat included; or (3) those who pay heat separately consume heat differently than those who

have heat included in their rents and do not have to pay extra for additional heat usage.

As noted earlier, this analysis rests on the assumption that the differential applies to renters in equivalent properties and the only difference is the inclusion (or exclusion) of heat from the rent bill. If no equivalent properties exist, then one cannot analyze the heat differential with the method discussed.

13

IV. Analysis of Equity11 Our analysis assesses whether the benefits of the Homestead Credit and the SPTC are distributed equally to residents of Wisconsin. Because the Homestead Credit and the SPTC are based on property and income, equity concerns may arise due to income or tenure status. By closely examining the distributions of individual property tax relief, we hope to determine if certain groups receive a disparate amount of aid from the Homestead Credit and/or the SPTC. We illustrate how the SPTC is distributed by income and examine the distribution of the SPTC and the Homestead Credit by tenure status. The non-refundability of the SPTC may raise equity concerns because credit claim-ants do not always receive the entire credit for which they would be eligible if it were refundable. Indeed, non-refundability means that one can only receive a credit equal to or less than income tax liability. For example, if a claimant would be eligi-ble for a full $300 SPTC based on property taxes paid but has an income tax liability of $200, he or she can only receive $200 of the SPTC. People with lower income tax liabilities, often those at lower income levels, will receive different amounts of relief even if they pay the same amount in property taxes as those with more income tax liability. While the Homestead Credit may equalize the impact of non-refund-ability because it is available only to those at lower income levels, our analysis examines the overall equity concerns raised by the non-refundability of the SPTC. Second, we examine the possibility that disparities exist due to tenure status for both the Homestead Credit and the SPTC. Specifically, does tenure status affect the likelihood that one will claim these credits? In addition, does the amount of the credit received have an association with tenure status? For this portion of the analysis, we study homeowners and renters with the same incomes to see if tenure status alone plays a role in how individual property tax relief gets distributed to Wisconsin residents. Finally, our analysis addresses the ability of these credits to relieve property tax liability. A person who pays $3,000 in property taxes and receives a credit of $300 sees 10 percent of his or her property tax bill relieved by the credit. A person with identical income who pays $1,000 in property taxes would also receive a credit of $300, realizing greater relief as a share of total property taxes paid. Thus, we address how well the SPTC and the Homestead Credit achieve their goals of lessening the property tax burden. We examine this by income and tenure status for the SPTC and by tenure status only for the Homestead Credit. By examining the distribution of the SPTC and Homestead Credit by income and/or tenure, we hope to illustrate to what extent, if any, disparities exist with respect to individual property tax relief amid different groups in Wisconsin.

11 We use Wisconsin adjusted gross income (WAGI), referred to as “income,” throughout Section IV as it is the only income data provided for SPTC claimants. Income sources that are included in and exempted from the WAGI are reported in Appendix E: Wisconsin Adjusted Gross Income.

14

Analysis of the Distribution of Individual Property Tax Relief12 To assess the equity of individual property tax relief by income and/or tenure status, we examine three main aspects of the Homestead Credit and the SPTC:

(1) the manner in which credit claimants are distributed by income level and/or tenure status;

(2) the average credit amounts distributed by income level and/or tenure status; and

(3) the impact of the credits in relieving property tax burden. We examine the distribution of the SPTC by income and tenure status, then we analyze the Homestead Credit by tenure status only.13

Distribution of the School Property Tax Credit14 More than 1 million Wisconsin tax returns received the SPTC in 2005(06). The largest portion of SPTC funds, about 23 percent or $85 million, goes to taxpayers with incomes between $40,000 and $60,000 per year. People with incomes less than $10,000 make up approximately 7 percent of the claims but receive less than half a percentage (about $675,000) of the SPTC expenditure. This reflects the non-refundability of the SPTC because residents with lower incomes receive no benefit if they have no income tax liability. Figure 1 illustrates how much of the total credit amounts claimed and used go to people in different income categories.

12 Unless otherwise noted, all data are obtained from the Wisconsin DOR. 13 We also examined the distribution of credit amounts in selected Wisconsin counties and the City of Milwaukee. We found similar distributions for the SPTC as we report here for Wisconsin overall. The Homestead Credit distribution is similar to the state’s, but it varies more by location of the claimants than the SPTC. These results are described in Appendix F. 14 In discussing the SPTC we refer to a “claimed credit” as the amount of credit one is eligible for based on his or her property taxes or PTE. Because the SPTC cannot exceed tax liability, claimants with lower tax liabilities will not use the entire credit amount claimed. The “used credit,” therefore, refers to the portion of the credit claimed that a claimant actually receives.

15

Figure 1: Distribution of Total Credit Dollars Claimed and Total Credit Dollars Used by Income, 2005

0%

5%

10%

15%

20%

25%

Less than$10,000

$10,000-14,999

$15,000-24,999

$25,000-39,999

$40,000-59,999

$60,000-79,999

$80,000 -99,999

$100,000- 199,999

$200,000- 499,999

Greaterthan

$500,000

Income

Expenditures as a Percentage of Total School Property Tax Credit Claimed

Expenditures as a Percentage of Total School Property Tax Credit Used

Total Amount Claimed: $419,110,163Total Amount Used:$373,053,033

Source: Created by authors using tax return data provided by the Wisconsin DOR for 2005(06).

We also examined the income distribution of the SPTC by the number of claimants in each category. While approximately 25,000 claimants with incomes of less than $10,000 receive some portion of the credit claimed, this represents only about 14 percent of the total number of claimants in this income category. For income above $40,000, on the other hand, almost all claimants receive something from the SPTC. Thus, whether one receives a benefit from the SPTC depends greatly on income. To assess further the distribution of the SPTC, we examine by income the average credit amounts claimed and used. The average credit claimed ranges from approximately $154 for those with incomes less than $10,000 per year to $296 for those with incomes greater than $500,000. The average credit used ranges from approximately $27 at the lowest income level to $296 at the highest level. Therefore, the credit received greatly increases as income rises. The largest jump in the credit received occurs between those with incomes below $10,000 and those with incomes between $10,000 and $15,000. For those in the $10,000 to $15,000 range, the average credit used is almost 300 percent greater than the average credit used for those with incomes less than $10,000. Table 4 summarizes the distribution of the SPTC by income level. Ultimately, as a non-refundable credit, the SPTC goes to those with higher incomes more often than those with lower incomes.

16

Table 4: Distribution of Credit Claimants and Credits by Income, 2005

Wisconsin Income Class

Percentage of Claimants Using Some

Portion of the SPTC

Average Credit

Claimed

Average Credit Used

Less than $10,000 13.7 $154.15 $26.73 $10,000 – 14,999 72.3 $164.36 $103.20 $15,000-24,999 95.2 $176.23 $157.81 $25,000 – 39,999 99.8 $200.34 $199.92 $40,000 – 59,999 99.9 $237.65 $237.61 $60,000 – 79,999 100.0 $264.97 $264.96 $80,000 – 99,999 100.0 $280.21 $280.20 $100,000 - 199,999 100.0 $289.43 $289.43 $200,000 - 499,999 100.0 $293.96 $293.96 Greater than $500,000 100.0 $296.26 $296.24

Source: Created by authors using tax return data provided by the Wisconsin DOR for 2005(06).

We also find that tenure status plays a large role in the distribution of the amount of SPTC used but not of the number of claimants. Of those claiming the credit, the majority, approximately 68 percent, were homeowners. Homeowners were an even greater proportion, 70 percent, of those using some portion of the claimed credit. This reflects data obtained from the U.S. Census Bureau indicating that approximately 70 percent people own as opposed to rent their homes (U.S. Census Bureau, 2007e). Thus, renters and homeowners seem fairly equally represented in the number using the SPTC. Disparities exist, however, when examining the amount of credit claimed and used by tenure status. The SPTC, as noted in Section II, is equal to 12 percent of the first $2,500 in property taxes or PTE for a maximum credit of $300. As the PTE percentage equals 20 percent of rent if heat is included and 25 percent of rent if heat is not included, annual rent must amount to $12,500 if heat is included in the rent and $10,000 if heat is not included for a renter to claim the full $300 credit. According to data on the SPTC, however, the average annual rent for those with heat included is about $5,000 and about $5,200 for those paying heat separately. Thus, most renters cannot claim the full SPTC amount, even at the highest income level. For example, at the highest income level, those with heat included have an average annual rent bill of about $11,000 and could claim an SPTC of at most $285. Homeowners, therefore, will almost always have a larger average credit claimed amount. At each income level, a higher percentage of renters claim some portion of their SPTC than homeowners. Overall, however, more homeowners receive at least some portion of the credit claimed because there are more homeowners in the higher income categories. At the lowest income level,

17

for example, about 18 percent of renters receive some portion of the SPTC claimed while only 9 percent of homeowners use a portion of their claimed credits. In total, however, we find that about 91 percent of homeowners versus 83 percent of renters use some portion of the claimed credit. Table 5 illustrates these differences between homeowners and renters.

18

Table 5: Distribution of the School Property Tax Credit by Tenure and Income, 2005

Wisconsin Income Class

Percentage of Homeowners Using

Some Portion of Credit Claimed

Average Homeowner

Credit Claimed

Average Homeowner Credit Used

Percentage of Renters Using

Some Portion of Credit Claimed

Average Renter Credit

Claimed

Average Renter Credit

Used

Less than $10,000 8.9 $207.08 $23.31 17.5 $108.82 $27.18 $10,000 – 14,999 57.6 $216.17 $125.25 83.0 $120.93 $88.77 $15,000 – 24,999 91.6 $217.34 $184.51 98.2 $134.12 $130.00 $25,000 – 39,999 99.7 $224.61 $224.05 99.9 $153.06 $152.96 $40,000 – 59,999 99.9 $246.32 $246.29 100.0 $174.28 $174.24 $60,000 – 79,999 100.0 $266.64 $266.63 100.0 $187.70 $187.70 $80,000 – 99,999 100.0 $280.07 $280.06 100.0 $191.91 $191.88 $100,000 – 199,999 100.0 $288.79 $288.79 100.0 $195.46 $195.41 $200,000 – 499,999 100.0 $293.66 $293.66 100.0 $219.51 $219.51 Greater than $500,000 100.0 $296.46 $296.45 100.0 $223.96 $223.96 Average 91.9 $250.44 $247.52 83.2 $142.61 $140.95

Source: Created by authors using tax return data provided by the Wisconsin DOR for 2005(06)

19

The final piece of analysis regarding the SPTC examines how well it provides property tax relief to individuals. We find that as a percentage of property taxes or PTE, the credit going to renters represents a larger portion of their PTE than it does of homeowners’ property taxes. Thus, even though renters receive, on average, a smaller credit, that credit relieves a larger portion of their property tax liability. Furthermore, while the credit does not relieve the property tax or PTE liability as much for those with incomes below $15,000, the property tax relief is distributed relatively equally for those with incomes greater than $15,000. Figure 2 illustrates the individual property tax relief due to the credit by income and tenure status.

Figure 2: Total Amount of Used Credit as a Percentage of Property Taxes Paid or Property Tax Equivalent by Income, 2005

0%

2%

4%

6%

8%

10%

12%

14%

Less than$10,000

$15,000-24,999

$40,000-59,999

$80,000 -99,999

$200,000- 499,999

Total

Wisconsin Income Class

School Property Tax Credit Used as a Percentage of Property Taxes Paid (Homeowners)

School Property Tax Credit Used as a Percentage of Property Tax Equivalent (Renters)

Source: Created by authors using tax return data provided by the Wisconsin DOR for 2005(06).

As expected due to the non-refundability of the SPTC, people at lower income levels receive less benefit from the credit than do those at higher income levels. In examining the SPTC by tenure status, we find some disparity in its distribution, with homeowners receiving larger credits on average. However, as a percentage of property taxes or PTE, the SPTC appears to benefit renters more than home-owners. The next section provides a similar analysis of the distribution by tenure status of the Homestead Credit.

Distribution of the Homestead Credit The Homestead Credit differs from the SPTC in three significant ways. First, the Homestead Credit targets low-income residents, specifically those with household incomes below $24,500. Second, because the credit is refundable,

20

a claimant receives all that he or she is eligible to receive regardless of tax liability. Last, because one need not file income taxes to receive the Homestead Credit, Wisconsin adjusted gross income does not provide an accurate measure of income by which to analyze the distribution of the Homestead Credit. Thus, our analysis of the Homestead Credit is limited to an analysis by tenure status only. In 2005, approximately 226,000 residents received $114 million from the Homestead Credit. Of those who claimed the credit, approximately 55 percent rented their homestead while 45 percent were homeowners. Using data from the American Community Survey, we find that in 2005 approximately 48 percent of the total population with incomes less than $25,000 were homeowners while the other 52 percent were renters (2005). Thus, as with the SPTC, the overall distribution of claimants by tenure status reflects the distribution of renters and homeowners in the general population. We also find that about 36 percent of the eligible renter population claims the credit, while about 32 percent of the eligible homeowners claim the credit. This indicates that while many renters and home-owners are not receiving the Homestead Credit, the distribution of those not claiming the credit does not appear to favor renters or homeowners. The following table highlights how the Homestead Credit differs by tenure status in its use and credit amount received.

Table 6: Homestead Credit Distribution by Tenure Status, 2005

Homeowner Renter Number of Claimants 105,725 126,524 Average Credit Amount $540 $475 Credit Expenditures as a Percentage of Property Taxes or PTE paid

26.5% 44.1%

Source: Created by authors using tax return data provided by the Wisconsin DOR for 2005(06).

As is the case with the SPTC, the Homestead Credit makes up a much larger percentage of a renter’s PTE than it does of a homeowner’s property tax bill although the average credit is smaller for renters. Overall the Homestead Credit constitutes about 45 percent of a renter’s PTE and about 26 percent of a homeowner’s property tax bill. Unlike the SPTC, however, more renters than homeowners—approximately 20,000 more—claim the credit. .

21

V. Contribution to Overall Fiscal Relief Our final analysis expands the assessment of property tax relief to include local assistance and local government fiscal controls. We compare local assistance and individual property tax relief to evaluate the effects of legislative trends that have shifted the focus of fiscal relief toward local assistance and limitation of local government taxing authority and away from individual property tax relief. We analyze the patterns that emerge to determine if the degree and composition of fiscal relief has changed during the last 15 years.

Assistance to Local Governments Wisconsin dedicates approximately 59 percent of its general purpose revenue15 to local government assistance (Wisconsin Department of Administration, 2006). As practiced in other states, school districts, municipalities, counties, and other special districts receive this aid to help offset the need to increase property taxes. Aid comes in the form of direct payments to local governments and property tax credits. While the state requires a certain portion of this aid to be dedicated to property tax relief, the majority is used at the discretion of local governments. For the most part, local governments determine whether funds will support public services or contribute to property tax relief. The largest share of local assistance goes to funding K-12 education. Approxi-mately 51 percent of school district revenue comes from state aid, representing the largest revenue source for school districts (National Center of Education Statistics, 2005). School aids include general school aid16 and categorical aid.17 The state distributes general school aid using a formula that aims to equalize each school district’s per-pupil property tax base. Categorical aid provides targeted funding for services such as education for students with exceptional needs and class-size reduction in low-income schools. In addition to K-12 funding, the state gives technical colleges funding that is mostly directed to partially equalizing the fiscal capacities of all Wisconsin technical college districts (WLFB, 2007f).

15 General purpose revenue is state revenue that is collected through several revenue sources, mainly the individual income tax, the general sales and use tax, and the corporate income and franchise tax. This revenue is not confined to any specific purpose and makes up the majority of funding used to support state operations. 16 The state distributes general school aid to local K-12 school districts on the basis of the relative fiscal capacity of each school district as measured by the district’s per-pupil value of taxable property. This is known as either the “general school aid” or the “equalization aid formula.” Many states have used this type of aid because different per-pupil property tax bases among districts means that a district with higher property wealth can raise more money with the same tax rate as another district in the state (WLFB, 2007e). 17 The state provides categorical aid to fund specific K-12 program costs, including special education, class size reduction, pupil transportation, and bilingual education. Categorical aid is paid on a formula basis or awarded as grants (WLFB, 2007e).

22

State aid constitutes approximately 39 percent of Wisconsin’s municipal and county revenues (U.S. Census, 2007b). The shared revenue program18 provides the primary source of state assistance to municipal and county governments. Aid also comes in the form of community aids19 and general transportation aid.20 The school levy credit21 and the lottery and gaming credit22 supplement school aids and shared revenue. These credits are provided to local governments for the distinct purpose of property tax relief. Alongside this state aid, Wisconsin has imposed fiscal controls23 on several taxing jurisdictions. Fiscal controls restrict the annual increase in school districts’ per-pupil revenues. Additionally, fiscal controls limit tax rates, as seen in counties and municipalities, so that tax rates essentially maintain their 1992(93) level. Increases in revenues or tax rates above the statutorily allowable limits can be approved only through referendum (WLFB, 2007c).

Composition of Fiscal Relief To gauge the effects of changing property tax relief policy, our analysis estimates the local assistance benefit and individual property tax relief realized by an owner of a median-valued home. Home values allow us to assign the appropriate fraction of local assistance and individual property tax relief that benefits a particular household. We have estimated the local assistance benefit for the median-valued home using data from the Legislative Fiscal Bureau and the Department of Revenue. The estimate for total local assistance derives from the total statewide funding provided by the state for local assistance programs with appropriations over $100 million. Though local assistance varies among counties, cities, and school districts, we use aggregate funding to develop an average rate of local assistance for the state overall. Appendix G develops the process used to determine the local

18 The shared revenue program delivers state aid primarily to municipal and county governments to provide property tax relief, to offset the impact of exempt property on local tax bases, and to supply additional payments for certain municipalities that limit spending (WLFB, 2007b). 19 Community aids are provided jointly by the state and federal governments. These funds are distrib-uted to counties to support human services programs (e.g. services related to mental health, substance abuse prevention, child abuse and neglect, family support, and Alzheimer’s support (WLFB, 2007h). 20 General transportation aid is paid to municipalities for the exclusive use of road maintenance, improvement, and construction (WLFB, 2007g). 21 The state allocates the school levy credit to municipalities to reduce individual property tax bills. The credit is allocated based on a municipality’s share of statewide school levies in the previous three years. The credit is provided to individual taxpayers in proportion to their share of the municipality’s total assessed property value (WLFB, 2007d). 22 The lottery and gaming credit provides additional property tax relief, and depends on the amount of revenue that the state receives from lottery, pari-mutuel on-track betting, and bingo receipts in a given year. The credit amount received by individual homeowners (renters are not eligible for this credit) shows up on an individual’s tax bill, and is based on the school tax rate in the individual’s municipality and the maximum credit value for a particular year (WLFB, 2007d). 23 Revenue limits began in 1993(94) and place fiscal controls on the revenue received by school districts, technical college districts, counties, and municipalities from a combination of intergovernmental aid and local levies (WLFB, 2007c).

23

assistance benefit realized by the median-valued home for a 15-year period, from 1991(92) through 2005(06). Table 7 shows the resulting total local assistance benefit for a median-valued home. The owner of a median-valued home realized the highest increase in local assistance in 1996(97), an estimated $261, largely as a result of the state’s commitment to fund two-thirds of Wisconsin public K-12 education (WLFB, 2007e). The increased funding put into assisting public schools more than offset the brief elimination of the lottery and gaming credit during the same year.24 The more substantial changes in local assistance in reference to a median-valued home include an increase of $440 in general school aid, a $62 increase from the school levy credit, and a $125 decrease from the lottery and gaming credit. In recent years, local assistance has decreased with more frequency. The largest drop occurred in 2003(04), an estimated decrease of $79 in aid. In 2003(04), the more substantial changes in local assistance in reference to a median-valued home include decreases of $39 in shared revenue, $22 in community aids, and $19 in categorical school aids. Table 7 lays out the net property tax bill faced by the owner of a median-valued home, factoring in local assistance.

Table 7: Local Assistance Realized by a Median-Valued Home

Median-Valued Home

Percent Change

Benefit from Local

Assistance

Percent Change

*Net Property

Taxes Paid

Percent Change

1991(92) $68,555 $1,885 $1,857 1992(93) $71,789 4.7 $1,944 3.1 $2,011 8.3 1993(94) $76,226 6.2 $1,957 0.7 $2,165 7.7 1994(95) $81,478 6.9 $2,102 7.4 $2,201 1.7 1995(96) $87,295 7.1 $2,196 4.5 $2,221 0.9 1996(97) $92,472 5.9 $2,457 11.9 $2,090 (5.9) 1997(98) $97,188 5.1 $2,595 5.6 $2,075 (0.7) 1998(99) $101,095 4.0 $2,577 (0.7) $2,180 5.1 1999(00) $106,160 5.0 $2,755 6.9 $2,109 (3.3) 2000(01) $112,200 5.7 $2,709 (1.6) $2,331 10.5 2000(02) $119,370 6.4 $2,698 (0.4) $2,428 4.2 2002(03) $126,473 6.0 $2,737 1.4 $2,517 3.7 2003(04) $133,821 5.8 $2,659 (2.9) $2,587 2.8 2004(05) $142,814 6.7 $2,645 (0.5) $2,706 4.6 2005(06) $153,525 7.5 $2,706 2.3 $2,730 0.9

* Net property taxes paid equals the property tax bill net all local assistance. The SPTC is calculated is calculated from this amount... Source: Created by authors using data collected from the Wisconsin LFB: Informational Paper 13 (1999, 2007b) and the Wisconsin DOR: Town, Village, and City Taxes – 2005, Table VI (2007). 24 The Wisconsin Legislature passed legislation in 1991 that created the lottery credit to provide property tax relief to property used as an owner’s primary residence. However, a circuit court found that, by providing lottery proceeds exclusively to homeowners, the provision violated the uniformity clause of the Wisconsin Constitution. Following this decision, the lottery credit was eliminated in 1996, and then distributed to all taxable properties in 1997. In 1998, following the constitutional amendment, lottery proceeds once again targeted homeowners (WLFB, 2007d).

24

In the case of individual credits, home values serve as an inadequate indicator for the credit amount received by a household. Though credit calculations involve home values, the amount of benefit realized also relies on income, in the case of the Homestead Credit, and tax liability, in the case of the SPTC. To measure the effects of both the SPTC and the Homestead credit, we estimate individual property tax relief for two median-valued homes with differing household incomes.25 We use Wisconsin’s median household income as a representation of a typical Wisconsin resident. We use the median household income of Homestead Credit claimants to capture the individual property tax relief realized by a lower-income household. These assumptions allow us to develop a realistic estimate of the benefit level received by the owner of a median-valued home from the two credits at two different levels of income. The households under review are defined as:

1. Median-income homeowner – A homeowner of a median-valued home and with a median household income.

2. Low-income homeowner – A homeowner of a median-valued home and with a household income equal to the median household income of the Homestead Credit claimant population.

Wisconsin’s median household income for 2005 was approximately $44,000 (U.S. Census, 2007f). This income level makes a median-income homeowner ineligible for the Homestead Credit. Ineligibility for the Homestead Credit holds for every year between 1991 and 2005. Therefore, the individual property tax relief provided to this homeowner equals the SPTC. To calculate the SPTC, we make the assumption that the owner of a median-valued home in each year has tax liability that allows her or him to use the entire SPTC for which he or she is eligible. The estimated SPTC amounts for the median-valued home are provided in Table 8.26 In our analysis, the changes in the SPTC are solely a result of legislative changes made throughout the years.

25 Our analysis does not take into account the possibility of a correlation between household income and housing consumption. Additionally, we chose to maintain the median-valued home for both household income levels due to a lack of data. As discussed in Appendix G, we were unable to calculate benefit amounts resulting from the lottery and gaming credit. The Wisconsin LFB Informational Paper 13 (1999, 2007b) only provides estimates for the median-valued home. 26 As discussed, the SPTC has gone through several adjustments since being enacted in 1989. The amounts provided in Table 8 reflect the credit formula used in each year. See Section II: Property Tax Relief in the United States for a discussion of the legislative changes to the SPTC since its enactment.

25

Table 8: Total Individual Property Tax Relief for the Median-Valued Home

SPTC Eligible & Used Homestead Credit:

Dollars Percent Change

Median-Income Homeowner ($)

Low-Income Homeowner ($)

Percent Change

1991(92) 186 0 770 1992(93) 200 7.7 0 822 6.8 1993(94) 200 0.0 0 822 0.0 1994(95) 200 0.0 0 822 0.0 1995(96) 200 0.0 0 770 (6.3) 1996(97) 200 0.0 0 770 0.0 1997(98) 200 0.0 0 770 0.0 1998(99) 305 52.6 0 770 0.0 1999(00) 0 (100.0) 0 759 (1.5) 2000(01) 280 N.A. 0 721 (5.0) 2000(02) 291 4.2 0 685 (4.9) 2002(03) 300 3.0 0 685 0.0 2003(04) 300 0.0 0 650 (5.1) 2004(05) 300 0.0 0 650 0.0 2005(06) 300 0.0 0 650 0.0

Source: Created by authors using data provided by the Wisconsin LFB and collected from Wisconsin LFB: Informational Paper 13 (1999, 2007b).

Table 8 also provides the individual property tax relief for a low-income home-owner. We apply the same tax liability assumption as used with the median-income homeowner to calculate the SPTC amount. Since tax liability decreases with income, our assumption may estimate somewhat higher SPTC amounts than actually experienced by low-income homeowners. To calculate the Homestead Credit realized by a low-income homeowner, we estimate the median household incomes for Homestead Credit claimants for each year under observation.27 Using this income and the net property taxes paid on a median-valued home, we calculate the appropriate Homestead Credit. The annual fluctuations in the Homestead Credit are largely due to legislative changes in the credit calculation and their effect on the median-income level of claimants. Since the maximum income in 1999(00) increased from $19,154 to $20,290, the median income for a Homestead Credit claimant increased as well. The $8,000 income threshold combined with increased household income had the effect of decreasing the Homestead Credit realized by a low-income homeowner and reducing property tax relief. In 2000(01), the maximum

27 The data available to calculate median household incomes found in the Homestead Credit claimant population for 1991(92) through 1995(96) provided claimant counts within certain household income ranges. Counts were listed in household income increments of $500. We use mid values as estimates for everyone who fell in any given range. These are rough estimates, and the actual median household income will fall in the vicinities of our approximations.

26

income increased further from $20,290 to $24,500. The expansion of the Homestead Credit contributed to a decrease in individual property tax relief for a low-income homeowner.

The expansion of the Homestead Credit discussed above only takes into account the changes in the median-income of claimants that result from legislative changes in income eligibility. However, the median-income naturally adjusts with the economy as well. As briefly mentioned at the end of Section II of this report, the higher incomes that result from inflationary pressures diminish credit amounts that are realized by a claimant and begin to push him or her out of eligibility. Many policy recommendations have been put forth to allow the formula factors, specifi-cally the maximum income level (i.e. $24,500 currently) and the income threshold (i.e. $8,000) to adjust with inflation. Though the nominal incomes of claimants rise, the costs of the goods they consume rise as well. Inflationary-adjusted formula factors would recognize the diminished purchasing power of fixed formula factors and would preserve the real value of claimant incomes. Table 9 provides the overall fiscal relief provided to a median-income homeowner and a low-income homeowner. Overall fiscal relief equals local assistance plus individual property tax relief. The amount that the low-income individual receives through the Homestead Credit represents the difference in overall fiscal relief seen between a median-income homeowner and a low-income homeowner.

Table 9: Annual Overall Fiscal Relief for Owner of Median-Valued Home–Local Assistance and Individual Relief Combined

Median-Income

Homeowner

Percent Change

Low-Income Homeowner

Percent Change

1991(92) $2,071 $2,841 1992(93) $2,144 3.5 $2,966 4.4 1993(94) $2,157 0.6 $2,979 0.4 1994(95) $2,302 6.7 $3,124 4.9 1995(96) $2,396 4.1 $3,166 1.3 1996(97) $2,657 10.9 $3,427 8.2 1997(98) $2,795 5.2 $3,565 4.0 1998(99) $2,882 3.1 $3,652 2.4 1999(00) $2,755 (4.4) $3,513 (3.8) 2000(01) $2,989 8.5 $3,710 5.6 2000(02) $2,990 0.0 $3,675 (0.9) 2002(03) $3,037 1.6 $3,723 1.3 2003(04) $2,959 (2.6) $3,609 (3.1) 2004(05) $2,945 (0.5) $3,596 (0.4) 2005(06) $3,006 2.1 $3,656 1.7

Source: Created by authors using data provided by Wisconsin LFB and collected from the Wisconsin LFB: Informational Paper 13 (1999, 2007b) and the Wisconsin DOR: Town, Village, and City Taxes – 2005, Table VI (2007).

27

This discussion provides understanding of how local assistance and individual property tax relief have changed throughout the last 15 years. The relationship between these two forms of state aid is depicted in Table 10. For the median-income homeowner with a median-valued home, local assistance has provided approximately 90 percent of overall fiscal relief realized. The SPTC provides the remaining 10 percent. The composition of overall fiscal relief has remained relatively unchanged throughout this period. Conversely, the makeup of fiscal relief for a low-income homeowner with a median-valued home has changed during the last 15 years. Individual relief has contributed a larger fraction of overall fiscal relief in comparison to a median-income homeowner; however, that fraction has fallen from 34 percent in 1991(92) to 26 percent in 2005(06). The expansion of the Homestead Credit and the inflexibility of the $8,000 income threshold have reduced the difference in fiscal relief between the two income levels.

Table 10: Local Assistance and Individual Property Tax Relief as Percentages of Overall Fiscal Relief

for Median- and Low-Income Homeowners

Median-Income Homeowner

Low-Income Homeowner

Local Assistance

(%)

Individual Property Tax

Relief (%)

Local Assistance

(%)

Individual Property Tax

Relief (%) 1991(92) 91 9 66 34 1992(93) 91 9 66 34 1993(94) 91 9 66 34 1994(95) 91 9 67 33 1995(96) 92 8 69 31 1996(97) 92 8 72 28 1997(98) 93 7 73 27 1998(99) 89 11 71 29 1999(00) 100 0 78 22 2000(01) 91 9 73 27 2000(02) 90 10 73 27 2002(03) 90 10 74 26 2003(04) 90 10 74 26 2004(05) 90 10 74 26 2005(06) 90 10 74 26

Source: Created by authors using data provided by Wisconsin LFB and collected from the Wisconsin LFB: Informational Paper 13 (1999, 2007b) and the Wisconsin DOR: Town, Village, and City Taxes – 2005, Table VI (2007).

28

VI. Conclusion Several states provide fiscal relief to their residents to limit property tax burdens. Wisconsin provides such relief using two approaches, aid to local governments and property tax relief for individuals. As requested by the Wisconsin DOR, we have focused our analysis on individual relief provided through the SPTC and Homestead Credit. We have analyzed the accuracy of two formula assumptions that affect the credits that claimants receive; specifically, the 20/25 PTE percentages and the cost of heat as a percentage of rent. Our evaluation of Wisconsin’s estimation of the PTE finds that the current formula percentages of 20 and 25 percent are close to our Milwaukee estimate of 21 percent for rental properties of five or more units. Our estimate for Madison’s PTE percentage, however, varies significantly at 13 percent. We also looked at the distribution of these credits and their contribution to overall fiscal relief. We have found that the non-refundability of the SPTC has created some inequities, with higher-income individuals receiving a greater benefit. When looking at tenure status, homeowners receive a greater benefit from the SPTC in comparison to renters. However, as a percentage of property taxes or PTE, renters benefit more than homeowners. The distribution of the Homestead Credit by tenure status closely resembles that of the SPTC. Specifically, homeowners, on average, receive larger credits than renters. Also, renters receive more relief on their PTEs paid than homeowners receive on their property taxes paid. However, more renters than homeowners claim the Homestead Credit, unlike the SPTC. In addition, the average Homestead Credit amount also appears to vary more by geographic location than the SPTC. We also find that the composition of overall fiscal relief has remained steady throughout the last 15 years for a median-valued home owner with a median-income. Individual relief provided 10 percent of overall fiscal relief. However, individual relief has made up a declining share of overall fiscal relief realized by the owner of a median-valued home with a low-income. In this case, individual property tax relief has declined from 34 percent in 1991(92) to 26 percent in 2005(06). This shift has diminished the difference in relief provided to median-income individuals and lower income individuals.

29

VII. Recommendations The architecture established to analyze the extant research questions and the empirical findings are a first step in assisting the Wisconsin DOR to improve its understanding of how the School Property Tax Credit and the Homestead Credit provide and distribute individual property tax relief. However, further analysis is necessary to verify the accuracy of the PTE across municipalities and statewide. Additionally, the Wisconsin DOR should address the diminished proportion of overall fiscal relief that is provided to low-income residents through direct individual property tax relief. Toward this end, we recommend that the Wisconsin DOR consider the following to extend the present study and strengthen the effect of individual property tax relief:

Currently, rental properties used as residences are classified as either residential or commercial, depending on the number of units in each building. We recommend disaggregating these rental properties in the following way: (a) identifying the number of rental units (used as residences) contained within residential properties (properties with four units or less); and (b) identifying the number of rental units (used as residences) contained within commercial properties (properties with five units or more). Distinguishing these properties would allow for a more accurate calculus of the total number of rental units used as residences. The distinction also would allow for an accurate measure of the property values and therefore property taxes assigned to rental units used as residences. This information can be used in conjunction with the rent data provided by the American Community Survey to calculate a more precise statewide PTE percentage. Alternatively, a survey of owners and managers of rental properties could be used to estimate the PTE percentage.28 The survey should include requests for the following items: (a) total residential units in the property; (b) total contract rent; (c) property taxes on residential rental portion of the property. In addition, the survey could request the share of residential rental units in which heat is included.29 The information from the survey would yield the PTE percentage for renters with heat included in their contract rent and for those who pay heat separately. This would provide an estimate of the accuracy of the 20/25 percent differential. Our analysis has revealed wide variance in the PTE percentages between the cities of Madison (13 percent) and Milwaukee (21 percent). While the reasons for this disparity are unclear, we recommend that the Wisconsin DOR explore the potential factors contributing to such variance. For example, the proportion of rent we were able to estimate may have contributed to differences in the PTE percentages; we estimated 61 percent and 37 percent of the rent paid on

28 For a model survey developed by the Minnesota Department of Revenue, see pages 10 and 11 of the Minnesota Department of Revenue report entitled “Property Tax as a Percentage of Residential Rent” (Minnesota Department of Revenue, 2005). 29 In addition, the survey could request the approximate cost of heat (when included).

30

apartments in Madison and Milwaukee respectively. However, systematic differences may exist between Madison and Milwaukee in the nature of their rental stocks and markets, requiring further analysis by the Wisconsin DOR. In addition to the above approaches for verifying the PTE, we recommend that the Wisconsin DOR support legislation that would annually adjust the Homestead Credit formula for inflation. This would require adjusting the maximum income (currently $24,500) as well as the income threshold (currently $8,000). This would allow the Homestead Credit to provide consistent property tax relief on an inflation-adjusted basis. An inflation-adjusted formula would work toward maintaining the composition of overall fiscal relief to Wisconsin’s low-income households.

31

References

Advisory Commission on Intergovernmental Relations. (1973). “Financing Schools and Property Tax Relief – A State Responsibility.” Washington, D.C.: Advisory Commission on Intergovernmental Relations.

American Community Survey. (2005). Wisconsin Financial Characteristics. Retrieved April 12, 2007 from http://factfinder.census.gov/servlet/STTable?_bm=y&-context=st&-qr_name=ACS_2005_EST_G00_S2503&-ds_name=ACS_2005_EST_G00_&-CONTEXT=st&-tree_id=305&-redoLog=true&-geo_id=04000US55&-format=&-_lang=en.

Baer, David. (1998). “Awareness and Popularity of Property Tax Relief Programs.” Washington, D.C.: American Association of Retired Persons (AARP).

Cico, David R.; Robnett, Stephen C.; Saltaman, Ellen W.; and Ulbrich, Holley H. (2004). “Property Tax Relief Programs in the United States.” The Jim Self Center on the Future. Clemson, SC: The Strom Thurmond Institute of Government & Public Affairs, Clemson University.

Connecticut Department of Revenue. (2007). “Q & A: Income Tax Credit for Property Taxes Paid to a Connecticut Political Subdivision.” Retrieved April 18, 2007 from http://www.ct.gov/drs/lib/drs/publications/pubsip/2006/ip06-16.pdf.

Lyons, Karen; Farkas, Sarah; and Johnson, Nicholas. (2007). “The Property Tax Circuit Breaker: An Introduction and Survey of Current Programs” The Center on Budget and Policy Priorities. Retrieved April 12, 2007 from http://www.cbpp.org/3-21-07sfp.htm.

Massachusetts Department of Revenue. (2007). “Circuit Breaker Tax Credit.” Retrieved April 18, 2007 from http://massresources.org/pages.cfm? contentID=69&pageID=12&Subpages=yes.

Mikhailov, Nikolai. (1998). “Types of Property Tax and Assessment Limitations and Tax Relief Programs.” Boston, MA: Lincoln Institute of Land Policy.

Minnesota Department of Revenue. (2005). “Property Tax as a Percentage of Residential Rent.” Retrieved March 1, 2007 from http://www.taxes.state.mn.us/taxes/legal_policy/research_reports/content/prop_tax_percent_rent_022405.pdf.

National Center of Education Statistics. (2005). “Revenues and percentage distribution of revenues for public elementary and secondary education, by source and state or jurisdiction: Fiscal year 2005.” Digest of Education Statistics. Retrieved April 18, 2007 from http://nces.ed.gov/pubs2007/expenditures/tables/table_1.asp.

32

New York State Department of Taxation and Finance. (2003). Form IT-214: Claim for Real Property Tax Credit for Homeowners and Renters. New York City: Author. Retrieved March 19, 2007 from http://www.tax.state.ny.us/pdf/2003/inc/it214_2003.pdf.

Norman, Jack. (2007). “Are Wisconsin Taxes Too High?” The Isthmus, April 5, 2007. Retrieved April 15, 2007 from http://www.thedailypage.com/isthmus/article.php?article=6214.

Quindry, Kenneth; and Cook, Billy D. (1969). “Humanization of the Property Tax for Low Income Households.” National Tax Journal: 22 (3).

Reschovsky, Andrew. (1994). “Do the Elderly Face High Property Tax Burdens?” Washington, D.C.: American Association of Retired Persons (AARP). Retrieved March 5, 2007 from http://www.doa.state.wi.us/docs_view2.asp?docid=6136.

Stark, Jack. (1991-92). “A History of the Property Tax and Property Tax Relief in Wisconsin.” Wisconsin Blue Book. Retrieved March 1, 2007 from http://www.legis.state.wi.us/lrb/pubs/feature/proptax.pdf.

U.S. Census Bureau. (2007a). American Fact Finder, Glossary. Washington, D.C.: Author. Retrieved April 18, 2007 from http://factfinder.census.gov/home/saff/main.html?_lang=en.

U.S. Census Bureau. (2007b). State and Local Government Finances by Level of Government and by State: 2003-2004. Washington, D.C.: Author. Retrieved February 15, 2007 from http://www.census.gov/govs/www/estimate04.html.

U.S. Census Bureau. (2007c). Federal, State, and Local Governments Public Elementary-Secondary Education Finance Data. Retrieved February 15, 2007 from http://www.census.gov/govs/www/school04.html.

U.S. Census Bureau. (2007d). Federal, State, and Local Governments Quarterly Summary of State and Local Government Tax Revenue. Retrieved April 15, 2007 from http://www.census.gov/govs/www/qtax.html.

U.S. Census Bureau. (2007e). Housing Vacancies and Homeownership, Annual Statistics: 2006. Retrieved March 26, 2007 from http://www.census.gov/hhes/www/housing/hvs/annual06/ann06t13.html.

U.S. Census Bureau. (2007f). Wisconsin Fact Sheet. Retrieved February 15, 2007 from http://factfinder.census.gov/servlet/SAFFFacts?_event=Search& geo_id=01000US&_geoContext=&_street=&_county=&_cityTown=&_state=04000US55&_zip=&_lang=en&_sse=on&ActiveGeoDiv=geoSelect&_useEV=&pctxt=fph&pgsl=010&_submenuId=factsheet_1&ds_name=DEC_2000_SAFF&_ci_nbr=null&qr_name=null&reg=null%3Anull&_keyword=&_industry=.

33

University of Wisconsin Tax Study Committee. (1959). Wisconsin’s State and Local Tax Burden – Impact, Incidence, and Tax Revision Alternatives. University of Wisconsin-Madison.

Wisconsin Continuing Revenue Survey Commission. (1960). Progress Report Number Two. Madison: Author.

Wisconsin Council on Children and Families. (2005). The Homestead Credit: An Effective Form of Property Tax Relief that is Losing Its Punch. Wisconsin Budget Project. Retrieved March 1, 2007 from http://www.wccf.org/pdf/homesteadlosingpunch.pdf.

Wisconsin Department of Administration. (2006). Annual Fiscal Report: Budgetary Basis. Madison: Author. Retrieved April 20, 2007 from http://www.doa.state.wi.us/docs_view2.asp?docid=6136.

Wisconsin Department of Revenue. (2006). The Wisconsin Individual Income Tax. Madison: Author. Retrieved April 20, 2007 from http://www.dor.state.wi.us/ra/06inctax.pdf

Wisconsin Department of Revenue. (2007). Town, Village, and City Taxes – 2005, Table VI. Madison: Author. Retrieved April 20, 2007 from http://www.dor.state.wi.us/pubs/slf/tvc05.pdf.

Wisconsin Legislative Fiscal Bureau. (1999). Informational Paper 13: Property Tax Level in Wisconsin. Madison: Author.

Wisconsin Legislative Fiscal Bureau. (2005). Informational Paper 24: Homestead Tax Credit. Madison: Author.

Wisconsin Legislative Fiscal Bureau. (2007a). Informational Paper 2: Individual Income Tax. Madison: Author. Retrieved March 28, 2007 from http://www.legis.state.wi.us/lfb/Informationalpapers/2.pdf.

Wisconsin Legislative Fiscal Bureau. (2007b). Informational Paper 13: Property Tax Level in Wisconsin. Madison: Author. Retrieved March 28, 2007 from http://www.legis.state.wi.us/lfb/Informationalpapers/13.pdf.

Wisconsin Legislative Fiscal Bureau. (2007c). Informational Paper 12: Local Government Expenditure and Revenue Limits. Madison: Author. Retrieved April 15, 2007 from http://www.legis.state.wi.us/lfb/Informationalpapers/12.pdf.

Wisconsin Legislative Fiscal Bureau. (2007d). Informational Paper 21: State Property Tax Credits (School Levy and Lottery and Gaming Credits). Madison: Author. Retrieved March 28, 2007 from http://www.legis.state.wi.us/lfb/Informationalpapers/21.pdf.

Wisconsin Legislative Fiscal Bureau. (2007e). Informational Paper 27: State Aid to School Districts. Madison: Author. Retrieved April 15, 2007 from http://www.legis.state.wi.us/lfb/Informationalpapers/27.pdf.

34

Wisconsin Legislative Fiscal Bureau. (2007f). Informational Paper 35: Wisconsin Technical College System. Madison: Author. Retrieved April 20, 2007 from http://www.legis.state.wi.us/lfb/Informationalpapers/35.pdf.

Wisconsin Legislative Fiscal Bureau. (2007g). Informational Paper 22: Transportation Aid (General Transportation and Connecting Highway Aid). Madison: Author. Retrieved April 20, 2007 from http://www.legis.state.wi.us/lfb/Informationalpapers/22.pdf.

Wisconsin Legislative Fiscal Bureau. (2007h). Informational Paper 49: Community Aids (Financial Assistance to Counties for Human Services). Madison: Author. Retrieved April 20, 2007 from http://www.legis.state.wi.us/lfb/Informationalpapers/49.pdf.

Wisconsin State Commission on Aging (1962). First Annual Report of the State Commission on Aging. Madison: Author.

35

Appendix A: Property Tax Relief: “Circuit-Breaker” Programs The nature and composition of income-based property tax relief varies considerably throughout the United States. The state of Massachusetts, for example, has a circuit-breaker credit known as the “Real Estate Tax Credit for Persons Age 65 and Older.” This is a refundable credit for senior citizens in which the maximum credit allowed for renters and homeowners in the 2005 tax year is $840. The law assumes that 25 percent of rent goes toward property tax, without any allowances for heat paid as a portion of rent (Massachusetts Department of Revenue, 2007). In contrast, the property tax credit in Connecticut, known as the “Income Tax Credit for Property Taxes,” bears little resemblance to the credit in Massachusetts. First, there is no age requirement to claim a tax credit in Connecticut. Second, the credit is only allowed for homeowners; renters in Connecticut are disallowed from claiming a credit, even if the landlord explicitly bills the tenant for property taxes. Finally, the credit is not refundable; depending on a homeowner’s property taxes and household income, the amount of the credit may be reduced to zero (Connecticut Department of Revenue, 2007). Therefore, Connecticut’s property tax relief program is not a circuit breaker, as it is a non-refundable credit available only to homeowners. Seventeen states in addition to Massachusetts have circuit-breaker programs in tax year 2005. However, even among those 18 states, there exists significant heterogeneity in eligibility requirements and maximum property tax relief benefits, as Table A-1 shows.

36

Table A-1: Property Tax Circuit-Breaker Programs in the United States (Tax Year 2005)

State Program Name

Renter Eligibility

(PTE Percentage)30

Age Eligibility Income Eligibility Limits Maximum Benefit Type of

Rebate

District of Columbia

Individual Income Property Tax Credit

Yes (15%)

All Single and joint filers: income < $20,000 $750

Income tax credit (filers); rebate check (nonfilers)

Illinois Circuit Breakers Yes

(25%)

65 and older; 16 and older and disabled; or surviving spouse

63 or older

$21,218 (one person household); $28,480 (two

person household); $35,740 (three person household)

$700 Rebate check

Maine

Maine Residents Property Tax and Rent

“Circuit-Breaker” Refund

Yes (20%)

All

Single filer: income < $77,000

joint filers: income < $102,000

$2,000 Rebate check

30 Property tax equivalent (PTE) percentage for renters who pay heat and utilities separate from their monthly rent.

37

State Program Name

Renter Eligibility

(PTE Percentage)30

Age Eligibility Income Eligibility Limits Maximum Benefit Type of

Rebate

Maryland

Homeowners’ Property Tax Credit

Program/ Renters’ Tax Credit Program

Yes (15%); Renters under age 60 must have at

least one dependent under

18 living with them

All

Homeowners: Single filer: net worth <

$60,000 joint filers: net worth <

$200,000 Renters:

Under age 60 income < $38,659; Over age 60

income < $30,00

Homeowners: Amount by which

property taxes (based on assessed value < $300,000) exceed

established “Tax Limits” Renters:

$600

Homeowners: Property tax

credit Renters

Rebate check

Massachusetts Real Estate Tax Credit

for Persons Age 65 and Older

Yes (25%)

Age 65 and older

Single filer: income < $45,000

joint filers: income < $67,000

$840 Income tax credit

Michigan Homestead Property Tax Credit

Yes (20%)

All Single and joint filers: income < $82,650 $1,200

Income tax credit (filers); rebate check (nonfilers)

Minnesota Property Tax Refund Yes

(19%) All

Homeowners: Single and joint filers:

income < $87,780 Renters:

Single and joint filers: income < $47,350

Homeowners: $1,640

Renters: $1,350

Rebate check

38

State Program Name

Renter Eligibility

(PTE Percentage)30

Age Eligibility Income Eligibility Limits Maximum Benefit Type of

Rebate

Missouri Property Tax Credit Claim

Yes (20%)

Age 65 and older, disabled, or 60 and

older receiving surviving spousal Social Security

Single filer: income < $25,000

joint filers: income < $27,000

Homeowners: $750

Renters: Lesser of 20% of rent

paid or $750

Rebate check

Montana Elderly

Homeowner/Renter Credit

Yes (15%)

Aged 62 and older Single and joint filers: income < $45,000 $1,000

Income tax credit (filers); rebate check (nonfilers)

New Jersey FAIR Rebate

Yes (18%); tenant must be 65 or

older or disabled

Homeowners: All

Renters: Age 65 or older

Homeowners: Single and joint filers:

income < $200,000 Renters:

Single and joint filers: income < $100,000

Homeowners: $1,200

Renters: $825

Rebate check

New Mexico Property Tax Rebate Yes (6%)

Age 65 or older Single and joint filers: income < $16,000 $250 Income tax

credit

New York

Real Property Tax Credit for

Homeowners and Renters

Yes (25%); average monthly rent

must be $450 or less

All

Single and joint filers: income < $18,000; market

value of home must not exceed $85,000

$375 (age 65 and older); $75 (under age 65)

Income tax credit (filers); rebate check (nonfilers)

Oklahoma Property Tax Refund No Age 65 and older or disabled

Single and joint filers: income < $12,000 $200 Rebate Check

39

State Program Name

Renter Eligibility

(PTE Percentage)30

Age Eligibility Income Eligibility Limits Maximum Benefit Type of

Rebate

Oregon Elderly Rental Assistance Program

Yes (n/a); renters

must pay more than 20% of

income for rent, fuel and utilities

Renters only; age 58 and older

Single and joint filers: income < $10,000; asset

limit of $25,000 if under age 65; no asset limit if over age

65

$2,100 Rebate check

Pennsylvania Property Tax/Rent Rebate Program

Yes (varies – range from 20% for

income < $5,500 to 2% for income between $13,000

and $15,000)

Age 65 and older; spouse age 65 or

older; disabled; or widow age 50 or

older

Single and joint filers: income < $15,000 $500 Rebate check

Rhode Island Property Tax Relief Credit

Yes (20%)

All Single and joint filers: income < $30,000 $250

Income tax credit (filers); rebate check (nonfilers)

Vermont Property Tax Rebate Yes

(21%) All Single and joint filers:

income < $47,000

None – State rebates difference between

maximum % of income claimant expected to pay

in property taxes (between 3.5 and 5.0%) and amount of property

taxes actually owed

Income tax credit (filers); rebate check (nonfilers)

40

State Program Name

Renter Eligibility

(PTE Percentage)30

Age Eligibility Income Eligibility Limits Maximum Benefit Type of

Rebate

Education Property Tax Payment (“Prebate”)

No All Single and joint filers: income < $110,000

None – State rebates difference between

maximum % of income claimant expected to pay in school property taxes (between 2.0 and 4.5%) and projected amount of

school property taxes owed

Rebate check

Wisconsin Homestead Credit Yes

(25%) All Single and joint filers:

income < $24,500 $1,160

Income tax credit (filers); rebate check (nonfilers)

Source: Lyons, et al. (2007).

41

Appendix B: History and Development of the Homestead Credit The Homestead Credit was born in the 1960s out of a concern for the aging Wisconsin population. At the time, three influential studies created the argument for providing property tax relief to the elderly. A 1959 tax incidence study conducted through the University of Wisconsin – Madison and led by Harold Groves showed that Wisconsin had an above average property tax burden for the United States and surrounding Midwestern states. Moreover, given that housing was a top financial priority for individuals and that housing was a larger portion of the budget for low-income taxpayers, the property tax was regressive at the lowest end of the income scale (University of Wisconsin Tax Study Committee, 1959). This committee also discussed the plight of renters with regard to the property tax. They noted that a landlord could shift a “substantial” portion of property taxes to the tenant and that the tenant was unable to take advantage of a federal income tax deduction for property taxes as could a homeowner (University of Wisconsin Tax Study Committee, 1959). In its 1960 report, the Revenue Survey Commission also showed that individuals in the lowest income bracket were hardest hit by the property tax. Additionally, it noted that many low-income individuals were elderly and retired. The Revenue Survey Commission took into consideration the dual realities of the enormous growth of the school-age population and the increased reliance on the property tax that this growth would create. The first reality was that the main function of the property tax was to support public education. The second reality was that the property tax was the main revenue source for local governments. For example, in 1950 there were 6 percent more people in the labor force than in dependent groups, but, by 1960, the reverse would be true with 18 percent more people in the dependent groups. The Commission projected that by 1965, expenditures would exceed revenues by more than $50 million if costs remained constant and only the numbers of units (per pupil, per capita, etc.) would increase (Wisconsin Continuing Revenue Survey Commission, 1960). This meant property tax rates would not cover 22 percent of the expected budget. Both of these studies discussed the possible use of a homestead exemption. A homestead exemption for low-income homeowners would allow individuals to exclude part or all of the value of their property from the assessment of their property value, effectively lowering their property tax bill. (This exemption was unlike the Homestead Credit in that it reduced the property tax bill while a credit reduced the income tax an individual must pay). The studies noted that while an exemption would be most beneficial to the low-income homeowner, it would significantly reduce the property tax base and do nothing for renters (University of Wisconsin Tax Study Committee, 1959; and Wisconsin Continuing Revenue Survey Commission, 1960).

42

The last influential study was conducted by the Wisconsin Commission on Aging in 1962. This descriptive study surveyed the aging population on their views of aging and described the services available to this population. The finding of the 24 hearings in the fall of 1962 was that the increasing property tax burden was one of the biggest concerns of the elderly, second only to the growing costs of medical care (Wisconsin State Commission on Aging, 1962). This report also noted that bill number 301-A, at that time before the legislature at the request of the Commission on Aging, was designed to bring property tax relief to persons over the age of 65 through an income tax credit. The constitutionality of the credit was challenged on the grounds that it violated the uniformity clause of the Wisconsin constitution. The clause states that all property taxpayers should be treated alike. However, the Wisconsin Supreme Court ruled that it did not violate the clause because the credit was administered through the income tax and because the credit was designed to provide relief – which is linked to welfare and not the tax system (Stark, 1991-92). Formula Changes Since 1964, when the Homestead Credit was finally enacted – probably due to a surplus in state revenues – there have been significant changes. In 1964, the credit was only for those above age 65 with incomes below $3,000. Rent constituting property taxes was equal to 25 percent for all renters. In addition, it was a credit “against income taxes for 50 percent (75 percent if the person’s income was $1,000 or less) of property taxes or rent constituting property taxes that exceeded 5 percent of the person’s income. This credit could not exceed $300, but it was refundable” (Stark, 1991-92). The credit was changed in the 1987-89 biennial budget from 25 percent of rent equal to the PTE, to its current form where 25 percent of rent is the PTE for those who pay their own heat and 20 percent for those who have heat included in their rent. Other significant changes to the credit have broadened the relief of the credit. In 1973, the age restriction was changed to include any person age 18 or older. This change increased the program cost from $10 million in 1972-73 to $35 million in 1973-74 (WLFB, 2005) but seniors still receive the most relief (Wisconsin Council on Children and Families, 2005). Due to the fact that from 1990 to 1998, the maximum income limit was not adjusted for inflation or any other measure, the number of claimants fell by 35 percent and expenditures fell by 32 percent during this period (WLFB, 2005). Finally, in 1999, Act 9 increased the maximum income limit to $20,290 (from $19,154) and then to $24,500 in the year 2000 and thereafter (WLFB, 2005).

43

Appendix C: Methodology for Estimating the Property Tax Equivalent Calculations for TOTAL RENT Step 1: Gross Rent on Buildings of 5 or More = % of Gross Rent for buildings with 5+ units Total gross rent Step 2: % of Gross Rent for 5+ buildings x Total Contract Rent = amount of contract rent for buildings with 5+ units Step 3: % of Gross Rent for buildings with 5+ units x Rent Asked = amount of rent asked for buildings with 5+ units Step 4: Add values from Step 2 and Step 3 to obtain Total Rent for All Units Calculations for PROPERTY TAXES Step 1: Add values of all apartment property values for buildings with 5+ units together Step 2: Multiply Step 1 value by net mill rate per thousand (e.g. if mill rate = 25, then the net mill rate per thousand = 0.025) to obtain Property Taxes on Rental Property Calculations for PROPERTY TAX EQUIVALENT Divide the TOTAL RENT by the PROPERTY TAXES.

44

Appendix D: The Assumption behind the Heat Differential We assume the purpose of using different percentages to calculate the PTE for tenants who have heat included in their rents and renters who pay heat separately is to equate the PTE for those in equivalent properties regardless of whether heat is included in the rent. Now, let A = total annual rent for those with heat included in their rent bills and let B = annual rent for those paying heat separately. Also, let H = the heat paid by renters regardless of whether heat is included in the rent. Then, A = rent + heat. For those in equivalent apartments, we assume that A = B + H. The differential assumes that the following equation for the percentage used to calculate the PTE must hold:

20% of A = 25% of B.

As A = B + H, we then have, 0.2 x B + 0.2 x H = 0.25 x B.

Solving for H yields,

0.2 x H = 0.05 x B H = (0.05 x B) / 0.2

H = 0.25 x B.

Thus, heat must equal 25 percent of annual rent for those paying heat separately in identical housing. Now, because H = 0.25 x B and A = B + H, we have,

B = 4 x H A = 4 x H + H

A = 5 x H.

Again, solving for heat yields, H = 0.2 x A.

The differential, therefore, also implies that heat constitutes 20 percent of total rent for those with heat included in their bills. Finally, as H = 0.25 x B and A = B + H, we have

A = B + 0.25 x B or

A = 1.25 x B. Thus, renters with heat included pay 25 percent more than those without heat included in their rent.

45

Problems with the differential arise if heat use or costs do not conform to the formulas calculated above. For example, if because of differences in heat use motivated by explicit payments for heat, heat constitutes 20 percent of rent for those with heat included in their rent bills and only 15 percent of rent for those who pay heat separately, then the equation for the percentage used to calculate the PTE equation for those with heat included becomes

Percentage used to calculate the PTE (heat included) = 0.2 x A = 0.2 x B + 0.2 x H = 0.2 x B + 0.2 (0.15 x B) = 0.23 x B < 0.25 x B.

In this situation, we can see that those paying heat separately receive a larger benefit from the PTE percentages. If, however, heat constitutes more then 25 percent for those paying heat separately, for example 30 percent, then the PTE equation for those with heat included is

PTE = 0.2 x A = 0.2 x B + 0.2 (0.3 x B) = 0.26 x B > 0.25 x B.

Here we see that those with heat included benefit from the percentages used to calculate the PTE. A similar analysis shows that if heat is 25 percent of rent bills for those who pay heat separately and not 20 percent of rent bills for those with heat included, then the PTE will not be equal. Therefore, to ensure equitable PTEs for those who do and do not have heat included in their rent bills, we find that heat must equal 20 percent of A and 25 percent of B.31

31 If the Wisconsin DOR or another agency were to collect data on the heat tenants pay for those who have heat included in their rent, this analysis would be more possible.

46

Appendix E: Wisconsin Adjusted Gross Income The base for the state income tax, Wisconsin adjusted gross income (WAGI), is federal adjusted gross income, modified to add income exempt from federal tax but subject to state tax, to subtract income taxed federally but not by Wisconsin, and to subtract expenses allowed by Wisconsin but not permitted under federal law. Additions include:

• State and municipal bond interest, which may not be taxed by the federal government but may be taxed by state and local governments. Wisconsin does not tax some state and municipal bond interest, so these amounts are not added back to federal adjusted gross income. These include interest on bonds issued by municipal housing, community development, and redevelopment authorities; local exposition, cultural and sports stadium districts; the Wisconsin Housing Finance Authority; and the governments of Puerto Rico, Guam, and the Virgin Islands. In addition, interest on Wisconsin higher education bonds and certain bonds issued by the Wis-consin Housing and Economic Development Authority and public housing agencies located outside Wisconsin are exempt from the state tax.

• Capital losses in excess of $500. Under federal law, a taxpayer may use up to $3,000 in capital losses to offset ordinary income; Wisconsin limits this offset to $500.

• Farm losses for persons not actively engaged in farming when income exceeds certain amounts. Farm losses may be deducted fully when non-farm WAGI does not exceed $55,000 ($27,500 for married persons filing separately). At higher incomes, the amount of farm losses is reduced as income rises, and no losses are allowed when non-farm WAGI exceeds $600,000 ($300,000 for married persons filing separately).

• Federal net operating loss carryovers, when these carryovers are different from carryovers for Wisconsin purposes.

• Lump-sum distributions. • Excess distributions from a passive foreign investment company. • Farmland preservation, farmland tax relief, and development zone credits

allowed under Wisconsin law. These credits are allowed for business expenses that are deducted in determining net business earnings included in federal adjusted gross income. They are added back to income so that the taxpayer is not allowed both a deduction and a credit for the same expenses.

Subtractions from federal adjusted gross income in the determination of WAGI include:

• 60 percent of capital gains on assets held for more than one year. These gains are fully included in federal taxable income, though long-term gains are taxed at lower rates than ordinary income.

• Interest on U.S. government bonds, which the federal government may, but states may not tax.

47

• Railroad retirement benefits, railroad unemployment insurance, and sickness benefits, which are taxable under federal law, but which states are not permitted to tax.

• Pensions received by persons who were members of or retired from Milwaukee city and county retirement funds, the state teachers’ retirement fund, and the civil service retirement system prior to January 1, 1964. Veterans’ pensions also are exempt from Wisconsin income tax and subtracted in determining WAGI.

• A portion of Social Security benefits that is taxable for federal purposes. Up to 85 percent of Social Security benefits are subject to federal tax, but Wisconsin limits the amount taxed to 50 percent of those benefits. For taxable years beginning in 2008 or after, all federally taxable social security benefits are allowed as a subtraction.

• Active duty military pay received by a member of a reserve component of the armed forces, including pay for partial mobilization, for presidential selective reserve call-up, and for special state service. Persons who take this exemption may not claim the armed forces tax credit also provided under state law; this credit is for up to $300 of military income for services performed while stationed outside the United States.

• A portion of unemployment compensation, which is fully taxable under federal law but taxed by Wisconsin only when income exceeds $18,000 for married couples and $12,000 for most other filers.

• Disability income for certain persons younger than the mandatory retirement age, or age 65, who were permanently and totally disabled when they retired.

• Fifty percent of health insurance premiums paid by employed persons whose employers do not contribute to their health insurance. Wisconsin allows a deduction for 100 percent of the premiums paid by the self-employed, to the extent those premiums are not deductible for federal purposes. Starting in 2006, the 50 percent subtraction for employed persons whose employer does not contribute to their health insurance will be increased to 100 percent. Additionally, a subtraction for individuals with no self-employment income and no employer will be phased in during 2007 and 2008. In 2009 the full amount of health insurance premiums these individuals pay will be allowed as a subtraction.

• Premiums paid for long-term care insurance. • Tuition payments to post-secondary institutions in Wisconsin and to post-

secondary institutions in Minnesota covered under Minnesota-Wisconsin tuition reciprocity. For each qualified student, the subtraction is limited to two times the average amount charged to resident undergraduates by the University of Wisconsin System at four-year institutions for the most recent fall semester. For tax year 2005 the available subtraction was $4,244 per student. A deduction for tuition and other education expenses also is allowed under federal law, but Wisconsin does not allow this deduction since it provides its own.

48

• Contributions to and distributions from Wisconsin’s EdVest College Savings Program that are included in federal adjusted gross income.

• Adoption expenses of up to $5,000 in the year the final court order of adoption is entered, for expenses incurred that year and the two previous years.

• Travel expenses, lodging expenses, and lost wages incurred by a person who, while living, donates one or more of his or her human organs to another human being for human organ transplantation. The expenses and wages are deducted from federal adjusted gross income in the calculation of WAGI.

• Gain from the sale of business or farming assets to a related person. • Settlements received or gain on assets recovered due to persecution by

Nazi Germany or any Axis regime from 1933 to 1945. Subsequent to Wisconsin’s enactment of this subtraction, a similar exemption has been created in federal law.

• Wisconsin net operating loss carryforwards, when these amounts are different from the federal net operating loss carryover.

• Farm loss carryovers for persons subject to the Wisconsin farm loss limits. • State income tax refunds. In the federal tax calculation, persons who claim

an itemized deduction for state income taxes paid must add back any refund received so that the federal deduction is allowed only for net tax liability. Since Wisconsin does not allow a deduction for its own taxes, it does not require its income tax refunds to be added back to income.

Source: Wisconsin DOR, 2006

49

Appendix F: Distribution of the School Property Tax Credit and Homestead Credit by Claimant Location At the request of the Wisconsin DOR, we analyzed the School Property Tax Credit (SPTC) by geographic location. We looked at Grant, Milwaukee, Portage, Vilas, and Winnebago counties as well as the City of Milwaukee to represent the rural and urban areas of Wisconsin. We found that while these areas vary in the total number of claimants and the average credit amount claimed and used, the distribution within counties reflects the statewide distributions discussed earlier. Specifically, people at lower income levels receive less benefit from the credit, and homeowners receive larger credits than renters.

Distribution of the SPTC by Geographic Location To demonstrate how different geographical areas reflect the overall distributive trends discussed earlier, we highlight the number of claimants and the average credit received by county and the City of Milwaukee for the SPTC. Table F-1 below shows how the distribution of claims by tenure status looks approximately the same regardless of county.

Table F-1: Number of SPTC Claimants by Geographic Location

County

Total Number of

Homeowner Claimants

Number of Homeowners Using Some Portion of

Claimed Credit

Total Number of Renter Claimants

Number of Renter

Claimants Using Some Portion of

Claimed Credit Grant 11,670 10,183 4,217 3,417 Milwaukee 178,165 163,648 146,409 117,790 Portage 16,132 14,848 6,594 5,436 Vilas 6,259 5,261 1,432 1,126 Winnebago 36,903 34,273 17,554 14,640 City of Milwaukee 88,940 79,931 103,242 79,963

Statewide 1,323,695 1,216,246 614,304 510,833

Source: Created by authors using data provided by the Wisconsin DOR.

50

We also examine the distribution of the average credit amounts by county shown in Table F-2. While some counties, Grant County, for example, have lower average credit amounts than other areas of Wisconsin, the overall pattern between homeowners and renters is reflected in all counties. Furthermore, while Grant County’s average credit amounts differs from other areas highlighted by the Wisconsin DOR, all of the other counties in Table F-2 fall within $50 of the statewide average.

Table F-2: Average SPTC Credit Claimed and Used by Geographic Location

County

Average Homeowner

Credit Claimed

Average Homeowner Credit Used

Average Renter Credit

Claimed

Average Renter Credit Used

Grant $184.71 $185.21 $102.65 $100.79 Milwaukee $270.30 $264.03 $159.65 $156.96 Portage $234.51 $232.55 $115.95 $114.87 Vilas $208.90 $203.85 $126.32 $124.22 Winnebago $252.35 $249.13 $125.53 $124.45 City of Milwaukee $255.14 $248.56 $154.48 $151.89

Statewide $250.44 $247.52 $142.61 $140.95

Source: Created by authors using data provided by the Wisconsin DOR.

Distribution of the Homestead Credit by Geographic Location The distribution of the Homestead Credit by geographic location somewhat reflects the overall trend discussed earlier in the average credit received. First, homeowners receive a larger credit than renters in every place we examined, which matches the statewide trend. Also, the average credit for homeowners fell within $30 of the statewide average credit for every area examined except Vilas County. With respect to renters, however, the variation was much greater. The average credit for renters ranged from $383 in Grant County to $567 in the City of Milwaukee. All but Grant County fall within $92 of the statewide average. Thus, the credit renters receive varies more by location than it does for homeowners. Table F-3 shows the variation by geographic location in both number of claimants and credit amounts.

51

Table F-3: Average Homestead Credit and Number of Claimants by Geographic Location

Location

Total Number of

Homeowner Claimants

Total Number of

Renter Claimants

Average Credit for

Homeowners

Average Credit for Renters

Grant 1,136 888 $522 $383 Milwaukee 16,251 36,702 $566 $549 Portage 1,431 1,274 $559 $444 Vilas 744 334 $476 $441 Winnebago 2,968 3,629 $540 $443 City of Milwaukee 11,033 28,749 $579 $567

Statewide 105,725 126,524 $540 $475

Source: Created by authors using data provided by the Wisconsin DOR.

The distribution of Homestead Credit claimants also varies by location. Statewide we see that more renters than homeowners claim the credit; however, in Grant, Portage, and Vilas counties, more homeowners claim the credit. These areas are more rural and may have fewer renters in general.

52

Appendix G: Local Assistance Realized by a Median-Valued Home The estimate for the local assistance benefit realized by a median-valued home derives from the total aggregate funding provided to all taxing jurisdictions within Wisconsin. Table G-1 displays statewide totals for state-funded programs that provide local assistance. Local assistance differs by county, city, and school district; however the state aggregate amounts allow us to determine an average rate of aid. Aid is distributed uniformly as dictated by the Wisconsin Constitution. However, a 1999 constitutional amendment allowed the lottery and gaming credit to deviate from the uniformity clause. Therefore, unlike the other local assistance categories, the lottery and gaming credit provides property tax relief exclusively to property used as an owner’s primary residence. We exclude this credit when determining the rate of aid for all types of real estate property. We then add the credit back into the estimated aid realized by the median-valued home (Table G-3).

53

Table G-1: Local Assistance Provided to Counties, Municipalities, and School Districts from 1992 to 2006

Year

Shared Revenue &

Related Programs

($)

General Transportation

Aid ($)

Community Aids ($)

General School Aid

($)

Categorical School Aid

($)

Technical College Aid ($)

School Levies

Credit ($)

Lottery & Gaming Tax

Credit ($)

Total Local Assistance

Provided by the State ($)

1991(92) 911,000,000 239,200,000 304,900,000 1,618,200,000 332,200,000 109,200,000 319,300,000 173,400,000 4,007,400,000 1992(93) 928,700,000 248,500,000 309,800,000 1,696,800,000 335,900,000 111,800,000 319,300,000 203,700,000 4,154,500,000 1993(94) 972,300,000 261,200,000 320,300,000 1,832,200,000 349,900,000 117,000,000 319,300,000 128,700,000 4,300,900,000 1994(95) 1,012,600,000 276,100,000 328,100,000 2,093,500,000 370,400,000 123,500,000 319,300,000 136,600,000 4,660,100,000 1995(96) 1,008,600,000 284,400,000 331,900,000 2,349,100,000 364,000,000 124,400,000 319,300,000 156,200,000 4,937,900,000 1996(97) 1,008,600,000 292,900,000 303,400,000 3,184,500,000 381,500,000 124,400,000 469,300,000 - 5,764,600,000 1997(98) 1,008,600,000 326,500,000 303,100,000 3,396,000,000 408,700,000 126,900,000 469,300,000 205,800,000 6,244,900,000 1998(99) 1,008,600,000 326,500,000 295,500,000 3,562,500,000 426,900,000 128,600,000 469,300,000 142,700,000 6,360,600,000 1999(00) 1,019,200,000 348,500,000 306,500,000 3,767,900,000 458,300,000 130,100,000 469,300,000 216,200,000 6,716,000,000 2000(01) 1,019,200,000 348,500,000 302,300,000 3,931,900,000 531,400,000 140,700,000 469,300,000 90,600,000 6,833,900,000 2001(02) 1,029,400,000 359,000,000 262,900,000 4,051,600,000 550,800,000 139,300,000 469,300,000 105,000,000 6,967,300,000 2002(03) 1,039,700,000 373,300,000 261,700,000 4,200,900,000 574,200,000 137,300,000 469,300,000 105,100,000 7,161,500,000 2003(04) 951,700,000 373,300,000 206,200,000 4,273,100,000 533,200,000 135,700,000 469,300,000 118,200,000 7,060,700,000 2004(05) 951,700,000 373,300,000 206,200,000 4,317,500,000 540,400,000 138,000,000 469,300,000 131,900,000 7,128,300,000 2005(06) 956,400,000 380,800,000 212,300,000 4,613,900,000 545,200,000 138,000,000 469,300,000 119,900,000 7,435,800,000

Source: Created by authors using data collected from the Wisconsin Legislative Fiscal Bureau: Informational Paper 13 (1999, 2007b) and the Wisconsin Department of Revenue: Town, Village, and City Taxes – 2005, Table VI (2007).

54

Table G-2 below provides the rates of aid for all taxable real estate property for 1991(92) to 2005(06). As mentioned, this rate excludes the lottery and gaming credit. We calculated the rate of aid by dividing local assistance by the full value of taxable real estate property. This rate of aid has fallen from 1991(92) through 2005(06). When these rates are applied to the value of the median-valued home, we obtain an estimate of realized aid. This includes the fraction of shared revenue, transportation aid, community aids, general school aid, categorical aid, technical college aid, and the school levy credit that makes up the local assistance benefit realized for the median-valued home.

Table G-2: Rate of Aid Calculation for All Taxable Real Estate Property

Year

Local Assistance Provided to All Taxable Real

Estate Properties ($)

Full Value of Real Estate Property ($)

Rate of Aid for All

Taxable Real Estate Property ($)

Median-Valued

Home ($)

Estimated Amount Provided

to Median-Valued Home

($) 1991(92) 3,834,000,000 150,927,756,160 0.025 68,555 1,741 1992(93) 3,950,800,000 159,587,003,190 0.025 71,789 1,777 1993(94) 4,172,200,000 171,677,163,530 0.024 76,226 1,852 1994(95) 4,523,500,000 184,994,866,100 0.024 81,478 1,992 1995(96) 4,781,700,000 201,538,109,000 0.024 87,295 2,071 1996(97) 5,764,600,000 216,943,757,600 0.027 92,472 2,457 1997(98) 6,039,100,000 233,074,233,400 0.026 97,188 2,518 1998(99) 6,217,900,000 248,994,915,200 0.025 101,095 2,525 1999(00) 6,499,800,000 266,567,513,500 0.024 106,160 2,589 2000(01) 6,743,300,000 286,321,491,800 0.024 112,200 2,642 2001(02) 6,862,300,000 312,483,706,600 0.022 119,370 2,621 2002(03) 7,056,400,000 335,326,478,700 0.021 126,473 2,661 2003(04) 6,942,500,000 360,710,211,300 0.019 133,821 2,576 2004(05) 6,996,400,000 391,187,814,700 0.018 142,814 2,554 2005(06) 7,315,900,000 427,933,562,000 0.017 153,525 2,625

Source: Created by authors using data from the Wisconsin Legislative Fiscal Bureau: Informational Paper 13 (1999, 2007b) and the Wisconsin Department of Revenue: Town, Village, and City Taxes – 2005, Table VI (2007).

To estimate the total local assistance benefit for the median-valued home, we must add the estimated lottery and gaming credit. The WLFB has estimated the lottery and gaming credit amount for the median-valued home. Table G-3 displays total local assistance for the median-valued home, taking the lottery and gaming credit into account. The final column in Table G-3 provides a state average for the total benefit realized by the median-valued home through state assistance to local governments (i.e. county, municipality, and school district).

55

Table G-3: Total Local Assistance Provided to Median-Valued Home

Year

Estimated Aid without Lottery and Gaming Tax

Credit ($)

Lottery and Gaming Tax

Credit ($) Total

1991(92) 1,741 144 1,885 1992(93) 1,777 167 1,944 1993(94) 1,852 105 1,957 1994(95) 1,992 110 2,102 1995(96) 2,071 125 2,196 1996(97) 2,457 - 2,457 1997(98) 2,518 77 2,595 1998(99) 2,525 52 2,577 1999(00) 2,589 166 2,755 2000(01) 2,642 67 2,709 2001(02) 2,621 77 2,698 2002(03) 2,661 76 2,737 2003(04) 2,576 83 2,659 2004(05) 2,554 91 2,645 2005(06) 2,625 81 2,706

Source: Created by authors using data from the Wisconsin Legislative Fiscal Bureau: Informational Paper 13 (1999, 2007b) and the Wisconsin Department of Revenue: Town, Village, and City Taxes – 2005, Table VI (2007).