Proposed pilot projects could reduce tax burden for older people.
Some exciting news. Adam Scanlon, a representative of the Massachusetts House of Representatives, filed a bill to establish the “Advanced Property Tax Delayed Pilot Program.”
I have always been a big fan of seeing a home as a retirement asset and the way people can get fair ways to support retirement at home. The traditional approach involves reducing the size, which requires retirees to move or take out the reverse mortgage, which allows people to stay in place, but involves substantial complexity and expected expenses. A better option in my book is property tax deferral.
Massachusetts has long recognized the property tax burden on older people and has developed three plans that could reduce relief for low-income taxpayers (see Figure 1). The biggest is the circuit breaker tax credit for taxpayers over 65 who own or rent a residential property. Credit equals property tax (half of water and sewer fees) or 25% of its rent exceeds 10% of income. The second largest is tax exemption for property tax over 70 years old who meets strict ownership, income and asset requirements. The smallest plan is a property tax extension, which allows local governments to allow some seniors to postpone property tax payments and recover those taxes plus interest when the homeowner dies or sells the home.
The adoption of extension plans is particularly low. There seem to be three factors at work. First, most homeowners are not eligible. Second, eligible homeowners are unaware of the plan (as only wealthy communities tend to promote their plans) and are often confused with other tax credits and exemptions plans. Third, homeowners who meet the criteria and are aware of often don’t know how to apply, worry about the stigma that comes with the income test plan, or hesitate to place the lien on their homes.
A few years ago, we proposed a new statewide property tax extension program that addresses many of these shortcomings.
- All individuals over 65 who have a major residence in Massachusetts will be able to defer their property tax to the initial $1,000,000 home net worth until the deferred extension, the sum of accumulated interest and mortgages combined reaches 60% of the assessed value.
- Participation in the program will be triggered by simply checking the box of the city or town property tax bill.
- When a city or town forwards a tax bill to the state, the state will send an amount equal to the deferred tax to the city or town.
- The annual interest rate will be set at the state’s borrowing costs and buffer regulations to cover administrative costs and defaults.
- The state will retain a lien on the home for unpaid property taxes and will repay principal and interest within one year of the homeowner's death or sale of the home.
This new plan will achieve several important goals. First, the average Massachusetts older homeowners can earn about $4,755 a year through a property tax extension. Homeowners can choose to defer a year to help pay for the cost of a new roof, or to postpone it annually to supplement Social Security and any other retirement income. Second, providing all available plans to everyone eliminates any concerns about stigma associated with the extension, which is important because insufficient retirement income is not limited to the poor. Third, it will reduce local burdens and encourage them to promote its availability.
The pilots represented by Scanlon will involve a group of municipalities, so about 10,000 families are eligible to participate. The median income of participants should match the entire state of the state and municipalities should include various regions throughout the state. Pilots will provide an opportunity to see how many families choose to participate, assess the impact on participants and assess the potential costs of the statewide program. (While the program will be neutral income at the household level, it affects cash flow when the government expects expected income and recoups interest from the loan only when the home is sold.)
The Advanced Property Tax Deferred Pilot Program is a good idea. Hope the legislature supports it.
