2)

Comparing t

he effects of three changes to the property tax:

Assume that the mayor of your city is concerned about the property tax burden on low

-

income

1

This problem is adapted from problem 3 in Chapter 9 of John Mikesell. 2003.

Fiscal Administration

. (New York:

Wadsworth Publishers).

households. She has asked you to analyze three proposals:

(1)

Homestead exemption

of $10,000 on assessed value o

f owner

-

occupied residential

property.

(2)

Comprehensive reassessment

of all property to so that estimated market value

equals actual market value; and

(3)

A

circuit breaker

, which is a credit for high property tax burdens on the state income

tax. The

circuit breaker credit (CB) is equal to

(PT

b*I)

, where

PT

is property

taxes,

I

is income,

b

is the share of income considered to be a high property tax

burden. When actual property taxes (

PT

) exceed the acceptable property tax burden

(

bI

), the differen

ce is the income tax credit; if

bI > PT

, then the credit is set equal to

zero. For renters, their property taxes are assumed to be 10% of income. The

property tax burden parameter (

b

) is equal to 7% if income is below $20,000, 8% if

income is $20,000 and

$30,000, 9% if income is between $30,000 and $40,000, and

10% for incomes above $40,000.