2) Comparing the 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 households. She has asked you to analyze three proposals:

(1) Homestead exemption of $10,000 on assessed value of 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 difference 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.

She has asked you to compare the impact on three typical households: TABLE is in attachment

* The market value of an apartment is what it would sell for as a condominium.

The other pertinent information for your analysis includes:

- all households have 4 persons

-nominal property tax rate: 5% of assessed value

-official assessment ratio: 50%

-assume all property taxes on rental property are passed onto the renter

-The state has a flat income tax with a rate of 8% on all taxable income. For simplicity, you can assume that taxable income equals total income.

Using this information answer the following questions. Use excel and show formulas.

a) Calculate the property taxes paid by each household and the two types of "effective tax rates" (total taxes divided by income, and total taxes divided by market value) for the following three cases:

(a) without the homestead exemption or reassessment;

(b) with the homestead exemption of $10,000;

(c)with reassessment of property. You can assume reassessment means that all estimated market values are brought up to actual market value. The assessed values will adjust to keep the official assessment ratio equal to 50%.

(d) with the circuit breaker.

Compare the impact of these two proposals on horizontal and vertical equity relative to the present system.

b) If you assume that tax rates can be adjusted so that these two proposals raise the same revenue, evaluate them on the other criteria. Based on your evaluation of all criteria, which would you recommend?

Please use Excel. Show formulas so I understand how to calculate.