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. A homestead exemption of $10,000 on assessed value of owner-occupied residential property.

2. A comprehensive reassessment of all property so that the estimated market values of properties equal the actual market values of these properties; 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 tax

payment, I is income, b is the share of income considered to be a high property tax burden.

When actual property tax payment (PT) exceeds the acceptable property tax burden (b*I), the difference is the income tax credit; if bI > PT, then the credit is set equal to zero.

The property tax burden parameter (b) is equal to 7% if household income is below $20,000; it is 8% if household income is between $20,000 and $30,000; it is 9% if household income is between $30,000 and $40,000, and it is 10% for household income above $40,000.

The mayor has asked you to compare the impact on three typical households:

Household income $ 15,000 $ 15,000 $ 50,000

Actual market value of property $ 60,000 $ 60,000 $ 150,000

Estimated market value of property $ 60,000 $ 60,000 $ 100,000

Assessed value of property $ 30,000 $ 30,000 $ 50,000

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

The other pertinent information for your analysis includes the following:

All households have 4 persons

Nominal property tax rate: 5% of assessed value of property

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 household income.

1) Calculate the property taxes paid by each household and the two types of "effective tax rates" - property taxes divided by gross (before tax) income, and property taxes divided by actual market value of homes - for the following four cases:

a) The present system, without the homestead exemption, reassessment, or circuit breaker;

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 their actual market values. The assessed values will adjust to keep the official assessment ratio equal to 50%.

d) With the circuit breaker. Assume that renters and homeowners are eligible for the circuit breaker and that the circuit breaker is refundable, that is, if the amount of the income tax credit provided by the circuit breaker exceeds the amount a taxpayer owes in income taxes, then the taxpayer receives a check for the difference between the amount of the credit and the amount of taxes owed. In calculating the property taxes, subtract the circuit breaker credit from property taxes calculated in part (a).

2) Compare the impact of these three proposals (b, c, and d) on horizontal and vertical equity relative to the present system (a). For your calculations, assume each proposal is implemented independently. For example, the circuit breaker is implemented without the homestead exemption or reassessment.

3) Based on all the criteria of tax evaluation (equity, efficiency, adequacy, and feasibility), which proposal would you recommend and why?