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Throwing a Lifeline to a Lifeline: How Other Tax Credit Reforms Can Save the Circuit Breaker

circuit breaker property taxThe circuit breaker is a popular tax credit that helps Missouri seniors and people with disabilities with fixed incomes to stay in their homes by offsetting costs related to property taxes. Lawmakers have been discussing several proposals to eliminate renters from the credit. While low-income seniors who rent their homes may not pay property taxes directly, property owners pass property taxes to their tenants through rental rates. Missouri can make other changes to tax credits that would both preserve the original policy intent, and save taxpayer money.

Eligibility for the Circuit Breaker Property Tax Credit

In 2016, Missouri’s circuit breaker property tax credit helped 193,561 seniors & people with disabilities with fixed incomes stay in their homes. 100,706 of those were renters.

For renters to qualify for the credit, income must be $27,500 or below if single, and $29,500 or below if married. For home owners, income must be $30,000 or less if single and $34,000 or less if married. The maximum credit is $750 for renters and $1,100 for owners. The actual credit is based on amount paid and total household income, taxable and nontaxable. In 2016, the average credit was $535.  (SOURCE: Missouri DOR)

Renters are Eligible for the Credit in 17 of 18 States with a Circuit Breaker

Eighteen states provide a Circuit Breaker. In 16 of those, circuit breakers are available to both homeowners and renters. Renters qualify based on their rental payments, as it is assumed that property owners pass through a portion of their property taxes to tenants. In one state, only homeowners qualify, while in another state only renters qualify for the circuit breaker.

A large body of evidence shows that lower-income families are much more likely to face high housing costs — usually defined as costs that exceed 30 percent of income — than are high-income families. Families below the poverty line typically spend 42 percent of their income on housing compared to the national median of 22 percent.  Families with high housing costs typically pay high property taxes relative to their incomes since property taxes within a given community tend to be roughly proportionate to housing costs.

Renters — who are disproportionately represented among low-income families— also can face high property taxes relative to their incomes. This is because landlords generally pass along a substantial portion of property taxes to them in the form of higher rents. (Source: Center on Budget & Policy Priorities “THE PROPERTY TAX CIRCUIT BREAKER: An Introduction and Survey of Current Programs”, 2007)

Reforming the Low Income Housing Tax Credit

Instead of making changes to the Circuit Breaker, Missouri has opportunities to reform other tax credits and tax statutes that would enhance the fiscal responsibility and stability of the state while supporting investments in critical services, including education, health care and public safety.

For example, because state taxes are deductible on federal taxes, about 30% of the value that developers receive from the Low Income Housing Tax Credit is eaten up in higher federal taxes. In response to this dynamic, several other states have transitioned their low income housing or other tax credits to forgivable loan or grants programs. In order to avoid federal tax consequences, Minnesota transitioned their program to a direct appropriation or grant program, which combines federal Low Income Housing credits with state funds to support the development of low income housing. North Carolina operates a “refundable credit” model, which allows state funds to avoid federal tax consequences. Converting to either model would allow Missouri to save at least 30% of the cost of the program, while maintaining the same impact. In 2016, $170 million in Low Income Housing Tax Credits were redeemed. Converting our model to a refundable credit, direct appropriation or forgivable loan program could have saved Missouri $51 million that year alone.

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