A homestead exemption based on a fixed percent of home value is a regressive and ineffective affordability policy. It engenders a permanent loss of much-needed revenue for public investments. Spending directly on policies that promote abundant housing supply is an effective, progressive alternative. Said progressive alternative targets the actual problem: extraordinary assessment growth due to a lack of supply in desirable neighborhoods.
The case for
Many council candidates – such as Laura Pressley – are pressing the City to adopt the maximum allowable homestead exemption. According to state law, that’s an exemption of 20% of a property’s assessed value. The exemption reduces the taxable value, which in turn reduces the taxes owed on a primary residence. A home assessed at $200,000 would only have a taxable value of $160,000. A resolution sponsored by Council Members Cole, Tovo, and Morrison requested a study of the benefits and fiscal impact of homestead exemption adoption by the City (the County already has an exemption).
The loss of revenue from the exemption must be made up by budget cuts or an increase in tax rates.
Proponents argue that relief is necessary due to rising tax bills. In their view, the exemption policy contributes to ‘affordability’ for homeowners by lowering their outlays to City government.
The case against
The relief for the typical homeowner (i.e. median home assessment of approximately $200,000) is calculated by City finance staff to be around $16 per month; that amount goes down to $10 per month if rates are adjusted to remain revenue neutral. But given the extremely large number of potential homestead claims (130,000 for the Travis County program), the expected ‘cost’ of the exemption is $36 million in lost revenue.
The relief provided by the exemption is not a meaningful enough amount to impact affordability. The median household income is $52,341 in Austin. Hence the annual savings are so small they don’t even reach 1% of income for the ‘typical’ Austin home assessment at the median income.
Further undermining the effectiveness of the homestead exemption are the market dynamics it supposedly seeks to correct. In a tight market, reducing the effective ongoing cost of a home by a infinitesimal amount doesn’t necessarily lead to lower per-square-foot prices. Assessment growth will continue as long as there isn’t sufficient supply. This is obvious since there’s already a homestead exemption program at the county level. The exemption does not improve the ability of the market to supply housing. It also does nothing to provide subsidized-housing.
The shift in taxation towards commercial property is regressive because the commercial category includes rental properties. Rental is the housing choice of those with relatively lower incomes and assets. Certainly, much commercial property is non-residential. This reduces the regressive aspect. And in a city that is majority rental units, the impact on an individual’s rent should be just as tiny as the relief provided most homeowners. We’re talking about tiny amounts both ways. One proponent of the exemption calculated that, assuming a full pass-through to renters, a typical renter pays $7 more per month versus a typical homeowner saving $10.
The policy writes the biggest checks to the most expensive residences – homes that are likely overwhelmingly composed of high-income, high-wealth individuals. A $2 million dollar-assessed home would get closer to $1,900 per year ($160 per month) under a 20% homestead exemption at current rates. A progressive scheme would aim windfalls at those in most need – the exact opposite of this policy.
Some proponents argue that there is plenty of waste in City budgets that could be cut so that renters don’t carry an additional burden in the next few years. Unfortunately, the problem with creating a permanently more regressive scale is that eventually they will certainly bare a disproportionate burden of future increases. Perhaps most importantly, there is a tremendous opportunity cost to allocating sizable resources to a regressive program given the many better alternatives available. To contextualize the size of the resource shift, $36 million is the current budget for the entire Austin Public Library.
A better alternative
The distribution of household income in Austin in the chart above makes clear that close to 23% of Austin households (74,095 of 325,991) have incomes under $25,000. While some of these are students, many are Austin’s working poor and unemployed. If we were simply interested in effectively using $36 million to reduce suffering from economic hardships by writing checks, this is the group of Austinites to target.
It’s doubtful many of the Austinites in this group own homes; there’s already an over-65 homestead exemption for individuals on fixed incomes. A generous ‘Income Assistance’ program delivered through the electric utility targeting some subset of this group (e.g. single parents who have fallen behind on their bills or are on unemployment insurance) would be a more effective household-level rebate program for delivering true affordability. Utility costs are a larger bill than the City’s property taxes for the typical resident.
Rebates don’t address the real problem, though. A better use of the annual $36 million (and likely to grow) loss in revenue from a 20% homestead exemption would be to directly target the actual problem: extraordinary assessment growth. Any relief from homestead exemptions will be flattened by our out-dated land use policies and limited subsidized-housing and publicly-led housing development initiatives. I’ve previously detailed several well-understood, proven initiatives that can help provide market-rate and subsidized supply that would help stabilize assessment growth by loosening the market.
Let’s just examine one alternative package: we commit the same amount as we would have spent on a homestead exemption towards a mix of subsidized and market-rate housing initiatives. Under this alternative plan, the City would do this for six years – which is the same time period as each of our previous two rounds of affordable housing bonds.
In that time – given past productivity of the affordable housing bonds – we could leverage $216 million in spending to build, rehabilitate, or weatherize over 10,000 housing units. These units could be placed in transit corridors or employment hubs, further promoting affordability through car independence. Subsidized units would provide meaningful income support to low-income Austinites; market-rate units would ease assessment growth.
After six years, the $36 million could continue to be focused on achieving an abundant housing supply. Or it could be switched to address whatever more pressing problem arose. Sadly, once the exemption is put in place, that revenue is gone forever.
And that’s ultimately the core flaw with the homestead exemption proposal: it undermines our ability to achieve the common good. Instead of thoughtful public investment, the homestead exemption proposal doles out tiny, symbolic rebates. It might be good politics but it’s definitely not good public policy.