Great Barrington tax reforms: Residential exemption, split rate could benefit most homeowners

Editor’s Note: This article details a proposal for reforming the Great Barrington tax structure in order to reduce property taxes for 80 percent of the residents of Great Barrington. To read Michael Wise’s accompanying advocacy of this approach, click here. 

Summary

Great Barrington’s taxes are high enough that some people are finding it unaffordable to live here. We can do something to help them stay.

Towns like Great Barrington that provide good public services have higher taxes than those that don’t. Other towns in the county of similar size that provide similar services also have higher-than-average taxes. In Williamstown, for example, tax bills are even higher than ours. But the taxes feel higher here because family and household incomes are lower. Great Barrington’s property tax bills, in relation to median income, are the highest in Berkshire County.

There are several measures we could take concerning our property taxes that would help keep Great Barrington affordable:

• Residential exemption: making the property tax progressive, shifting its impact from lower-valued homes toward more expensive properties and second homes.
• Split rate: easing the burden on homes by setting a higher tax rate for commercial and industrial properties.
• Tax relief programs: using means-based exemptions and refundable credits, mostly for seniors.

Under state law, towns can decide which measures to adopt and how to implement them.

Adopting the residential exemption would cut most homeowner tax bills. The mechanics look complex: The exemption, which applies to owner-occupied homes but not to rentals or second homes, is a fixed amount that is subtracted from assessed value to determine taxable value. To compensate for how it shrinks the residential tax base, state law requires raising the residential tax rate. Combining the effects of the smaller base and higher rate produces a “break-even” value. For homes below that value tax bills would decrease, and above it they would increase. The maximum exemption here would be $64,733, which would make the break-even $470,000.

The effect is clear: three-quarters of the town’s residential properties are assessed below that break-even value and thus could benefit. At the median home value, of $294,400, the residential exemption would cut the tax bill 11 percent. Benefits would be concentrated in Housatonic village and Risingdale, where most tax bills would drop at least 20 percent. Not all would benefit, of course. Near the break-even value tax bills would not change much, up or down. For the 100 high-end homes valued over $850,000, half of which are second homes, the tax bill would increase by seven percent or more.

A split rate, by itself, could not help residential taxpayers as much. The highest permissible split rate could reduce the average single family tax bill by 13.5 percent; however, that would raise the average commercial tax bill by 50 percent, which could drive away business and jobs. If a split rate is used, it should be at a lower level.

Combining the residential exemption with a lower split rate – and all of the towns that use the residential exemption also use a split rate – could make the nominal rate for all property the same while still providing a substantial benefit to most residential taxpayers. If Great Barrington adopted a split rate that raised business taxes 10 percent, along with the maximum residential exemption, the tax rate for all would be about $15.85 per thousand. That rate would fund the proposed budget for 2016, including the school assessment, while 80 percent of the homeowners living in Great Barrington would have lower tax bills than they are paying now.

Major changes like these would have side effects, amounting to potential costs that must be weighed against the benefits. Implementation of a split rate would be straightforward, but setting up for the residential exemption would be more complex. Towns that use it advise adding resources for administration and providing for a year of lead time. The residential exemption would make the town less attractive for expensive second homes. It would increase the taxes on rental properties, and landlords might try to pass that through to tenants.

The residential exemption tends to make the property tax progressive, which many (but not all) would take to be a benefit. It could, however, create problems for seniors trying to stay in expensive homes on reduced and often fixed incomes. Implementation of the residential exemption depends on making sure that this problem is addressed.

Several programs under state law can help seniors with their property taxes. The “circuit breaker” is a refundable income tax credit for property tax that exceeds 10 percent of a senior’s income. Seniors whose incomes and property values are similar to community averages in Great Barrington are likely to qualify for this relief. There is a means-based exemption for seniors under which the state reimburses the town for revenue lost. Great Barrington offers the maximum relief under this program, and the town granted 29 of these exemptions in 2014. But Great Barrington might do still more. Notably, we have not yet adopted the program that permits seniors with modest incomes to defer paying their property taxes until the taxpayer dies or the property is sold.

Great Barrington’s property tax burden

Taxes in Great Barrington are among the highest in Berkshire County. The average household tax bill here in 2015 is $5,138. Only Williamstown’s $5,552 is higher. Taxes in nearly all of the towns that are comparable to Great Barrington, in size and in range and quality of town services, are higher than the county-wide average. In the larger towns nearby the average bill is somewhat lower than ours, while in the small towns that provide few services it is much lower.

Source: Massachusetts DOR

Affordability is the challenge. In relation to income, property taxes in Great Barrington are also higher than elsewhere in Berkshire County. Incomes in Great Barrington appear to be in the mid-range among its Berkshire County peers and neighbors, about equal to the state average and above the Berkshire County average, when measured by per-capita income. But comparison based on household and family incomes reveals sharper differences. Household incomes in Great Barrington, although equal to the county average, are below nearly all of the comparable towns, while Housatonic village, considered separately, is at the bottom of the ranking for the entire county. Family incomes are somewhat above the county average and nearly as high here as in Lenox and Sheffield, but they fall far short of Williamstown and West Stockbridge. By this measure too Housatonic village ranks lowest in the county. (In the following table, which ranks towns in descending order of median household income, the “CDP” entries are for the towns’ central neighborhoods).

Source: U.S. Census, 2009-2013 American Community Survey 5-Year Estimates

The most direct measure of the tax burden is the relationship between property tax bills and incomes. When average household tax bills are compared to median family incomes, Great Barrington leads in Berkshire County. Nearly all of the comparable towns, as well as two of our smaller neighbors, are also above the county-wide norm. This comparison is an imperfect measure, because average taxes are significantly higher than median taxes in Great Barrington, and that might be true in other towns too. Nonetheless, comparing an estimate of median tax bills to median family incomes finds that Great Barrington still ranks highest. Both of these estimates, summarized on the following table, are based on some old data (from 2009-2011), and the percentages shown are misleadingly precise. The ranking is probably essentially accurate, though, showing that in relation to income, property taxes in Great Barrington are the highest in Berkshire County.

Property values are also relatively high here. The value of the average single family home is now slightly higher than the statewide average. It was well below the statewide average until 2008. Similarly, the average single family home tax bill here has risen since 2008 to slightly above the statewide average.

Compared to Berkshire county, the median home value in Great Barrington is about 50 percent higher than the county-wide value. Indeed, the median value here is higher than in the county’s other large towns, although values in Williamstown and Lenox are nearly as high. Yet in some smaller towns around Great Barrington the median value is even higher, probably because they have a much higher proportion of expensive second homes and estates. Data about median values in the chart below is from 2009. Prices dropped somewhat since then because of the financial crisis, but the relative positions of the towns are probably still roughly accurate.

Median home values in Berkshire County

Within Great Barrington, values vary widely. The average home value is much higher than the median value, and even that is well above the value of the typical home. In 2014, two-thirds of the single family homes were assessed below the arithmetic average value of $374,000. The median value was 22 percent lower: half of the homes in Great Barrington were assessed at or below $294,400.

Yet even that figure is much higher than the value of the “typical” home, which was assessed at approximately $200,000-$225,000. The chart above shows the number of homes in different categories of value. The bottom scale is divided into increments of $25,000 in assessed value. The left scale shows the number of single family homes in each segment. The peak is at the segment $200,000-225,000, in which there are about 230 homes; there are more homes in Great Barrington in that value range than in any other. About one-quarter of the 2,113 single family homes in Great Barrington are valued between $175,000 and $250,000. These relatively modest-valued homes are concentrated in Housatonic village and Risingdale. In those neighborhoods, the average assessed value is $230,000 and the median value is $213,000. (At the high end, above $800,000, the horizontal scale of this chart is compressed; otherwise, it would be three times wider and run way off the page to the right).

The property tax impact on most homeowners is lower than the average figure that is commonly reported. At the 2015 tax rate of $13.72, the tax bill on the average single family home is about $5,140. The bill for the median value home is about $4,050, and for the “typical” value home, about $2,930.

Second homes, which tend to be more expensive, increase the average value. They only comprise about 15 percent of the residences in town, but their values tend to be much higher than those of the homes occupied by permanent residents. The average value of single-family parcels that are second homes is about $460,000, which is nearly 35 percent higher than the average value of those that are not. The more expensive the home, the more likely it is to be a second or seasonal home. Of the 100 single family homes in town that are assessed at more than $850,000, half are second homes. Twenty-five second homes are valued over $1 million. In the chart below, each dot represents a group of 100 single-family homes, increasing in value from left to right. The circles show the average value of the parcels within each group (right scale). The diamonds show the percentage in each group that are second homes (left scale).

Data on second-homeownership comes from the records of the Great Barrington town assessor. Some of properties listed in those records are condominiums and mixed use properties, which are not shown on this chart. Of the approximately 185 condominiums in town, a large proportion (though less than half) are second homes.

Potential solutions

This report discusses several ways provided under state law to deal with the impact of property taxes on affordability. The three principal topics are:

• Split rate: The tax burden can be shifted among different classes of property, which results in a higher tax rate for commercial and industrial properties than for residences and open space.
• Residential exemption: By exempting from tax some of the assessed value of principal residences, this measure has the effect of making the property tax somewhat progressive. It reduces the taxes paid by those who own and live in less valuable homes, while increasing the amount collected from homes that are more expensive or that are not primary residences.
• Tax relief programs: State law authorizes several ways to relieve the burden of high property taxes, through exemptions or refundable credits. Most of these are aimed to help seniors.

Local governments can decide which, if any, of these programs to adopt and how to implement them, subject to parameters and limits set out in state law. The decision-making authority for this purpose is the Selectboard. Every year in the fall, after the state Department of Revenue has signed off on the town’s property evaluation data, the Selectboard holds a “classification hearing” at which it formally sets the tax structure and tax rate to collect the revenues needed to support the budget that was approved at town meeting. At that hearing, the Selectboard decides whether to use a split or flat rate, whether to authorize the residential exemption, and whether and how it will implement the other tax relief programs. To date, Great Barrington has not used either the split rate or the residential exemption, and it has used some, but not all, of the other tax relief programs.

Split rate

A split rate, charging different rates to different kinds of property, must be explicit. A town may not shift the tax burden by manipulating the assessed valuations while applying an ostensibly flat tax rate. The state monitors local assessment and taxation to ensure fair treatment. State law governs how much a town can shift the tax burden by reducing the percentage paid by residential property and correspondingly increasing the share paid by commercial and industrial property.[i]

The rules for applying the split rate use two technical terms, the “residential factor” and the “CIP shift.” The “CIP shift” is the proportion by which the amount raised from commercial, industrial and personal property exceeds the flat-rate levy. The CIP shift usually cannot be greater than 1.5.[ii] The “residential factor” is the revised percentage of the flat-rate levy that is to be raised from residential properties. When the rate is not “split” at all this factor is 1. The residential factor must normally be at least 65 percent. The residential factor that a town can adopt depends on how much CIP property is there. In a town with little CIP property, increasing the CIP share of the levy even by the maximum amount would not change the residential factor very much.

To illustrate the computation, suppose residential properties in a town accounted for 80 percent of the total assessed value, and commercial and industrial properties for the remaining 20 percent. (These are roughly the proportions for Great Barrington). Then the maximum that can be collected from commercial and industrial properties is 1.5 times that proportion, or 30 percent of the total. With 30 percent of the total collected from commercial and industrial properties, the levy on residential properties drops to 70 percent of the total. That figure is 87.5 percent of what would have been collected by the single rate, so 87.5 percent is the “residential factor.” If CIP property is only four percent of the tax base, then even the maximum CIP shift of 1.5 would cut the residential levy by just over two percent, to 97.9 percent of the flat-rate level. But if CIP property is 40 percent of the tax base, then the maximum CIP shift corresponds to a near-minimum residential factor of 66.6 percent and thus a tax cut of about one-third for residential property.[iii]

Over 100 towns and cities in Massachusetts, that is, nearly a quarter of them, use a split rate. Five towns and cities in Berkshire County use a split rate in 2015:

Source: DOR website

The following table shows the effect in Great Barrington of adopting a split rate at different degrees of CIP shift. Residential property and open space are 78.7 percent of assessed value here, and commercial, industrial and personal property are 21.3 percent. The median value of commercial and industrial parcels is $366,000, and the average value is $682,551. At the maximum CIP shift of 1.50, tax bills on residences would fall by 13.5 percent, but tax bills on CIP property would increase by 50.6 percent. At half of that level, or a CIP shift of 1.25, the tax rate on residences would fall by eight percent (from $13.72 to $12.79), and the average single family tax bill would drop from $5,138 to $4,790. At this rate, the “typical” single family home tax bill would drop from $2,950 to $2,750. The rate on CIP property would rise by 25 percent (from $13.72 to $17.15), and the average CIP tax bill would increase from $9,365 to $11,706.

Source: Assessor’s data for 2015

Implementation of the split rate would be straightforward. The town’s property records already classify properties into these categories. Programming the billing software to assign the correct tax rates would be a simple step.

Trying to shift too much of the burden onto CIP property could backfire, though. Charging a higher rate makes the town appear unfriendly to business. Setting it too high could drive out jobs and even reduce tax revenue, if it became too expensive for businesses to stay in Great Barrington. A modest increase would not put Great Barrington out of line with its neighbors. Lenox is the nearest large town with a commercial center and a split rate, where the CIP shift of 1.18 leads to tax rate for commercial and industrial properties of $15.18, nearly 11 percent higher than our current rate of $13.72, and an average bill of $15,600. In Lee, which does not use the split rate, the rate is $14.08, slightly higher than ours, and the average bill is $11,226.

Residential exemption

The residential exemption option was created in 1979 as part of a general legislative reform of property taxation and assessment practices.[iv] In jurisdictions that have adopted it, the taxable value of an owner-occupied principal residence is determined by subtracting the fixed “residential exemption” from its assessed value. The amount of the exemption is the same for all, so the proportionate effect of the exemption is much greater for a less expensive home. The exemption reduces the taxable value of the town’s residential properties. To raise the same revenue from that class of property, the residential tax rate must be increased. The combined effects of reducing the taxable value and increasing the tax rate produce a “break-even” value where the tax bill is the same with or without the exemption. For homes above that value, using the residential exemption increases the tax bill. For homes below that value, the savings could be substantial.[v]

Second and seasonal homes do not get the exemption. The exemption could thus be seen as a way of raising more revenue from that aspect of the local “tourism” business. Rental houses and apartments also do not get the exemption. Condominiums and co-ops that are the principal residences of their taxpaying owners may get the exemption.

This local option has been adopted in fourteen towns and cities in the state. About 1 million people, or 15 percent of the state’s population, live in places where the residential exemption is used. Most of these places are in the core of the Boston metro area inside Route 95: Boston, Brookline, Cambridge, Chelsea, Everett, Malden, Somerville, Waltham and Watertown. Due to special legislation, in Boston, Cambridge and Somerville the exemption is 30 percent of the average Class I value, rather than the 20 percent maximum that applies in the rest of the commonwealth. The residential exemption is also used on the Cape and the islands, in Barnstable, Nantucket and Tisbury, where it shifts property taxes toward expensive second and seasonal homes. Two towns, Marlborough and Somerset, that are neither in the core Boston area nor on the Cape also use it. Most jurisdictions that use the residential exemption adopted it shortly after the reform legislation 35 years ago. Towns that have considered it since then, or that are considering it now, include Concord, Hingham, Mashpee, Newton, Sudbury, and Weymouth.

In Great Barrington, the maximum exemption would be $64,733. That is 20 percent of the average assessed value of residential property, which for this purpose is $323,666. That average is based on residences of all types, including condominiums and mixed use properties as well as single-family homes. There are 2,113 single-family residences in Great Barrington, with an average value of $374,519 and median value of $294,400, and 187 condominiums, with an average value of $265,131 and median value of $213,150. In addition, there are 144 mixed-use parcels with residences.[vi] Second homes account for 286, or 13.5 percent, of the single-family homes. The remainder of the approximately 385 second homes in town are condominiums or residences in mixed use properties. The proportion of condominiums that are second homes appears to be significantly higher than the proportion among single family homes.

The effect of the exemption depends on the proportion of property owners who are residents and claim the exemption. Predicting the effect thus requires knowing how many residences are rentals and second homes, which could not claim the exemption. The town maintains data about second home ownership, but not about which properties are rented. Some idea about the number of rentals can be derived from Census data. According to the 2010 Census, 37.5 percent of 2,879 occupied housing “units” in Great Barrington were rented. Many of those would be apartments, but some would be homes, condominiums or parts of duplexes or triplexes. The Census found that 1,800 “units” were owner-occupied. Second homes are treated as “vacant” under the Census definitions and thus would not be included in those figures. Although the Census definitions are not the same as the town’s assessment classifications, nonetheless the Census figure of 1,800 owner-occupied units is roughly consistent with an estimate based on the town’s assessment data. The number of single family homes, condominiums, mixed-use residences and duplex and triplex parcels, minus the second homes, comes to a total of about 2,350. If about 20 percent of those are rentals (while the rest of the renters are in apartments), that would leave about 1,900 properties occupied by permanent residents.

The following table tests how varying the assumptions about the rate of owner-occupancy changes the post-exemption tax rate and the break-even point. It is based on the maximum 20 percent exemption. The first data column assumes that nearly all single family homes and condominiums are owner occupied; that produces a tax rate of $16.64 and a break-even point of $330,000. Reducing the proportion of owner-occupancy lowers the post-exemption rate and raises the break-even point. The next three columns show the effect of reducing the owner-occupancy rate for single family homes and condominiums in steps of 10 percent. The last column shows the effect of treating most condominiums as non-resident or rented and a quarter of single-family homes as second homes or rentals.

Source: Department of Revenue website calculator

Varying these assumptions changes the post-exemption tax rate by only about five percent, from $15.85 to $16.64, but it changes the break-even point by 28 percent, from $424,934 to $330,908. The following chart uses the maximum and minimum rates from this table to illustrate the potential impact of the exemption in Great Barrington. It shows the percentage change in the household tax bill for properties in different value ranges.

The sharp drop at the left side of the chart shows the dramatic reduction for taxpayers with less expensive homes, under any set of assumptions about the proportion of renters or second homeowners. Even on the most conservative assumptions, producing a tax rate of $16.64, the tax bill for the median home would drop by six percent, and for the “typical” home, by 16 percent. Assuming a lower rate of owner-occupancy, leading to a rate of $15.85, the tax bill for the median home would drop by 11 percent, and for the “typical” home it would drop by 20 percent.

That lower rate is credible. Using 2015 data and assuming that the residential exemption would be claimed for 2,000 properties (relying on a conservative reading of the Census tally of 1,800 owner-occupied housing units), the resulting tax rate would be $15.59 and the breakeven point would be about $468,000. Because the median values of single family homes and condominiums are well below the break-even points under any of these scenarios, most residences in Great Barrington would benefit from implementing the exemption.

Benefits would be concentrated in Housatonic village and Risingdale. Each of Great Barrington’s four precincts contains a mix of high-end and modest houses. But in Housatonic village and Risingdale, 90 percent or more of the homes are valued below the break-even points of these examples. The average ($230,000) and median ($213,000) values in these neighborhoods are the “typical” value for the town as a whole, for which tax bills would drop by from 11 to 20 percent.

Around the break-even point is a mid-range where changes would be small. The precise location of that break-even point is not yet clear.[vii] For a post-exemption rate of about $16.00, it would be in the range of $425,000-$475,000. Around that range, there are about 350 homes, plus 30 condominiums and 20 mixed use residences, for which the tax bill would change less than three percent, up or down. Farther up the value scale, for about 350 single-family homes, 20 condominiums, and 25 mixed use residences the tax bill would increase by more than three percent. At the high end, over $850,000, the bill would increase by seven percent or more, up to 16 percent for the handful valued over $2 million. Half of these top 100 high-end homes are second homes.

Combination of split rate and residential exemption

All of the towns that use the residential exemption also use a split rate. The split rate by itself makes the rate paid by residences lower than the rate paid by businesses, while the residential exemption by itself makes the residential rate higher than the business rate. It is possible to set the split rate and the residential exemption independently, treating them as separate issues. But it is also possible to apply them together in a way that produces a virtually uniform nominal rate for both classes of property. Such a uniform rate could help overcome the concern that the split rate is disproportionately burdensome for businesses, while still providing a substantial benefit to residential taxpayers.

If Great Barrington adopted a split rate with a CIP shift of 1.1 along with the maximum residential exemption of 20 percent, the result would be a residential rate of $15.85 and a virtually identical CIP rate of $15.84. Business properties would pay 10 percent more than under a flat rate. For residences, the break-even point would be $475,000, so about 2000 residential parcels, amounting to 80 percent of the residences in Great Barrington, could benefit from lower tax bills. The following table shows how this combination approach would affect the tax bills of owner-occupants. (The second column, showing the number of single family homes in each value range, includes second homes and rentals that do not benefit from the exemption.) The columns show the effects, compared to the tax bill under a flat rate with no exemption, of setting the residential exemption at 20 percent, 15 percent, 10 percent and five percent of average value, while adjusting the CIP shift so tax rates on CIP and residential property are equal. The highlighted figures show the homes below the break-even point, whose taxes would fall. Reducing the amount of the exemption leads to a smaller tax break at the low end but also to a smaller tax increase at the high end. It also lowers the break-even point, so fewer taxpayers receive that smaller break, while more would pay the (smaller) increase.

Implementation and other issues

Changing tax rules requires preparation and would encounter transition complications. This would be particularly true for the residential exemption. Taxpayers would need to show that they own the property and that it is their principal residence. For this purpose, some towns and cities require the application for the exemption to include a copy of the first page of the Massachusetts income tax return, showing the filing address.

Technical issues will come up in some cases. The Department of Revenue has issued guidance about questions involving trust ownership, which are relevant to claims for several kinds of property tax exemptions. Whether a property that is in a trust qualifies for exemption can depend upon details of the underlying legal documents. The taxpayer must retain sufficient beneficial interest and a record legal interest, in order to get a personal exemption or the residential exemption. For a personal exemption, the owner must have status both as beneficiary and as trustee. For an income-based qualification, all trustees have to meet the income test. The trust need not name the owner-beneficiary, as long as the beneficial effect is clear. A tenant holding under a life estate, having conveyed title to a trustee with other beneficiaries, is entitled to the residential exemption.

Most situations would be straightforward. Nonetheless, processing two thousand applications would inevitably require staff time and attention, particularly at first. Some towns report that when the residential exemption was first adopted, the telephone and foot traffic in the office more than doubled. The assessor’s office would need additional resources to process inquiries and applications. But after the inventory of qualified properties has been set, annual upkeep would be simpler.

More abatement applications could be expected. Although most taxpayers would benefit from the residential exemption, for some taxes would increase, and they might be more inclined to challenge their valuations or the assessor’s determination about whether they qualify for the exemption. Adopting the split rate would probably spur businesses to seek relief, too. There would thus be more work for the Board of Assessors.

Towns that have adopted the residential exemption advise maintaining some budget flexibility. In preparing the town budget and setting the tax rate, the effect of the residential exemption will necessarily be an estimate. Applications for exemption can be filed up to 90 days after tax bills are sent. If the actual number of exemptions turns out to differ very much from the estimate used to set the tax rate, the town’s budget balance would change.

Because of the additional work and the complications involved in getting started, the towns that have already done this advise allowing a year of lead time for implementation. This practical advice could be difficult to follow. The Selectboard decides about the tax rates one year at a time, and it could not formally set the rate and classification to take effect in the following budget year. But it could announce an intention to change the policy. The annual classification hearing happens shortly before the start of the next year’s budget process. If the Selectboard decides at the outset to base the next year’s budget on changes in the tax structure, that would allow for nearly a year of lead time before tax bills would incorporate the changes. An election would have intervened by then, so the members who announced the intention to change the policy might not be the same ones who have to make the actual decision to do it.

Changing rules and rates could affect residential and commercial real estate markets. The split rate, by raising business taxes, would tend to encourage businesses to locate elsewhere. Great Barrington is the local commercial center and an attractive market, so it is unlikely that a small increase would drive many away. But a large increase would. Thus if the split rate is adopted, it should be at a modest level that keeps Great Barrington competitive. Lenox, which has about the same proportion of CIP property as Great Barrington, uses a CIP shift of 1.18. Combining the split rate with the residential exemption to make the rates equal, which Great Barrington could do with a CIP shift of 1.1, would show that the town does not want to overburden businesses.

The residential exemption would spread some ripples through the housing market. Lower taxes and thus lower monthly payments could inspire sellers to try to raise their asking prices, increasing the average valuation level. In the Boston area, where the residential exemption has been standard for thirty years, real estate advertisements often detail the effect of the exemption. At the high end of the market, the higher tax rate will make the town a less attractive place for second-home mansions and estates. Because rental properties cannot take the exemption, landlords might try to pass through their higher tax payments to apartment dwellers, so rents might increase.

Change is unsettling. Although most taxpayers would benefit from the residential exemption, if the town decided later to stop using it, those beneficiaries would then face an unpleasant tax increase. Perhaps because that after-shock would be unacceptable, only one town has adopted the residential exemption and then dropped it later: Weymouth, which used the exemption from 1982 to 1986. (Tisbury recently reduced the amount of the exemption, while keeping the program in place.)

The residential exemption tends to make the property tax progressive. If owners of less expensive homes also have lower incomes, and owners of more expensive homes have higher incomes, then it succeeds. Owners of less expensive homes with comfortable incomes will also benefit, although they would not need the tax break. But for taxpayers living in expensive homes on low incomes, the residential exemption creates a problem. For some, the mismatch is a signal that they should move. For seniors on reduced, fixed incomes trying to stay in their homes, though, that looks unfair. Implementation of the residential exemption depends on making sure that this problem is addressed. To measure the extent of this problem accurately in Great Barrington could require a formal survey or census, which would be time-consuming and expensive. Information about the use of tax relief programs already in place gives some indication of how many seniors here could be in that situation.

Tax relief programs

Several programs under state law provide property tax relief for people with limited incomes, mostly for seniors to help them remain in their homes.

• Income tax “circuit breaker” relief:8

Seniors facing high property taxes may be able to take a refundable credit against their state income tax liability.[viii] People over 65 for whom the property tax on their principal residence exceeds 10 percent of income can get a credit for the excess over 10 percent. Moreover, if this amount exceeds the income tax that is due, it can received as a refund. Thus, a senior who owes no state income tax could still benefit from this help with property taxes. The maximum credit (or refund) is now $1,050. Eligibility criteria are based on income and the value of the home. The annual income limits are $56,000 for an individual, $70,000 for a head of household, and $84,000 for a couple filing jointly, and the valuation limit for the principal residence is $691,000. These limits and the maximum credit are adjusted annually for inflation.

Thus a senior couple in Great Barrington whose income was at the maximum level, $84,000, living in a home valued at the maximum amount, $691,000, with a tax bill of about $9,450, would get the maximum credit (or refund) of $1,050. At the other end of the economic scale, a senior on a fixed income of $19,000 living in a “typical” Great Barrington home, valued at $215,000 with a tax bill of $2,950, would also get the maximum credit, which would most likely be paid as a refund, of $1050.

The home-value limit to qualify for this relief is much higher than the average home value in Great Barrington. Only about 8 percent of the single family homes (plus three condominiums and 17 mixed-use residential properties) exceed the cutoff value. The income limits are also well above average incomes here. If seniors’ incomes and property values are similar to, or below, the community averages, then most should be able to take advantage of this relief if they need it.

Seniors in Great Barrington are already doing so. For 2010, which is the latest year for which data is available from the Department of Revenue, 155 tax returns from Great Barrington claimed the circuit breaker, receiving an average tax cut or refund of $764. According to the Census that year, there were 1,297 people here over the age of 65, implying that a significant fraction were in a position to use it.

For some seniors, the circuit breaker could dampen or eliminate the effect of adopting the residential exemption. This could happen where the change causes the property tax bill to cross the 10 percent threshold, or where the taxpayer was not already getting the maximum circuit breaker relief. For example, a taxpayer with an income of $84,000 and a home valued at $650,000 would now be eligible for circuit breaker relief of $418. Implementing the residential exemption would increase the taxes on this property by 4.5 percent, or $400. The sum of the increase, $400, and the current bill that is already being credited, $418, is $818. That is less than the maximum benefit of $1050, so the circuit breaker would cover all of the increase. There are about 200 homes in Great Barrington whose values fall between the likely break-even point and the maximum home value for the circuit-breaker credit. In the absence of a tabulation correlating age, income and home value, it is not possible to specify how many are occupied by senior taxpayers who would be in a comparable position.

• Property tax deferral:

State law authorizes towns to permit seniors to defer paying their property taxes.[ix] This is done through an agreement between the taxpayer and the town. The deferred taxes will come due and be paid, with interest, when the property is sold or the taxpayer dies. To qualify, the taxpayer must be over 65 and have lived in the property for at least five years. Eligibility for this program does not depend on the property’s value, but there is an income cutoff. The income limit in the statute is low ($20,000), but the town meeting can vote to raise the limit, up to the maximum for the circuit breaker provision for a single taxpayer, $56,000. The amount of deferred taxes that can accrue is capped at half of the property’s value.

Dozens of cities and towns elsewhere in the state have adopted this program. It has not been used yet anywhere in Berkshire County, though.

• State-reimbursable exemptions for the elderly:

Under state law, towns can offer some relief from property taxes to seniors of limited means.[x] To benefit, the taxpayer must meet residency requirements (generally ten years in the state, five years in the property at issue) and criteria based on income or gross receipts and upon assets or estate value. The state reimburses the town for some of the revenue that the town loses by granting this relief. Local jurisdictions can tailor these exemptions by changing the eligibility requirements, within limits.

“Clause 41” is the basic provision, which applies unless a jurisdiction has elected one of the alternatives in Clauses 41B, 41C and 41C½. Clause 41 makes available a $500 reduction in taxes (or an exemption from the amount subject to tax, whichever leads to the greater relief). Great Barrington has adopted Clause 41C, which permits higher limits for eligibility and is thus somewhat more generous. Last year Great Barrington adopted the highest limits and terms permitted by this section of the law. The potential tax reduction was increased to $1,000, and the eligibility caps were raised, to gross receipts of $20,000 ($30,000 for a couple) and estate value (other than the property subject to tax) of $40,000 ($55,000 for a couple). Those caps rise with inflation. The state will only reimburse Great Barrington for 39 of these exemptions, that number being based upon how many were reimbursed before the town elected the newer program. In FY 2014, Great Barrington granted 29 exemptions under Clause 41C.

For Clause 41C½, which Great Barrington has not adopted, the income limit is higher – the same cutoff as for circuit-breaker relief, $56,000 – and there is no limit based on the total value of the estate. This clause does not provide for a fixed sum reduction, but instead works like the residential exemption, by subtracting from the assessed value the amount of the senior exemption. The senior exemption, like the residential exemption, is computed as a percentage (up to 20 percent) of the average assessed value of residential property in the town. This senior exemption could be tacked onto the residential exemption. So far, only one town, Ashland, has adopted this newest alternative.

Clause 17 of this section of the law provides relief for surviving spouses and for some senior taxpayers. The amounts are smaller and the technical requirements are more complex than under Clause 41 relief. In addition, Clause 52 could provide some relief to seniors whose sewer and water bills have the same impact as higher property taxes. And Clause 18 is a general provision for short-term hardship relief.

• Voluntary local fund:

The town can also pass the hat to help seniors pay their taxes. That is, the town can set up a way for people paying their taxes to add something for a fund that helps pay the property taxes of the low income elderly and disabled.[xi] Jurisdictions that have set up such funds include Barnstable and Chicopee.

Sources:

[i] MGL, Chapter 40, Section 56:

The selectmen … shall annually first determine the percentages of the local tax levy to be borne by each class of real property, as defined in section two A of chapter fifty-nine, and personal property for the next fiscal year … . In determining such percentages, the selectmen … shall first adopt a residential factor … . Said factor shall be an amount not less than the minimum residential factor determined by the commissioner of revenue in accordance with the provisions of section one A of chapter fifty-eight … .

MGL, Chapter 58, Section 1A:

In each city and town which [the commissioner] has determined to be assessing at full and fair cash valuation, he shall determine a minimum residential factor for each city and town which shall be sixty-five per cent subject to such adjustment upward as may be required to provide that the percentage of the total tax levy imposed on any class of real or personal property shall not exceed one hundred fifty per cent of the full and fair cash valuation of the taxable property in said class divided by the full and fair cash valuation of all taxable real and personal property in the city or town.

[ii] The Commissioner of Revenue sets the maximum permitted shift for each community annually.

[iii] There is a spreadsheet calculator on the DOR website which might be used to explore how these factors interact. The site’s input data may not be current, however. www.mass.gov/dor/local-officials/municipal-data-and-financial-management/financial-mgt-assistance/calcandforms.html.

[iv] The statutory authority for the residential exemption is Chapter 59, Section 5C of the Massachusetts General Laws. The basic provision is:

Section 5C. With respect to each parcel of real property classified as Class One, residential, in each city or town certified by the commissioner to be assessing all property at its full and fair cash valuation, and at the option of the board of selectmen or mayor, with the approval of the city council, as the case may be, there shall be an exemption equal to not more than twenty per cent of the average assessed value of all Class One, residential, parcels within such city or town; provided, however, that such an exemption shall be applied only to the principal residence of a taxpayer as used by the taxpayer for income tax purposes.

The section also regulates the cumulative effect of this exemption along with others, provides for a process of appeal to local assessors in case of dispute over eligibility, and prescribes how to apply the exemption to co-operatives and mobile home lots.

[v] For simplicity, this report usually refers generally to residential properties or homes. The technically accurate term under the state law governing assessment and taxation is Class I properties or parcels, which includes single-family residences, apartments, multi-family units, condominiums, and vacant land.

[vi] There are 80 mixed-use parcels that are classified as principally residential (codes 013-018), and 64 parcels with more than one home (code 109). The total number of residential parcels also includes 199 duplexes and 19 triplexes, as well as 27 apartment complexes with from four to eight units, two larger apartment complexes (Beech Tree and Christian Hill) and a dormitory (Eagleton).

[vii] The breakeven point is , where E is the amount of the exemption, r₀ is the tax rate that would apply if the town did not adopt the exemption, and r_E is the tax rate under the exemption.

[viii] MGL, Chapter 62, Section 6(k)(3).

[ix] MGL, Chapter 59, Section 5, Clause 41A.

[x] MGL, Chapter 59, Section 5, Clauses 17, 41, 41B, 41C, and 41C½.

[xi] MGL, Chapter 60, Section 3D:

A city or town which accepts the provisions of this section is hereby authorized, subject to the approval of the commissioner, to design and designate a place on its municipal tax bills, or the motor vehicle excise tax bills, or to mail with such tax bills a separate form, whereby the taxpayers of said city or town may voluntarily check off, donate and pledge an amount not less than $1 or such other designated amount which shall increase the amount otherwise due, and to establish a city or town aid to the elderly and disabled taxation fund for the purpose of defraying the real estate taxes of elderly and disabled persons of low income.

Any amounts donated to said fund shall be deposited into a special account in the general treasury and shall be in the custody of the treasurer. The treasurer shall invest said funds at the direction of the officer, board, commission, committee or other agency of the city or town who or which is otherwise authorized and required to invest trust funds of the city or town and subject to the same limitations applicable to trust fund investments, except as otherwise specified herein. The fund, together with the interest earned thereon shall be used for the purpose specified in this section without further appropriation.

In any city or town establishing an aid to the elderly and disabled taxation fund, there shall be a taxation aid committee to consist of the chairman of the board of assessors, the city or town treasurer and three residents of the city or town to be appointed by the mayor or board of selectmen as the case may be. Said board shall adopt rules and regulations to carry out the provisions of this section and to identify the recipients of such aid.