ACFB RECOMMENDATIONS ON SENIOR/DISABLED PROPERTY-TAX RELIEF

Background: When local voters approved taxing authority for Austin Community College in 1987, the ACC Board adopted a $75,000 extra homestead exemption for over-65 homeowners (later extended to disabled homeowners), bringing their total exemption to $80,000 when the $5,000 exemption provided to all homesteads is included. ACC’s exemption level is the highest among local taxing entities (City of Austin is $51,000; AISD is $50,000; Travis County is $70,000).

The motivations for the large exemption (above median home value at that time) were both to defuse potential opposition to an ACC tax levy from senior citizens who did not expect to use ACC services and to address the acknowledged financial problems that could arise for people with fixed retirement incomes whose primary assets were in the form of the illiquid value of their home.

State law was subsequently changed to permit senior/disabled homeowners to defer part or all of their property taxes (at 8% interest) as long as they live, so there is no longer any possibility of Texas senior or disabled homeowners losing their homes due to property taxes. However, such liens do diminish the value passed on to heirs as well as reducing the potential for borrowing money based on the home value, which was also subsequently made legal.

Recently, state law was changed to let colleges, at their option, freeze senior/disabled property taxes by limiting tax receipts from a property to no more than the amount paid the previous year once the property qualifies for a senior/disabled exemption. This report gives an ACFB analysis of the consequences to be expected from such a freeze or from indexing the senior/disabled exemption, an alternative method the ACFB recommends if the Board wishes to control the impact of inflation on ACC property taxes on senior or disabled homeowners with fixed modest incomes.

Distribution of assessed-property values for Travis County homesteads in the ACC district:

	All	Regular	Senior*	Disabled*
Median assessed value	$151,428	$149,978	$162,457	$138,872
Total number of homesteads	118,439	93,510	21,361	5,651
Assessed less than $80,000	11,369	10,678	395	298
Total assessed value	22.628 Billion $	17.690 Billion $	4.396 Billion $	0.925 Billion $
Exempted assessed value	2.263 B$ (10%)	0.538 B$ (3%)	1.748 B$ (40%)	0.366 B$ (40%)

* 37% of disabled homestead owners are also over 65 years old, and thus qualify for the exemption either way

Alternative 1: FREEZE SENIOR/DISABLED TAXES

Probable cost of a senior/disabled tax freeze: The ACFB reviewed the analysis by the ACC staff dated 10/5/05, which concludes that in the long term such a senior/disabled tax freeze would decrease college revenues by more than $6 million/year. This analysis was found reasonable, including its warning that the actual loss should be substantially higher than this lower limit due to expected demographic shift that will increase the proportion of older homeowners. Note, however, that costs 20 years from now should be discounted by about half to be comparable to current costs. Taking both these effects into account, however, still leaves it likely that a present-value estimate of about $4 million/year understates the long-term effect, especially if inflation rises.

Timing of tax relief/loss from a tax freeze: The impact of a senior/disabled tax freeze on ACC revenues would be gradual. However, initial tax relief would also be small, and long-term impact would be unpredictable and inflexible.

Beneficiaries of the tax-freeze approach: A senior/disabled tax freeze would direct the most tax relief to the most expensive properties and eventually to those owned by the oldest taxpayers – neither of which criteria is positively correlated with financial need. Also, homeowners who change residence or move into the area after they are 65 would not receive tax relief comparable to those with similar homes who have not moved.

Alternative 2: INDEX SENIOR/DISABLED EXEMPTION LEVEL

Alternative proposal – index the senior/disabled exemption level: It is felt by the ACFB that a more dependable and straightforward way to provide senior/disabled tax relief where it is most needed would be to adjust the $80,000 total exemption, which has been unchanged since 1988. Cumulative general inflation since that time has been 73%, and median homestead values have about doubled, so clearly the original senior/disabled exemption has been substantially diluted by inflation. Since ACC’s exemption is still the greatest in the area, however, that dilution might be seen by some as simply bringing exemptions down to an appropriate level. But if the Board feels that the current value is at or below an appropriate level, it should index the exemption to a corresponding percentage of median value.

Cost of increasing the $75,000 exemption: Each $1,000 increase in exemption level would result in tax decreases totaling about $23,000/year (based on the FY2006 tax rolls). Thus tax reductions would be about $184,000/year for a senior/disabled exemption of $83,000 and $575,000/year for a senior/disabled exemption of $100,000. Both values are far below the projected long-term costs of a senior/disabled tax freeze. Unlike the tax freeze, however, any exemption-level change would have its full tax impact immediately both for ACC and for homeowners.

Beneficiaries of the increased-exemption approach: All eligible property owners whose home value is greater than the exemption level would receive the same dollar amount of tax relief (homes valued at less than their exemption level would of course be assessed no ACC taxes).

Appropriate senior/disabled exemption level: Setting the target exemption to some percentage of median homestead value would keep inflation from diluting the exemption without requiring the ACC Board to frequently revisit the topic. The $75,000 value is about 50% of the current median value, but assessments are expected to increase by about 20% over the next two years, so an exemption indexed at 50% of median assessed value would rise to about $83,000 in 2007 and $91,000 in 2008.

Suggested policy language: The Board could implement this approach by amending provision [3] of policy G-7 to read as shown below:

[3] The additional homestead exemption for elderly or disabled shall be $75,000 50% of the median assessed value for all homesteads in the district, rounded to the nearest thousand dollars.