Tax Exemption Versus Tax Freeze

Which is better? In the 2009 Richardson City Council race, Amir Omar ran on a platform that included a property tax freeze for seniors:

"Although the City has insituted [sic] Senior property tax exemptions, home values increase almost every year. These exemptions are not permanent and risk being outpaced by property value increases. If the budget tightens, the City Council has the option of rolling back the exemptions. This would be a way to raise taxes without publicly 'raising taxes'. Our Seniors deserve better. They live on a fixed income and should not have to worry year over year about the Council's whims. That is why a permanent freeze in property tax is important. A freeze will remove the temptation of turning to exemptions during a budget shortfall while giving the final assurance to our Seniors that they deserve."

That platform won for Omar a seat on the City Council. After the jump, how Omar is trying to make good on that campaign promise.

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This week, during a council work session on the 2010-2011 budget, council member Omar proposed a property tax freeze for seniors. According to the report by Ian McCann on The Dallas Morning News Richardson blog, Omar's proposal is to phase out Richardson's senior property tax exemption and replace it with a senior property tax freeze.

"Omar insists his proposal would be revenue-neutral or would work out better for the city financially by having a freeze but not an exemption. And seniors would benefit by having their city property taxes capped at the level they are at when they hit 65, no matter what happens to the tax rate or property values."

Is it possible? Can a tax freeze benefit seniors and be revenue neutral at the same time? Or is Omar practicing voodoo economics? It's difficult to judge for sure. Let's consider some scenarios.

Under today's system, homeowners turning 65 become entitled to a senior property tax exemption. This results in a tax reduction the year the homeowner turns 65. Thereafter, his taxes likely will start going up again, assuming property values rise and/or tax rates go up. Eventually, his property taxes will be back to where they were before the senior exemption kicked in, still less than they would be without the exemption, but more than they were the year he turned 65. How much property tax the homeowner pays over his whole lifetime will depend on many things -- how long he lives, how much his house appreciates in value, how the tax rate changes over time.

Under Omar's proposal, the senior exemption goes away. A homeowner turning 65 won't get a break on his property tax. He'll pay just as much property tax this year as he paid last year. But his tax will be frozen. No matter what happens to the value of his house or what happens to tax rates, he'll pay the same property tax year after year until death. How much property tax the homeowner pays during his lifetime will depend on only one thing -- how long he lives.

Under which scenario does the homeowner do better? It depends. Some homeowners will do better with the exemption (if you die, say, soon after 65). Others will do better with the freeze (if you live to be, say, 100). As they say, your own mileage may vary. There is also some value in the predictability a freeze offers, but it's hard to put a monetary value on that peace of mind.

Under which scenario will the city do better? That, too, depends, but because we're counting averages of thousands of Richardson homeowners, the city can calculate with higher confidence what to expect. It doesn't appear that anyone has done that. The Dallas Morning News story said a freeze cost of $12.3 million was mentioned, but it also said that Omar objected to the assumptions behind that figure.

What about the rest of us? There are two ways to look at it. One way is as a zero-sum game. If the seniors benefit, the young lose, and vice versa. The other way is a longer-term view. Because the young eventually grow old, if the young lose out now, they'll eventually win out later, and vice versa.

I came into this predisposed against a senior tax freeze because it shifts the tax burden from older homeowners to younger, regardless of ability to pay. But the senior tax exemption already does that. Is it possible that the senior tax freeze is the lesser of two evils? Stay tuned. I'm sure we'll be hearing more about Councilman Omar's campaign promise.