circuit-breaker tax relief for farmers in wisconsin and michigan a comparison of benefits and...

Agricultural & Applied Economics Association

Circuit-Breaker Tax Relief for Farmers in Wisconsin and Michigan a Comparison of Benefitsand IncentivesAuthor(s): Marvin B. Johnson and Caryn E. WirthSource: North Central Journal of Agricultural Economics, Vol. 1, No. 1 (Jan., 1979), pp. 73-81Published by: Oxford University Press on behalf of Agricultural & Applied Economics AssociationStable URL: http://www.jstor.org/stable/1349319 .

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CIRCUIT-BREAKER TAX RELIEF FOR FARMERS IN WISCONSIN AND MICHIGAN A COMPARISON OF BENEFITS AND INCENTIVES

Marvin B. Johnson and Caryn E. Wirth

ABSTRACT

Michigan and Wisconsin have recently im- plemented the only programs using circuit- breaker tax credit schemes to provide property tax relief specifically to eligible farmers. The tax relief provisions of the two existing circuit- breaker programs are different. This paper out- lines the differences in their formula design. The effects of differences in relief distribution on work disincentives and protection against property tax increases are described. Finally, the ability of each program to concentrate relief on needy farmers and reduce property tax regressivity is discussed.

Wisconsin and Michigan recently adopted programs designed to provide tax relief to eligible farmers.l In both states, tax credit formulas act like circuit-breakers by preventing property tax payments from overloading household income: property taxes which are "excessive" relative to income are relieved with income tax credits. Although many states have circuit-breaker programs for general property tax relief, only Wisconsin and Michi- gan have special circuit-breaker schemes for farmers. Circuit-breakers offer an alternative to differential or use-value assessment, the most common approach to statewide reduction in farm property taxes.

Both circuit-breakers and use-value assessment schemes are designed to reduce the property tax pressure on farmland by reducing the size of existing tax bills and by protecting the landowner a- gainst future increases in property tax bills. In circuit-breaker programs, unlike differential assessment plans, tax relief depends on the income of the landowner. Tying credits to ability-to-pay has the advantage that tax relief is directed to those

with low income rather than being scattered among all property owners. A disadvantage of the circuit- breaker approach is that the implicit tax associated with earning additional income is increased and ef- ficient farming and off-farm employment may be discouraged.

Although based on the same circuit-breaker principle, the tax relief provision of the Wisconsin and Michigan programs are different. The amount of tax credits received by farmers in comparable situations, the level of protection against future property tax increases, the disincentive to earn additional income, and the degree of concentration of relief on the needy all differ between the two states' programs.

While the Michigan and Wisconsin programs ex- hibit the flexibility of circuit-breakers in program design, there has been little previous research comparing the effects of the differences in the programs. The operation of the two programs has been individually documented. Barrows [2; 3] has described Wisconsin's program, and compared it to differential assessment programs offered by other states. Hepp and Ott [5] and House [6] have provided information on the Michigan plan.

Research concerning the impacts of farm circuit-breaker tax relief has not considered the question of variation in tax relief formulas. Barrows and Johnson [4] have compared the use-value assessment and circuit-breaker approaches to farm property tax relief, but circuit-breakers were considered in a general form. Lochner and Kim [8] have examined the distributional effects of two hypothetical farm circuit-breaker programs, but fo- cused primarily on the effects of variation in program cost constraints. White, Miller, and Logan [9] have compared the distribution of property tax burdens and tax relief for farm and homeowners in Georgia but consider a single formula specification.

The purpose of this paper is to provide a de- scription of differences in benefits and incentives resulting from the different formula designs in the two existing circuit-breaker tax relief schemes for farmers. Five basic questions are considered in the following sections: How are credits determined in the two states? Which program provides more tax relief? Which better insulates the farmer from increases in property taxes? Which more strongly dis- courages the earning of additional income? Which better concentrates credits on needy farmers?

Marvin B. Johnson is Assistant Professor and Caryn E. Wirth is Research Assistant, Department of Agricultural Economics, University of Wisconsin- Madison.

The research was supported by the College of Agricul- tural and Life Sciences in the University of Wisconsin- Madison and by Hatch Project 2098. The authors are grate- ful to Richard Barrows for suggesting the research question and acknowledge David Runkle's preliminary work on the problem.

1The Michigan Farmland and Open Space Preservation Act (P.A. 116) was adopted in May 1974. The Wisconsin Farmland Preservation Act became law in June 1977, and was revised in April 1978. The revised version of the Wis- consin law is analyzed here.



74 NORTH CENTRAL JOURNAL OF AGRICULTURAL ECONOMICS, Vol. 1, No. 1, January 1979

THE FARM PROPERTY TAX RELIEF FORMULAS

The Michigan and Wisconsin farm tax circuit- breakers represent two of many possible circuit- breaker formulas. The Advisory Commission on In- tergovernmental Relations characterizes the Michi- gan formula as a simple threshold circuit-breaker [1, p. 3]. Wisconsin's formula is a more complicated variation on the threshold idea. A threshold formula defines excessive property taxes as that part of the property tax bill which exceeds a cer- tain (threshold) percentage of income. How the key variables of income and property taxes are defined, as well as how they are combined in the relief formula, determines the amount of tax credits that eligible farmers receive. Michigan

The Michigan formula is a direct application of the threshold principle. All farm property taxes (T) in excess of 7 percent of household income (Y) are considered excessive property taxes (E):

E = T - (.07)(Y).

Michigan refunds all excessive farm property taxes as income tax credits. If income tax liability is less than the credit, the farmer receives a refund. Farm- ers with property tax liabilities less than 7 percent of income receive no tax credits.

For calculating Michigan tax credits, household income and property taxes are broadly defined. All ad valorem taxes on land and structures except special assessments, penalties, and interest are considered property taxes. Household income is defined to include all federal taxable income, capital gains, social security, interest, retirement and pen- sion benefits, gifts, and any other income received from farm or nonfarm sources.

Wisconsin

The calculation of Wisconsin tat credits is more complicated. While Michigan's plan defines acceptable property taxes as 7 percent of household income for all levels of income and property taxes, acceptable property taxes under the Wiscon- sin program increase with household income at an increasing rate. Thus, there is no single threshold rate associated with the Wisconsin formula but rather an implicit variable threshold rate which increases with household income. Like the Michigan program, the Wisconsin scheme defines excessive property taxes as the difference between actual and acceptable tax levels. Unlike Michigan, however, Wisconsin does not refund all excessive property taxes and thereby further complicates its formula.

Despite the complicated nature of the Wiscon- sin formula, household income and property tax

payments are the two critical variables. Fortunate- ly for purposes of comparing the programs in Mich- igan and Wisconsin, the two states define these variables the same way. Wisconsin defines all taxes on land and structures- excluding special assessments, late payments, and interest-as property taxes. Household income includes all farm and nonfarm income and transfer payments received by the participating farmer, spouse, and minor dependents.

Table 1 summarizes the working of the Wiscon- sin formula. The acceptable level of property tax payments, or the "income factor," is based on household income. For purposes of calculating the income factor, the first $7,500 in nonfarm wages, salaries, and tips are excluded. Table 2 illustrates how income factors vary with household income. The threshold rate, acceptable property tax payments as a percentage of income, implicit in the Wisconsin system is also shown in Table 2. The income factor and the implicit threshold rate increase and do so at an increasing rate. Thus, the percentage of income which can reasonably be allo- cated to property taxes is assumed to increase with household income in the Wisconsin formula.

Excessive property taxes are the difference between the property tax bill and the income factor. It follows that for a given level of property taxes, larger household incomes are associated with relatively lower excessive property taxes.

Not all excessive property taxes are refunded. Potential tax credits are 80 percent of the first $4,000 of excessive property taxes plus 50 percent of the next $2,000. The maximum eligible excessive property tax is $6,000 and tax credits are lim- ited to $4,200. The combination of the tax credit limit and property tax ceiling set an effective income ceiling at $38,400 excluding up to $7,500 in nonfarm employment income. No farmer with a household income greater than $45,900 can quali- fy for tax credits.

The actual tax credit is a percentage of the potential tax credits (Table 1), where the percentage depends on whether the county has adopted an agricultural zoning preservation plan and exclusive agricultural zoning and on whether the farm is located in a rural or urban county [2; 3].

AMOUNT OF CREDITS

The amount of farm tax relief provided by both the Michigan and Wisconsin programs depends on the individual farmer's household income and property taxes. Both plans define household income and property taxes similarly for the calculation of tax credits. The formula specifications and limits cause dissimilarities in the size of relief benefits for most combinations of household income and property taxes. In this section, the differences in Wisconsin and Michigan relief benefits



CIRCUIT-BREAKER TAX RELIEF, Johnson and Wirth 75

Table 1. Calculation of Wisconsin Tax Credits

A. INCOME FACTOR (I.F.)

I.F. = 3% of the 1st $5,000 of incomea plus 4% " " 2nd " " " plus 6% " " 3rd plus 8% " " 4th plus 15% " " 5th plus 25% " " 6th plus 35% " all income > $30,000

B. EXCESSIVE PROPERTY TAXES (E.P.)

E.P. = PROPERTY TAXES (< $6,000) - I.F.

C. MAXIMUM POTENTIAL TAX CREDITS (P.T.C.)

P.T.C. = 80% of 1st $4,000 of E.P. 50% " next $2,000

D. ACTUAL TAX CREDIT (A.T.C.)

A.T.C. = 50% of P.T.C. under initial program contracts

75% of P.T.C. in rural county with preservation plan and contracts

75% of P.T.C. in rural or urban

county with exclusive agricultural zoning

100% of P.T.C. in counties with both zoning and plans

aIncome is defined as household income less the first $7, 500 in nonfarm income.

associated with identical combinations of property ttixes and household are assessed.

Table 3 summarizes Michigan tax credits for a sample of household income and property tax levels. The table corresponds to the Wisconsin range of property taxes and household income, but the Michigan program extends tax relief to all levels of household income and property taxes where property taxes are greater than 7 percent of household income.

The Michigan program exhibits a regular pat- tern of relief benefits. For a given level of household income, $1,000 more in excessive property taxes will be relieved by $1,000 more in tax credits. For a given level of property taxes, $5,000 more in household income decreases tax relief by 7 percent, or $350.

Wisconsin potential tax credits for the corres- ponding household income and property tax combinations are presented in Table 4. Actual tax credits are the same, .75 or .5 times as great as the potential tax credits, depending on an individual's county zoning and planning provisions.

As expected, the Wisconsin tax credit scheme does not display the regularity of Michigan's. Tax credits increase across property taxes for every level of household income, but the increase in tax- credits does not reflect the entire property tax increase. As household income increases, tax credits decrease at an increasing rate for each level of property taxes.

A comparison of Michigan and Wisconsin tax credits reveals that, for most combinations of household income and property taxes, Michigan provides more tax relief. Table 5 summarizes the differences between Michigan and Wisconsin tax credits. The table was derived by subtracting Wis- consin potential tax credits from Michigan tax credits. For all combinations with household income of $0 to $25,000 and above and all property taxes greater than $3,000 Michigan offers larger tax credits. For property taxes greater than $3,000, Michigan tax credits increase faster than Wisconsin tax credits. Michigan provides more tax relief for all property taxes greater than $6,000. The difference between Wisconsin and Michigan tax credits diminishes as household income increases to $20,000, for all property taxes greater than $3,000. Of course, the figures in Table 5 would be much larger for farmers qualifying for only 50 or 75 percent of potential credits.

The combinations of household income and property taxes which generate Wisconsin tax cred-

Table 2. Wisconsin Income Factors and Threshold Percentage Rates

for Selected Levels of Household Income

Threshold Household Income Percentage Income Factor Rate

$0 $0

$ 5,000 150 3

$10,000 350 3.5

$15,000 650 4

$20,000 1,050 5.3

$25,000 1,800 7.2

$30,000 3,050 10

$35,000 4,800 14




Table 3. Michigan Tax Credits for Selected Combinations of Household Income and Property Taxes

Household Property Taxes Income $1,000 $2,000 $3,000 $4,000 $5,000 $6,000

(Dollars)

$0 1,000 2,000 3,000 4,000 5,000 6,000

$ 5,000 650 1,650 2,650 3,650 4,650 5,650

$10,000 300 1,300 2,300 3,300 4,300 5,300

$15,000 0 950 1,950 2,950 3,950 4,950

$20,000 0 600 1,600 2,600 3,600 4,600

$25,000 0 250 1,250 2,250 3,250 4,250

$30,000 0 0 900 1,900 2,900 3,900

$35,000 0 0 550 1,550 2,550 3,550

its greater than Michigan's can be more exactly specified. Figure 1 illustrates the relationship between Wisconsin and Michigan tax credits associated with household income for property taxes of $2,000. At $9,480, both Wisconsin and Michigan tax credits are $1,336. Wisconsin provides more relief for all household incomes between $9,480 and greater than $23,200 when property taxes are $2,000. Wisconsin farmers with $2,000 in property taxes and qualifying for 50 to 75 percent of the potential tax credits will receive less tax relief than similar Michigan farmers for all household income levels.

Figure 2 summarizes the combinations of household income and property taxes for which (100 percent) potential Wisconsin tax credits ex-

ceed Michigan's. The upper boundary coincides with those combinations of property taxes and household income which result in equal Wisconsin and Michigan tax credits. The lower boundary de- lineates the area where Wisconsin tax credits are greater than Michigan's. The size of the area increases as property taxes and household income increase but begins to decrease as property taxes reach $2,800 and household income approaches $20,000. The decrease in the size of the range oc- curs because Wisconsin tax credits decrease more than proportionately as household income approaches $38,000 and property taxes approach $6,000. Of course, for household income and property taxes beyond these limits, Michigan always provides more relief.

Table 4. Wisconsin Potential Tax Credits for Selected Combinations of Household Income and Property Taxes


(Dollars)

$0 800 1,600 2,400 3,200 4,000 4,500

$ 5,000 680 1,480 2,280 3,080 3,625 4,125

$10,000 520 1,320 2,120 2,920 3,525 4,025

$15,000 280 1,080 1,880 2,680 3,375 3,875

$20,000 0 760 1,560 2,360 3,160 3,675

$25,000 0 160 960 1,760 2,560 3,300

$30,000 0 0 0 760 1,560 2,360

$35,000 0 0 0 0 160 960




Table 5. Differences Between Michigan and Wisconsin Tax Credits for Identical Levels of Property Taxes and Household Income

(Michigan-Wisconsin Potential Credits)

Household Property Taxes Income $1,000 $2,000 $3,000 $4,000 $5, 000 $6,000

(Dollars)

$0 200 400 600 800 1,000 1,500

$ 5,000 - 30 170 370 570 1,025 1,525

$10,000 -220 - 20 180 380 775 1,275

$15,000 -280 -130 70 270 575 1,075

$20,000 0 -160 40 240 440 925

$25,000 0 90 290 490 690 950

$30,000 0 0 900 1,140 1,340 1,540

$35,000 0 0 550 1,550 2,390 2,590

$2,000 I I I

$1,500 ?- WISCOs/I C, (100%)

wwisc o $1,000 - (75%

$500 (50%)

HOUSEHOLD INCOME

Figure 1. A Comparison of Michigan and Wisconsin Tax Credits (Property Taxes = $2,000) In sum, for most combinations of household

income and property taxes within the Wisconsin ceilings, Michigan provides more tax relief. For property taxes less than $2,800 and household income less than $25,000, Wisconsin can provide more tax relief than Michigan depending upon the combination of household income and property taxes. Within these limits, Wisconsin tax credits tend to be larger than Michigan's when property taxes are small relative to household income. For a

given level of property taxes, if household income decreases, the Michigan program provides more tax relief. For example, the Michigan scheme always offers more tax relief to farmers with zero household income and provides more tax relief for all property taxes of $6,000 or more.

PROTECTION AGAINST PROPERTY TAX INCREASES

A justification for property tax relief for farmers has been that property taxes have grown faster




than farm incomes and threaten to "squeeze" farmers off their land. The size of tax credits provided by a particular tax relief program is a good indicator of the degree of relief from the existing squeeze. However, since property taxes may continue to grow relative to farm income, it is equally important to consider how well the Michigan and Wisconsin programs will protect farmers from future property tax increases. One measure of the protection provided is the percentage of additional property taxes which are relieved under the two schemes.

The Michigan plan provides participating farmers with complete insulation from any increase in local property tax rates or assessments. As described above, any change in property taxes is ac- companied by an equal change in Michigan tax credits. Eligible Michigan farmers are expected to pay no more than 7 percent of their household income in property taxes. All local property taxes in excess of 7 percent of income, without limit, are relieved via a state income tax credit.

The Wisconsin system does not provide perfect protection from increases in local property taxes, and the rate of insulation varies with the level of property tax payments. As discussed above, the Wisconsin plan refunds 80 percent of the first $4,000 in excessive property taxes and 50 percent of the next $2,000. If property taxes increase within the first $4,000 increment, 80 percent of the tax increase will be offset by Wisconsin tax credits. Similarly, a property tax increase within the sec-

ond $2,000 increment ($4,001-$6,000) will be relieved with a tax credit equal to 50 percent of the change. Property tax increases that fall into both increments will be offset by some proportion of tax relief between 50 and 80 percent of the tax increase. For example, a participating Wisconsin farmer with $10,000 in household income and property taxes of $3,500 would receive $755 in increased tax credits if his property tax bill rose to $4,500. Of the $1,000 tax increase, $150 falls within the 50 percent bracket while $850 falls in the 80 percent bracket. These weights result in the $755 tax credit increase which offsets the $2,000 tax increase by 75.5 percent. Thus, the degree to which the Wisconsin program can protect farmers against property tax increases depends upon the absolute levels of property taxes before and after the increase.

Since Michigan farmers are protected from 100 percent of all property tax increases, the Wisconsin scheme clearly provides less insultation from future squeezes. Depending on the level of property taxes, the Wisconsin system does protect participating farmers from 50 to 80 percent of any property tax increases.

While circuit-breaker relief programs can offer some protection against farmers being squeezed off their farms by fast-growing property taxes, they can also distort the benefits and costs of local public activities for credit recipients. Local property taxes are the price local people pay for local public goods. If a farm tax relief program absorbs part or

3,ooo 00

C,) S2,000 - X

I- I-

0 PC 1,000 -

0 6,000 12,000 18,000 24,000 HOUSEHOLD INCOME

Figure 2. Combinations of Household Income and Property Taxes for Which Wisconsin Tax Credits Exceed Michigan Tax Credits




Table 6. Implicit Marginal Tax Rates Inherent to the Wisconsin Program Decreases in Tax Credits Associated with a $1,000 Increase in Household Income

Household Income Changes Property Taxes From To $1,000 $2,000 $3,000 $4,000 $5,000 $6,000

(Dollars)

$0 $ 1,000 24 24 24 24 15 15

$ 5,000 $ 6,000 32 32 32 32 20 20

$10,000 $11,000 48 48 48 48 30 30

$15,000 $16,000 64 64 64 64 40 40

$20,000 $21,000 0* 120 120 120 120 75

$25,000 $26,000 0* 0* 200 200 200 160

$30,000 $31,000 0* 0* 0* 280 280 280

$35,000 $36,000 0* 0* 0* 0* 0* 280

* Wisconsin Tax Credits = $0

all of a tax increase, there is a reduced monetary incentive to vote or work against any increase in public sector activity. The farmer's effective property tax payment does not accurately reflect the level of services the local governments provide.

Under the Michigan plan, participating farmers whose tax bill is more than 7 percent of income pay no part of the increased cost of government services. Wisconsin farmers must pay higher taxes for higher local spending, although they are protected from part of additional public service costs.

WORK DISINCENTIVES

Work disincentives are inherent to all circuit- breaker formulas because tax credits are inversely related to income. A reduction in tax credits, due to an income increase, is like a tax on additional income. This implicit tax tends to reduce the participating farm household's incentive to increase income; farm family members may be less movitated to maximize farm profits through improved man- agement and effort, or to accept or continue nonfarm employment.

The implicit tax rate under the Michigan formula is simple to determine. Any increase in household income reduces excessive property taxes, and Michigan tax credits, by 7 percent of the additional household income until tax credits diminish to zero. Thus an increase of $1,000 in household income will result in a $70 decrease in Michigan tax credits.

The implicit tax rates associated with the Wis- consin farm tax relief formula are relevant for all household income increases except those which correspond to the Wisconsin $7,500 off-farm em-

ployment income deduction. All increases in off- farm employment income within the $7,500 limit will not reduce Wisconsin tax credits. Thus, work disincentives under the Wisconsin program relate primarily to on-farm activity.

Table 6 illustrates that Wisconsin implicit tax rates, expressed as the dollar change in tax credits range from zero to $280 per $1,000 in additional household income. As household income increases for a given level of property tax payments, the implicit tax rates increase until household income becomes sufficiently high to cause tax credits to go to zero. Changes in property taxes do not affect the implicit tax rates until property taxes exceed $4,000 where tax credits become an incremental, rather than continuous, function of excessive property taxes.

Compared to Michigan's constant $70 implicit tax rate resulting from a $1,000 increase in household income, Wisconsin's approach creates smaller disincentives for farmers with incomes less than $25,000, about the same for farmers of about $15,000, and greater disincentives for high income farmers with household incomes between $20,000 and $38,000. The disincentives would be proportionately lower for Wisconsin farmers qualifying for only 50 to 75 percent of potential credits. A- gain, there is no disincentive associated with off- farm employment under the Wisconsin program for off-farm employment incomes up to $7,500.

An alternative view of these marginal changes in tax credits, due to changes in household income, is insurance against bad years. In this sense, the problem is determining to what extent the circuit-




Table 7. Wisconsin Tax Credits as a Percentage of Household Income

Household Property Taxes Income $ 1,000 2,000 $3,000 $4,000 $5,000. $6,000

$0 co GO 00 00 00o

$ 5,000 13.6% 29.6% 45.6% 61.6% 72.5% 82.5%

$10,000 5.2 13.2 21.2 29.2 35.3 40.3

$15,000 1.9 7.2 12.5 17.9 22.5 25 8

$20,000 0 3.8 7.8 11.8 15.8 18.4

$25,000 0 .6 3.8 7 10.2 13.9

$30,000 0 0 0 2.5 5.2 7.9

$35,000 0 0 0 0 .5 2.7

breaker formula protects a farmer from income los- ses with greater tax credits. For example, if a Mich- igan farmer, through no fault of his own, earned $1,000 less in household income, he would receive $70 more in tax credits. From this perspective, the Wisconsin scheme provides more protection against bad years for high income farmers, but less to low income farmers, than the Michigan program. Under the Wisconsin plan, relative protection declines with property tax payments greater than $4,000, and, presumably, with increases in the value of land holdings.

CONCENTRATION OF RELIEF

One advantage claimed for the circuit-breaker approach is that tax credits are concentrated on those with the greatest need for property tax relief. Other approaches to farm tax relief, notably use- value assessments, offer benefits to individuals who can well afford to pay their property taxes. State tax relief funds may be more efficiently utilized with a circuit-breaker approach to farm tax relief.

Does the Michigan or the Wisconsin circuit- breaker formula do a better job at concentrating tax relief on low income farmers?

As shown in previous sections, the Wisconsin and Michigan tax relief programs provide different levels of credits for each combination of property taxes and household income. The total cost of the two programs are different. Without information on the distribution of income and property taxes of the participating farmers there is no way to hold the total cost of the programs constant and no way to definitively compare the progressivity of tax relief concentration under the two formulas. Prelimi- nary empirical work on the question of relative concentration of relief on low income farmers indicates that the Michigan program reduces property tax regressivity to a greater extent than the Wiscon-

sin scheme [7], but a full report of that work is beyond the scope of this paper.

However, a consideration of the size of tax credits in relation to income under the two programs allows some insight into the problem of the distribution of tax relief benefits. Tables 7 and 8 show the ratio of tax credits to household income for selected levels of household income and property taxes under the two programs. Both the Wiscon- sin and Michigan programs display regressive distri- butions of tax credits. Under both schemes, tax relief declines with household income increases for a given level of property taxes. Since one of the purposes of farm tax relief programs is to reduce the regressivity of the local property tax system, a regressive aid system is the appropriate policy tool. So, in design, both programs concentrate relief on farmers with relatively low income, and tend to reduce the regressivity of the property tax system for farmers. That is all that can be concluded without information on the distribution of eligible farms in household income and property tax aids.

Nevertheless, the property tax ceiling of $6,000, and the resulting income ceiling of $38,000 under the Wisconsin program, has an ob- vious implication for the concentration of tax relief benefits on the needy. Under the unrestricted Michigan plan, a farmer qualifies for tax credits whenever property tax liabilities exceed 7 percent of household income, regardless of income or property tax level. Clearly, the provision limiting eligible property taxes to $6,000 implies that most probably the Wisconsin program concentrates relief to low income farmers to a greater extent than Michigan's scheme.

SUMMARY

Wisconsin and Michigan have recently adopted farm tax relief programs based on the circuit- breaker principle. Participating Michigan farmers




Table 8. Michigan Tax Credits as a Percentage of Household Income


$0 00 00 00 00 0000

$ 5,000 13 33 53 73 93 103

$10,000 3 13 23 33 43 53

$15,000 0 6.3 13 19.6 26.3 33

$20,000 0 3 8 13 18 23

$25,000 0 1 5 9 13 17

$30,000 0 0 3 6.3 9.6 13

$35,000 0 0 1.6 4.4 7.3 10.1

receive tax credits equal to all property taxes paid in excess of 7 percent of income. The determina- tion of tax credits under the Wisconsin scheme is more complex but is based on the same notion of "excessive" property tax payments relative to income.

A comparison of relief benefits shows that the Michigan program provides more generous tax credits for most combinations of household income and property taxes. The Michigan scheme always provides more tax relief to farmers with property tax bills greater than $2,800 or household income greater than $2,500. For farms with relatively small household incomes (about $2,500 or less) and relatively small property tax bills (less than $2,800), Wisconsin may provide more tax relief if property taxes are small relative to income. In all cases, the difference between Michigan and Wisconsin tax credits increases with increases in income and property taxes.

All circuit-breaker relief programs discourage the earning of additional income. Compared to the Michigan program, where the disincentives are constant over income and property taxes, the disincentives inherent to the Wisconsin program are larger

for all participating farmers with incomes less than about $10,000, smaller for farmers with incomes above $20,000, and roughly equal for farmers with incomes around $15,000.

Circuit-breakers also insulate participating farmers from increases in their property taxes. The Michigan program offers complete insulation a- gainst such increases. All additional property taxes in excess of 7 percent of income are refunded. The Wisconsin system protects participating farmers against between half and three-fourths of property taxes increases. The protection rate percentage under the Wisconsin system declines with the level of property tax payments greater than $4,000.

Both programs reduce the regressivity of the property tax system with respect to household income by concentrating tax relief on farmers with low incomes. There is no perfect measure of the degree of regressivity of aid concentration achieved by the two programs. However, the Wisconsin property tax limit of $6,000 implicitly excludes all farmers with household incomes greater than $38,000. The Michigan program, with no ceilings on tax credits, income, or property taxes, provides relief to farmers with higher incomes.

REFERENCES

[1] Advisory Commission on Intergovernmental Relations. Property Tax Circuit-Breaker: Current Statutes and Policy Issues. Washington: U.S. Government Printing Office, 1967.

[2] Barrows, Richard. Wisconsin's Farmland Preservation Program. Bulletin G-2890. Madison: University of Wis- consin-Extension, 1977.

[3] - . Wisconsin's New Farmland Preservation Act: A Comparison with Other States. Economic Issues No. 13. Madison: University of Wisconsin-Extension, 1977.

[4] , and Marvin B. Johnson. Farmland Tax Relief in Wisconsin: Use-Value Assessment vs. Income Tax Credits. Agricultural Economics Staff Paper No. 121. Madison: University of Wisconsin-Extension, 1977.

[51 Hepp, Ralph E., and Stephen L. Ott. Farmland and Open Space Preservation Act. Bulletin E-792. East

Lansing: Michigan State University Cooperative Exten- sion, 1975.

[6] House, Al. "Questions and Answers on the Farmland and Open Space Preservation Act: P.A. 116, 1974." Mimeographed. East Lansing: Michigan State Univer- sity Cooperative Extension Service, 1974.

[7] Johnson, Marvin B., and Caryn E. Wirth. "Estimating the Progressivity of Farm Tax Credits for Alternative Circuit-Breaker Formulas." Mimeographed. Madison: University of Wisconsin, 1978.

[8] Lockner, Allyn 0., and Hans J. Kim. "Circuit-Breakers on Farm-Property-Tax Overload: A Case Study." Na- tional Tax Journal 27(1973).

[9] White, Fred C., Bill R. Miller, and Charles A. Logan. "A Comparison of Property Tax Circuit-Breakers Applied to Farmers and Homeowners." Land Economics 52(1976).



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