The homestead tax credit does treat all homeowners equally-it gives them all an equally limited increase in annual tax bills. It's no less fair than the fact that my parents bought their house almost 20 years ago for a price that would be considered ludicrously low today, even with the market in the tank.

The homestead credit rewards longevity, not just being there. My neighbors, many who were initial owners when our row was built in the 1940s, have homestead credits that I would kill for, but that's because they have been capping their increase for decades.

The homestead credit encourages people to stay where they are and discourages flipping, in principle. It promotes stable neighborhoods. Whether it's high enough now to actually do that (or policed well enough) is another question. But it's not designed to make everyone's tax bills equal, or equally low, nor should it.

It does get to be frustrating when you look at Real Property or talk to neighbors who pay 1/4 of the property tax you do because they have lived in the same house for 30 years. My taxes are about $6k a year and my neighbors are about $1800 for a nearly identical house. That said, I wouldn't want to have the risk of a huge one year increase in out of pocket expenses - the credit makes it easier to plan future expenses.

Responding to designing a tax system... Do away with the property tax and go to an income tax based system.

I've heard it brought up in other states. It's always dismissed as crazy, but I've never really understood why. What's the main reason we don't collect county taxes based on income?

We do, jfg -- part of what you pay when you do your Maryland state taxes is a local "piggyback" income tax. Rates here: http://individuals.marylandtaxes.com/incometax/localtax.asp

Someone who bought their house 10 years ago may not be able to afford the house at today's prices and resulting property tax. With the homestead tax credit, they are able to stay in their home rather than being forced out.

As Aaron points out, the credit rewards longevity. Mr. Kennedy may change his mind about the credit if he stays in his condo for ten years or more. More info as to how long Mr. Kennedy lived in his previous homes and whether he considered the credit unfair at that time would be helpful to understand his true feelings about the credit.

Homeowners are protected against large increases by the phasing in of new assessments.
People who would be "priced out" of their own homes are already protected by the MD Homeowners Tax Credit that limits the amount of property tax liability based on income.

Property taxes should be based on a percentage of the purchase price. This would assure buyers would fight tooth and nail to bring prices down, lest they be over-taxed for eternity.

I don't think that comparison with the home prices is valid here. Taxes pay for roads, schools, emergency services, etc. If someone bought a house 30 years ago, they are using the roads today and they need to be maintained today at the today's cost. And I agree that it's "robbing Peter to pay Paul".

The income tax idea actually does seem quite fair to me. I never really understood why all of a sudden I have to pay more taxes if I move from a rental to my own home. If we want to encourage people to live in communities for long, why are we taxing them for that at all?

Jelena,
Our gov't is taxing like crazy because the bills for the nanny state are not only coming due, but increasing as we "spend more to save the economy".

we need to vote out the bums.

Both tax credits and the federal tax deduction for home mortgage interest should be abolished. There is no reason so subsidize homeownership. Renters have no such subsidy. Why should we favor one group over another? The net effect will be to reduce home purchase prices. Rooting for high home values is like rooting for a high energy bill. When will the mass public realize the false sense of wealth that the gov't and the banks portray as it relates to owning a home?
Switch to a flat sales tax, no IRS, no accountants, no tax filing nightmare every year.
Also-switch mail delivery to at most, twice a week. Downsize this unnecessary behemoth. IF something has to be there faster than bi-weekly, use UPS.

Lose vehicle emissions for any car younger than 10 years. Seriously, how many cars built in the last 10 years fail? And how many pay to get tested to find that mentioned number?

SImplify everything. We need to stop hanging on to old antiquated ideas. People need to adapt and learn to adjust quickly to a rapidly changing world.

I agree with the Maryland Attorney General that the homestead tax credit is unconstitutional. It puts a disproportionate amount of the property taxes on new home owners; what's the rational basis for it?

When a tax system penalizes a minority (new home owners), I think you have a problem.

elweedz

Congrats on the most sensible post I have ever seen on this blog.

Agree 110%

I'm not saying I think the big difference in tax assessments are fair, but here is another way to think about this tax credit. Someone who has recently bought a house will likely tell you the property values have been flat or gone down. Therefore their annual property tax bills should not be increasing (and may even decrease). However that person who's lived next door for 30 years has a long way to go before they are being taxed at the full rate for their house value, so even if the recession lasts another 10 years, their taxes will keep going up 4% every year. Sure, the long term resident still has the upper hand in total dollars, but they have to keep budgeting higher bills while the new home owner can assume a flat rate.

Darwin- Thanks. Long time reader, seldom post though. Reading your posts, i suspect you would find value in another blog i follow if you dont already. Thehousingbubbleblog.com

Hear hear! elweedz for President! Or at least for Governor.

The homestead tax incentives dissuade people from moving. The corresponding tax loss from the homestead credit theoretically is made up by the extremely high property tax rate, which in reality causes so many needed new families and tax revenue to bypass buying a home in the city.

The tax system promotes aging in place at the expense of newcomers and investment.

I sold one home and bought another in the tumultuous year of 2008. I thought I had crunched all the numbers carefully. I have an excellent credit rating, and could put 20% down, so I felt I could confidently take full advantage of dropping home prices and interest rates (NEVER thought I'd see 4.5% fixed for 30 years, wow!), and I did.

My only miscalculation: the Homestead credit whammy described above. Listings and estimated monthly payments reflect the seller's situation, not yours if you buy the house. In my case the seller had been there 32 years and had huge Homestead and other credits. Homestead limits property taxes increases to 4% -- except for the first year in a new home. So I saw a 74% increase in my property taxes!

Double whammy: this was compounded by the fact that my home was assessed just before I bought it, and the assessment reflected the height of the bubble, not the very discounted price I actually paid. So while home prices were dropping, my assessed value was increasing with 10% phase-ins per year! The 45-day appeal window had closed before I bought it, and I didn't realize new buyers could appeal (my bad) -- but it wasn't the assessment that really fueled the 74% spike, it was the removal of the previous owners Homestead (and other) credits.

I didn't overextend myself in the purchase, so I can absorb this whammy. But I can see how this inhibits home buying (if you knew your taxes might double) -- or could send some new homeowners into foreclosure (if they didn't see this coming). I think it is good to promote longevity and ownership to make stable neighborhoods (too many careless renters was causing our old neighborhood to fall apart). But there should also be a cap on how big this first-year property tax whammy can be: even a 20% cap would be much much better than the 74% I saw. Ouch! And beware buyers...

I though it was only me to have this problem, but apparently, a lot of ppl out there like me. I live in a townhouse and I figured out last year that I paid 30% more on property tax than my neighbors. I could not understand why this is happening. I did not receive more service from the county than others, and pay more back to the community. It doesn't make any sense. I checked MD state website, it actually says that "it is actually a credit calculated on any assessment increase exceeding 10% (or the lower cap enacted by the local governments) from one year to the next.".
As far as I understand, when people calculate the credit, they should compare the current assessed value to the last assessed value instead of the value at the time when the house got purchased. but I called in the county tax office, the staff told me that all my neighbors got hughe credit because they bought the house early, and cheap. They always compare the current assessed value to the cost when they bought house. Is this wrong?

Xudong, when you a buy a home, you don't immediately qualify for the credit -- so you pay taxes on the current assessed value for the first full tax year.

You're eligible for the Homestead credit your second July 1 in the property. So the cap (which varies, depending on your home jurisdiction) kicks in at that point.

Thanks Jamie for your reply. I understand this. I've already bought my townhouse from two hand half years. Last year, I got several hundred bucks as homestead credit. But my neighbors got several a couple of thousands for that. This year, my new assessed value came in, it went down almost 100K, so my property tax bill showed no homestead credit at all, but my neighbors still get $800 for that. It is not fair at all, but I guess it's just the way it is.

True, Xudong -- that's the way it is. Your neighbors must have been paying on such a small assessed value compared with the full value that even a $100,000 drop in their assessment didn't completely wipe out their Homestead credit.