Elderly and Disabled Persons; Disposable Income

Subject:

Requested By: D. R. Holbrook Director, Ad Valorem Tax Division North Carolina Department of Revenue

Question: Are Veterans Administration benefits includable in "disposable income" in determining entitlement of certain elderly and disabled persons to property tax relief?

Conclusion: Yes.

G.S. 105-277.1 provides that the first $75,00 in value of certain property owned by North Carolina residents who are either 65 years of age or older, or are totally and permanently disabled, "shall not be assessed for taxation", but only if the owner’s "disposable income" for the next preceding calendar year did not exceed $9,000. "Disposable income" is defined in the law as "adjusted gross income as defined for North Carolina income tax purposes in G.S. 105-141.3 plus all other moneys received from every source. . . ." (Emphasis added.)

From time to time, persons with various kinds of income which are not included in "adjusted gross income" for State income tax purposes inquire whether such income must be considered in determining their entitlement to the benefit of the $7,500 exclusion provided in G.S. 105-277.1. Their basic contention is generally that the law requires that such income not be taxed. Examples of such income would include Social Security payments, interest paid on federal obligations, disability pay received by virtue of service in the armed services, and State retirement benefits. Most recently, a number of inquiries dealing with benefits paid by the Veterans Administration have prompted a request to review the propriety of including such payments in "disposable income."

In order to do so, a brief review of the background of G.S. 105-277.1 will be helpful. The premise which basically underlies property tax is that all property is taxable. G.S. 105-274. However, the Constitution, Article V, Section 2, permits the General Assembly to exempt and classify certain kinds of property so that it will either avoid taxation altogether or be taxed at a lower rate than property generally. Acting in reliance on its Constitutional power to classify, the Legislature in 1971 for the first time established a social policy that certain persons, because of age and income, should receive limited property tax relief, and provided for the reduced taxation of certain property of persons 65 years of age and older whose disposable income as then defined did not exceed $3,500. (S.L. 1971, c. 932). The income limit was raised to $5,000 in 1973 but still applied only to persons above the specified age. (S.L. 1973, c. 448). In 1975, for the first time, the General Assembly extended the benefit to include perons "totally and permanently disabled". At the same time it raised the income limit to $7,500 and broadened and definition of "disposable income" to include "all other moneys received from every source" (S.L. 1975, c. 881). The statute was amended again in 1977, but in ways not material to this discussion.

The legislative history of the statute reveals an unfolding and expanding policy of property tax relief for elderly, and disabled, persons. However, that policy is clearly aimed at all persons in a given age or disability category having incomes below a certain level, and it excludes all above that level, regardless of the source of that income. It is unnecessary to debate what the policy ought to be, because it is so clear what the policy is. It was stated in the 1975 "Report of the Joint Legislative Committee on the Tax Structure of the Local Units of Government", pp. 14 and 15, wherein the Committee recommended an amendment to include those kinds of income exempt from income tax in the definition of "disposable income" for purposes of property tax relief:

"A number of inequities have resulted from the definition of disposable income as it now appears in the statute: "Disposable income" means adjusted gross income of the owner or of the owner and his or her spouse, if residing with the owner, as defined for North Carolina income tax purposes in G.S. 105-141.3, increased by amounts excluded from gross income pursuant to G.S. 105-141(6) (1), (2), (4), (8), (10), (12), (13), (14), (15), and (16).

The inequalities resulting from this definition may best be seen by example. Excluded from this definition are retirement benefits of state employees, while benefits derived from a private retirement plan are included in disposable income. A retired state employee may receive the same monthly payment as a private retiree and still qualify for the exemption while the private retiree does not. Similarly, military retirement benefits are excluded from disposable income, but military disability payments are not. These examples are not exhaustive. The Committee concluded that the definition of disposable income had to be changed to provide for equitable treatment of all the elderly citizens of North Carolina.

The approach recommended is to include in the term "disposable income" all monies received by the applicant regardless of the source of the funds in addition to the gross adjusted income as calculated for state income tax purposes. At the same time, the ceiling on disposable income is raised to $7,500 to accommodate the funds which were heretofore excluded from the definition. The broader definition will enable administration of the exemption in a manner that treats similarly situated applicants in the same way."

It is clear from the above that the Legislature was not as concerned with the source of the funds, or the reason for their payment, as it was that relief be extended to all persons below a given income level.

It is necessary to keep in mind that distinction between a tax on property and a tax on income. Here we are dealing with tax on property. Prior to enactment of G.S. 105-277.1, all persons, regardless of age, disability or income level, paid property tax, and there was no contention that any person was entitled to a reduction in that tax because part of his income was received from Social Security, government bonds, State retirement or the VA. Now that age, disability and income are relevant considerations, income is merely a measure of whether property tax relief obtains, but the property tax remains no more a tax on income that it was prior to enactment of

G.S. 105-277.1.

I must advise, in response to the specific question, that VA compensation is includable in "disposable income", as defined in G.S. 105-277.1, for the purpose of determining entitlement to property tax relief. That inclusion does not, however, result in any tax on such income.

Rufus L. Edmisten Attorney General

Myron C. Banks Special Deputy Attorney General