NOVEMBER
2004

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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11-24-04

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What Did We Vote For?


You may have seen it on the ballot on Nov. 2. It was an amendment to the Indiana constitution to allow the General Assembly to exempt homes, business equipment and inventories from property taxes. That sounded good to 71 percent of the voters. The amendment passed.

What happens now? Maybe nothing at all. That was partly the point. As part of tax restructuring in 2002, the General Assembly eliminated property taxes on business inventories as of 2007. But Article 10, Section 1 of the constitution said that assessment and taxation had to be "uniform and equal" for all property, "both real and personal." Inventories are personal property. Do we have uniform taxation of real and personal property if inventories get a 100 percent exemption, so its owners pay no taxes at all? I don't think so either.

The state was wide open for a lawsuit challenging the constitutionality of the coming inventory tax exemption. Not any more. The amendment tossed out a piece of Article 10. The article used to say that the General Assembly could exempt personal property, except "property being held for sale in the ordinary course of trade or business." Business inventories, in other words. The amendment crossed that phrase out. So, now, the General Assembly can exempt inventories. As of 2007, the Indiana inventory tax will be a thing of the past, and no lawsuit will happen.

Tax restructuring also increased the part of a home's assessed value that is exempt, from $6,000 to $35,000 for most houses. That's a big chunk of residential assessed value that isn't taxed, so this exemption was vulnerable to lawsuits under the uniform and equal taxation standard, too. Again, not any more. The amendment added a new phrase to Article 10, letting the General Assembly exempt real property that is used as a "primary place of residence." The $35,000 homestead exemption will stand.

What happens now? Here's another answer: maybe a lot. Article 10, Section 1 used to be really strict in limiting what state and local officials could do with the property assessment and taxation. It's not so strict any more. 

The General Assembly could classify property. All property would be assessed at full market value, as "uniform assessment" requires. Then, for owner-occupied residential property, only a fraction of that assessment would be taxed, while 100 percent of agricultural, commercial and industrial property would be taxed. About one-third of the states have classification of property. It's a way to deliver more tax breaks to homeowners. Businesses don't like it much.

The General Assembly could exempt business equipment. The amendment crossed out a phrase in Article 10 that said the General Assembly could not exempt "property being held, used or consumed in connection with the production of income." That's the machinery in factories, utilities, office buildings and on farms. Now, the General Assembly can exempt business equipment from the property tax. Eleven states, including Illinois, exempt business equipment. The hope would be that with equipment untaxed, businesses will find it more profitable to invest in Indiana. That would aid economic development. But homeowners might object.

The problem, of course, is that if we don't reduce the total amount collected from the property tax, new exemptions just rearrange tax payments. Every time we exempt one taxpayer's property, another taxpayer picks up the tab. In a sense, all that assessment of property does is to measure the slice of the property-tax pie that each taxpayer pays. If a new exemption makes my slice smaller, your slice has to be bigger.

The amendment OKs the exemptions that we have on homes and inventories, and permits more exemptions for homes and new exemptions for business equipment. So what can't be exempted? Farmland. Rental houses. Apartments. Shopping malls.  Office buildings. Factories. Owners of such property will pay more if the General Assembly enacts additional new constitutional exemptions and does not reduce the level of property taxes.

The General Assembly has a lot on its plate and may not consider new property tax exemptions in 2005. But the scope of what our legislators can do is much wider now. Sooner or later, new exemptions will be debated.

 

 

Writer: Larry DeBoer,
Editor: Olivia Maddox,