OCTOBER
2004

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

Visit Larry DeBoer's Indiana Local Government Information Web site

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10-14-04

Download the audio of Capital Comments: MP3, WMV

We All Get To Vote on the Property Tax


They say elections often turn on pocketbook issues. This year, Indiana voters will decide a pocketbook issue themselves. On Nov. 2, we'll get to vote on the property tax.

Public question No. 1 will read, "Shall Article 10, Section 1 of the Constitution of the State of Indiana be amended to allow the General Assembly to make certain property exempt from property taxes, including (1) a homeowner's primary residence; (2) personal property used to produce income; and (3) inventory?"

Article 10, Section 1 starts with, "The General Assembly shall provide, by law, for a uniform and equal rate of property assessment and taxation and shall prescribe regulations to secure a just valuation for taxation of all property, both real and personal." That's the sentence that caused the Indiana Supreme Court to declare our old assessment rules unconstitutional in 1998. The decision led to the reassessment under market-value rules that started in 2002. And that led to some big shifts in property taxes. Many owners of older homes, owners of rental property and farmers saw tax hikes. Many owners of newer homes and many businesses saw tax cuts.

Market-value reassessment also led to tax restructuring in 2002. The sales tax was increased, and so were cigarette and riverboat taxes. Much of the added revenue was used for property tax relief -- about a billion dollars worth.

Tax restructuring provided property-tax relief for homeowners in another way, too. It increased the homestead deduction to $35,000. The first $35,000, or up to half of a home's value, doesn't get taxed. Restructuring also provided a tax break for businesses. A 100 percent deduction will be applied to business inventories for taxes in 2007. Inventories will no longer be subject to property taxes. Some counties have adopted this inventory deduction early.

Are these deductions constitutional? Do we satisfy the constitutional requirement for an equal rate of property assessment, if a large part of the value of a home is not taxed, or if all inventories are exempt? It's a question that the courts have yet to decide.

So, to nail down the constitutionality of restructuring, in 2002, the General Assembly started the amendment process. It passed a joint resolution in 2002, and again in 2003. Putting the question to the voters is the last step. This happens Nov. 2.

That first sentence of Article 10, Section 1, is followed by some exceptions. The General Assembly is allowed to exempt the property of non-profit organizations and personal property, such as televisions and washing machines as well as stocks and bonds. It can exempt cars and boats, as long as another tax replaces the property tax. But that's it. Homes are not mentioned, and business inventories are singled out as not exempt.

The amendment adds homes to the list of property that can be exempted. It also adds business inventories and business equipment. If the amendment passes, the $35,000 homestead deduction and the coming 100 percent inventory deduction are constitutional, without a doubt.

The amendment doesn't require the General Assembly to exempt anything. But passing the amendment might provide a green light for lawmakers. They might exempt a larger part of the value of homes or some or all business equipment. They could classify property, assessing homes at a smaller share of market value, business property at a larger share.

Exemptions and deductions don't cut property taxes. They just change who pays them. Bigger deductions mean there is less property to tax, so a higher tax rate is needed to raise any amount of revenue. Everyone pays a higher rate. Owners of property without a new deduction pay more tax.

The amendment doesn't mention exemptions for business real property. Deductions and exemptions for factories, stores and office buildings, rental property, farm buildings and farmland may not be constitutional. If homeowners get bigger deductions, and nothing else changes, those taxpayers will pay more.

What will happen if the amendment doesn't pass? Maybe nothing. But, maybe, the homestead and inventory deductions will be challenged in court, and, maybe, a judge will find them unconstitutional. If they are eliminated and nothing replaces them, homeowners and businesses with a lot of inventories will see big tax hikes. Farmers, landlords and other business owners will see tax cuts.

The question on the ballot is mercifully short, but you can see the entire amendment online. It takes a little doing. Go to the Indiana General Assembly's Web site, at http://www.in.gov/legislative, click on "Session Rules, Journals & Archive," then click on "Archives of Past Sessions," then "2003 Regular Session," then "Resolutions." You want a joint resolution, SJR 5, which became Public Law 278. You'll see the text of Article 10, Section 1, with some parts crossed out and some new parts added. These are the changes that we'll decide on Election Day.

 

 

Writer: Larry DeBoer,
Editor: Olivia Maddox,