OCTOBER
2004

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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10-28-04

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Property Tax Stability and Circuit Breakers


Stability is one advantage of the property tax. In recessions, other tax revenues drop. Property tax revenues keep increasing.

The property tax is stable for two reasons. One, its tax base is assessed value. In the past, Indiana has not reassessed very often. Right now, our assessments are based on sales prices from 1999. The recession in 2001 didn't affect assessments very much. Two, the tax rate adjusts every year to raise a particular amount of revenue, called the levy. Most of this revenue is fixed each year by the state's property tax controls. Each year, the tax rate is figured by dividing the levy by the total assessed value in each jurisdiction. If assessed value falls, the tax rate rises, and the revenue rolls in.

The property tax is more stable than the income or sales or corporate taxes. This can be measured using a standard deviation, which tells how much some numbers typically vary around their average. A high standard deviation means that the numbers are unstable -- they bounce up and down a lot. A low standard deviation indicates stability.

During 1977 to 2002 (just before tax restructuring), the standard deviation of statewide property tax growth was 1.6 percent. That means that in about two years out of three, the property tax growth rate varied no more than 1.6 percent above or below its 25-year average. The standard deviation of the sales tax was 2.7 percent. The income tax had a standard deviation of 5.8 percent. And the corporate income taxes, added together, had a standard deviation of 9.5 percent.

The property tax is the most stable revenue source. Its revenues grow steadily, and predictably, year after year.

Stability is a big help for local governments. It's a hardship for some taxpayers, though. If you lose your job, your business goes bankrupt, or your crops fail, you still owe the same property tax. Stability means that incomes can rise or fall and the tax people must pay doesn't change very much.

Some states have a tax relief program that helps taxpayers through such difficulties. It's called a circuit breaker. Property tax payments are compared to income. If the payment is higher than a maximum percentage of income, the excess is rebated by the state.

In Illinois, for example, the maximum is set at 3.5 percent. A person with a $465 property tax bill and an income of $10,000 would receive a circuit-breaker grant of $115. That's because 3.5 percent of $10,000 is $350. That is the maximum property tax that Illinois thinks someone with that income should pay. The amount above $350 is rebated.

Here's how the circuit breaker treats the stability problem. Suppose a recession came along and the taxpayer's income dropped to $4,000. The 3.5 percent maximum tax payment would drop to $140, and the grant would rise to $325. The rebate rises when income falls.

The property taxes are still paid. The tax remains a stable source of revenue for local government. A circuit breaker creates a new problem for the state, though. When a recession hits, state sales, income and corporate taxes go down, but the amount the state must pay in circuit-breaker grants goes up. Paying for the grants when they are most needed can strain the state's resources.

Illinois handles this problem with some pretty strict eligibility requirements for its circuit-breaker program. It is limited to people who are 65 years old or older or who are disabled. A couple must have an income less than $28,480 to qualify. Plus, the rebate that people can receive is capped at $700 for those with the lowest income, no matter what their property tax payment. People with a higher income have a lower cap. You can see the Illinois circuit-breaker form (if you like reading that sort of thing) at the state's Web site, http://www.revenue.state.il.us/circuitbreaker.

A state can set eligibility requirements as its budget requires. If it has money to spare, a state can spread the relief around. Or, if its budget is tight, a circuit breaker can target the tax relief to taxpayers in greatest need.

 

 

 

Writer: Larry DeBoer
Editor: Olivia Maddox