AUGUST
2007

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

Visit Larry DeBoer's Indiana Local Government Information Web site

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08-23-07

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How Do Indiana Taxes Compare?


Homeowner property taxes are going up in Indiana. But how do they compare to property taxes in other states? Here's some evidence.

The U.S. Census does a survey of American households each year, called the American Community Survey (ACS). It's a survey, not a census, so you probably didn't receive a survey form. But three million Americans did, and the Census has the 2005 results on its Web site, http://factfinder.census.gov (no "www").

Here's what's exciting (for a data wonk like me). The ACS asks homeowners how much they paid in property taxes. The Census Web site shows the median value for each state. The median is the payment in the middle, with half of all homeowners paying more and half paying less. That means we can compare Indiana homeowner property taxes to those in other states!

I mean that exclamation point sincerely. It's always been hard to compare property taxes, because every state runs its property tax system differently. Perhaps the best way to do it is simply to ask the taxpayers.

The ACS says that the median Indiana homeowner paid $1,079 in property taxes in 2005. That seems about right. Indiana data for 2003 showed the average homestead tax at $1,145, and the average is always higher than the median, with data like this.

Indiana's median homeowner property taxes ranked 35th highest in the country. Among our neighbors, Illinois was seventh with an average homeowner tax bill of $2,904. Kentucky was 44th at $693. Nationwide, New Jersey was No. 1, with an average homeowner tax bill of $5,352. Louisiana was lowest, with $175. What explains that big range?

In some states, governments spend more. In others, they spend less. In some states, governments pay for a lot of their spending with property taxes. In other states, they use more sales and income taxes.

We can get some more evidence from the Federation of Tax Administrators (FTA), which has some state comparisons on its Web site at http://www.taxadmin.org. One of its tables shows the total taxes collected per person. Another shows the share of taxes that each state raises from property, sales and income taxes.

Consider Alabama. The median homeowner tax bill in Alabama was only $302 in 2005, second lowest in the country. And Alabama state and local governments had the lowest total taxes per person. Do their governments deliver more services for the buck? Or are Alabama citizens content with fewer or lower-quality government services? You can't tell from this number. Either way, they're not collecting much in taxes in Alabama.

Only 15 percent of those taxes are property taxes. That's the fifth-lowest share in the United States, Alabama homeowners pay so little in property taxes because their governments don't spend much, and they prefer sales taxes to property taxes.

Contrast that with New Jersey, with the highest homeowner property taxes in the United States, as of 2005. Jersey ranks fifth in total taxes per capita and levies 45 percent of those taxes on property, the second-highest share in the country. New Jersey homeowners pay so much because their government spends a lot, and they don't use sales or income taxes as much as other states do. (There's been new property tax relief in New Jersey since 2005, which has helped some.)

How about Indiana? Indiana ranks 26th in taxes per person--smack in the middle of the 50 states, plus Washington, D.C. Indiana also ranks 26th in property tax share, at 29 percent (after state credits are accounted for). Yet Indiana homeowners rank 35th in median tax bill. Why so low?

Homeowners aren't the only ones paying property taxes. In 2005, businesses paid about half of all property taxes. Maybe Indiana had lower homeowner property taxes because it had higher business property taxes.

But that was 2005. Taxes are changing. Trending and elimination of the inventory tax have shifted property taxes from businesses to homeowners. And Indiana is reducing its property tax share, paying more tax relief out of the state budget and encouraging local governments to adopt income taxes.

Indiana has been a moderate tax state, making moderate use of the property tax, lighter on homeowners, heavier on business. The policy debate will decide if we want to stay that way.

 

 

 

Writer: Larry DeBoer
Editor: Olivia Maddox