JULY
2007

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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07-26-07

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What's Behind the Property Tax Crisis?


Tax bills arrived. Homeowners were shocked. The statewide average increase in homeowner property tax bills is expected to be 24 percent, before the end-of-year rebates. The increases were larger in Indianapolis. Taxpayers protested.

The Department of Local Government Finance ordered a reassessment in Marion County. Reassessments may be ordered in other counties, too. Gov. Mitch Daniels appointed a commission to study local government. We may have a special session of the legislature.

But why are homeowner taxes going up? To solve the problem, we need to know what's causing it.

The problem was a long time in coming. For decades we gave homeowners a tax break by under-assessing houses relative to business property. In 1998 our Supreme Court said that had to stop. Indiana had to adopt a market-value assessment system, basing assessments on predicted selling prices of property.

The 2002-03 reassessment was based on market value, and the tax bills on many older homes jumped. The General Assembly responded with a tax reform package that increased state property tax relief payments by about a billion dollars. Huge homeowner tax increases were reduced to "merely" big increases.

But tax relief kept growing as a share of the budget. The General Assembly decided to cap it. That's one reason homeowner taxes have increased so much this year. Without an increase in state relief, taxpayers pay the entire annual increase in property tax collections. The cap accounts for about 4 percent of the 24 percent homeowner tax bill increase.

The 2002 tax reform also scheduled the elimination of the inventory tax, which was the property tax applied to the assessed value of inventories. Indiana voters approved this policy change in a constitutional referendum in 2004.

The last 51 counties eliminated their inventory taxes this year.  Someone else has to pay those taxes, and that's another reason homeowner taxes have increased. Inventory tax elimination accounts for another 4 percent of the 24 percent increase. The shift to homeowners was bigger in places with a lot of inventories, such as Indianapolis.

The Supreme Court says we must keep assessments close to property selling prices. Selling prices change every year, so assessments must be adjusted. This year we tried to do that for the first time. That's trending.

This year trending adjusted assessments from 1999 selling prices to 2005 selling prices. That's six years of price change. Assessments changed a lot. But business equipment assessments have always been updated each year, so those assessments increased just a little. Taxes shifted from business equipment to land and buildings, including homes.

Assessors trended homes based on evidence from the prices of similar homes that sold. But most of the time, there were no comparable sales of factories or office buildings. The law says that where there are no sales, other evidence must be used. Apparently this was not done everywhere. In Marion County, and maybe in other counties, business assessments were not trended. That's why Marion County was ordered to reassess. This trending error caused an additional tax shift to homeowners. About 10 percent of the 24 percent statewide increase was due to trending.

Rising local tax collections account for about 6 percent of the statewide 24 percent increase. In places with big government construction projects, higher tax collections contribute more. That's another reason why homeowners in some counties saw bigger increases.

Homeowner tax bills are increasing mostly because of tax shifts, from businesses to homeowners, and from the state budget to local taxpayers. In most places, big homeowner tax hikes are not the result of large increases in tax collections. Big increases in government spending are not the main problem.

Remember, some help is on the way. The end-of-year rebates should reduce the average homeowner tax increase from 24 percent to 8 percent.

Property assessment is the way we divide up the cost of local government among taxpayers. Market-value assessment says that homeowners should pay more than they did under our old system. Homeowners don't think that's fair.

Perhaps it's time to step back from the year-to-year tax crises and ask ourselves, "What is a fair way to divide up tax payments?" Perhaps that's one topic the governor's new commission will take up. If so, the question will be, "Can we agree on what's fair?"

 

 

Writer: Larry DeBoer,
Editor: Olivia Maddox,