MAY
2007

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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05-24-07

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Band-aid or Surgery for Indiana Property Taxes?


Each year brings a new property tax crisis. The General Assembly scrambles to defend homeowners from big tax hikes. Each year, legislators are accused of merely postponing the problem with a policy "Band-aid." When will Indiana's system of local finance get the diagnosis and treatment it needs? When should we schedule the surgery?

The legislature faced another property tax crisis in 2007. Average homeowner tax bills are rising an estimated 24 percent statewide. Legislators stuck a two-year Band-aid on the problem. But, this time, maybe they've scheduled the surgery.

Homeowner taxes are expected to increase because of policy changes made in past years. Property taxes on inventories will be eliminated for taxes this year in 51 counties. These payments will shift to other taxpayers, including homeowners. The state has capped its payments for property tax relief at just over $2 billion. Without added tax credits, homeowners pay a bigger share of rising tax levies.

The policy change with the biggest effect, though, is trending. We're updating assessed values each year to keep up with changing sales prices. Unfortunately, assessments this time are being updated from 1999 selling prices to 2005 selling prices. That's six years of accumulated price changes, all at once. The results so far show that in many counties home assessments are being trended upward a lot more than business assessments. This shifts taxes toward homeowners.

The 2007 General Assembly stuck a Band-aid on this problem. We're going to use the up-front payments from the two new "racinos"--the horse tracks that are installing slot machines--to reduce the homeowner property tax hike in 2007 and 2008. That's $550 million in new property tax relief over two years. That should reduce the average homeowner tax bill hike to about 8 percent in 2007 and 2008.

This year, homeowners will receive a "Christmas bonus" in November or December, rebating part of their tax bills. In 2008, the tax relief will be applied directly to tax bills. The year-end rebate may be a political move to remind taxpayers that the General Assembly is delivering tax relief. But there's a practical reason for the rebates, too. The state won't have the money until then. The racino payments won't arrive until later this year.

That's the Band-aid. What about scheduling surgery? We may have a tentative date with the operating table: Aug. 1, 2009.

The General Assembly offered local governments some new income tax options for property tax relief. The big one is an income tax of up to 1 percent to be used dollar-for-dollar to reduce property taxes. A county can distribute the money in three ways. It can reduce property taxes for all property owners, for homeowners only, or for homeowners and rental-housing owners. Counties have until Aug. 1 each year to adopt.

In the average county, a 1 percent income tax would reduce property taxes for all taxpayers by about 20 percent. Most farmers, retired homeowners and corporate businesses would pay less overall. Renters would pay more. Most employed homeowners would see their income taxes rise more than their property taxes would fall.

If the tax relief goes to homeowners alone, though, the impact is different. Homeowner property taxes would be cut in half in the average county, and almost all homeowners would see their combined property and income tax payments drop. Other property owners who earn income in the county would pay more. If the tax relief goes to homeowners and landlords, homeowner property taxes would drop by a third, and most would see an overall tax cut.

Come 2009, the racino money runs out and the Band-aid comes off. It's likely that homeowner taxes will jump again. What will the General Assembly do? Perhaps it will find money for more state credits. Or, perhaps legislators will say to local governments, "It's your problem, now."

The new income tax options give counties the ability to enact major property tax cuts. If the state legislature backs off in 2009, taxpayers may pressure counties to act. That's our date with surgery: The mix of taxes that we use to pay for Indiana local government could change--a lot.

 

 

Writer: Larry DeBoer,
Editor: Olivia Maddox,