APRIL
2008

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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04-24-08

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Circuit Breakers: A Simple Idea with Complex Results


I wonder if it's a rule of thumb that the simplest ideas have the most complicated consequences.

Our new property tax "circuit breaker" is a simple idea. A property owner's tax bill will be limited to a fixed percentage of the property's value. By 2010, homeowner tax bills will be limited to 1 percent of the home's value, taxes on rental housing and farmland will be limited to 2 percent and taxes on all other property will be limited to 3 percent.

If your home is assessed at (say) $120,000, your tax bill can't be more than $1,200, after all deductions and credits. If it's higher, you'd get a circuit-breaker credit, to hold the tax bill to the limit. Taxpayers won't pay the amount of their credits. Local governments won't receive that tax revenue.

This simple idea makes for some new complications in the local budget process. To understand what's new, you have to know how your property tax bill is built.

Starting in spring, local governments work out how much money will be needed to provide public services in the next year. They subtract the non-property tax revenue that they expect to receive -- local income taxes, auto excise taxes, charges, and fees and so forth.

What's left must be raised with the property tax levy. The state sets limits on the maximum amount each government can raise from property taxes, and local governments often need to cut their budgets to get inside this limit.

Then they figure the property tax rate. The county assessor provides the assessed value of property within the local government's boundaries. The property tax levy divided by the assessed value is the property tax rate. When that rate is multiplied by each taxpayer's taxable property value, the total equals the amount needed in the government's budget. Or it used to, before the circuit breakers.

Each taxpayer's property is in a county, a township, and a school corporation, and maybe in a city or town and in special districts for libraries or fire protection. The taxpayer's tax bill is based on the sum of the rates set by all these local governments. The amount the taxpayer pays is then divided among the local governments, based on their shares in the total tax rate.

That's where the complication from the circuit breaker enters in. The circuit breaker limits the total tax bill. If the tax rate sum pushes the taxpayer's bill above the circuit breaker limit, the lost revenue from the tax credit is divided among the local governments. Each will lose revenue based on its share in the total tax rate.

If there are circuit-breaker credits, each local government will raise less than the budgeted property tax levy. But each government can't know how much less, until the other governments in the county set their tax rates. That makes the budgets of local governments interdependent. No one can budget until everyone budgets. That's something new in our local budget process.

The new property tax law, House Enrolled Act 1001 ("ten-oh-one," the Statehouse folks call it), adds a step to the process to allow for this interdependence. A couple of weeks before budgets are finalized, all the local governments in a county submit their budget proposals to the county council.

What will the council do with that information? Maybe take the proposed tax rates and the new assessed values for all the taxpayers and calculate the circuit-breaker credits taxpayers would receive. Then divide those credits among the local governments, so each can see how much revenue they'll actually raise. This is a much more complicated bit of budget analysis than most counties do now. It could mean some late nights for the county auditor's staff.

The law requires the county council to make non-binding recommendations about the budgets of the other governments. Maybe those recommendations could be about the tax adjustments needed to reduce circuit-breaker credits. Perhaps local governments would make adjustments in their proposals and submit new tax rates for a second round of analysis.

It's a simple idea, the circuit breaker. But it may take some pretty heavy number crunching to make this simple idea work.

 

 

 

Writer: Larry DeBoer
Editor: Olivia Maddox