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Property Taxes Down; Sales Taxes Up
Before long, we'll know the results of the General Assembly's tax debate. Right now, it's tough to analyze the effects of proposed changes, because those changes keep changing.
Still, let's take a few policy ideas that keep showing up as the debate moves forward. The state would take over some local government property tax levies, about $3 billion worth. The state would end the two property tax credit programs, which cost about $2 billion, and use that money to pay for the levy takeovers. The state would increase the sales tax, from 6 percent to 7 percent, to raise the extra billion. That's new property tax relief. And the state would channel that relief to homeowners, with a new 35 percent homestead deduction.
For homeowners, property taxes are cut. For everyone, sales taxes are increased. If one tax goes down, and another goes up, what happens on net? Who pays less, and who pays more?
To figure this out, we need information about Indiana households. Fortunately, there's a new bunch of numbers from the U.S. Census Bureau, called the "American Community Survey." You can see it at www.census.gov/acs/www.
The survey says that the median Indiana home is worth $120,700. Half are worth more, half less. The median homeowner has an income of $55,634. Those two numbers let us look at the property and income tax payments of a middle-income household.
We need sales taxes, too. The U.S. Bureau of Labor Statistics' Consumer Expenditure Survey shows how much people spend on 73 categories of goods and services. We find, for example, that the average family of three with an income of $59,449 spends $201 a year on pork and $427 on footwear. You can find these numbers at stats.bls.gov/cex (no "www"). We'll use a three-person household with two adults and one kid, since that's closest to the average household size in Indiana.
Let's run the numbers. First the property tax. The Legislative Services Agency says that these policy changes would cut homeowner property taxes 31 percent. At state average property tax rates, our homeowner saves $415. Less than half of this household's spending is subject to the sales tax, and the household saves some of its income, too. The 1-point sales tax increase costs $192.
This household itemizes its deductions for the federal, state and local income taxes. Property taxes are deductible; sales taxes aren't (not all of them, anyway). Lower property taxes make the household's deductions smaller, so taxable income is larger. State and local income taxes rise by $18, federal taxes by $60.
In total, the middle-income homeowner sees a tax cut of $146. Maybe three-quarters of homeowners would see tax cuts of $50 or more. Households with modest incomes and more valuable homes (like those older homeowners on fixed incomes) would see bigger tax cuts. Only about one in 10 would see tax increases of more than $50. They're households with high incomes and modest homes. A household with the median home value would need an income of more than $150,000 to see a tax increase.
Renters would pay more. Renters don't get property tax cuts. They pay added sales taxes. The median renter with an income of $24,992 would pay an extra $139. In the long run, maybe rents would be lower because of property tax cuts that landlords get. Probably not enough to offset the added sales taxes, though.
So far we've ignored the circuit breaker, which would cap a homeowner's property taxes to 1 percent of the home's value. The median homeowner's cap would be $1,207, but after the tax rate cuts and added deduction, this homeowner pays $910. The middle-income homeowner at the state average tax rate would not be eligible for the tax cap. The tax rate needs to be above average for this homeowner to be eligible. Almost all of the tax relief for homeowners under this plan come from the rate cuts and added deduction, not the 1 percent circuit breaker.
The General Assembly might amend these conclusions away. But under this version of the tax plan, most homeowners would see property tax cuts bigger than their sales and income tax increases. But renters would see net tax hikes.