NOVEMBER
2009

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

Visit Larry DeBoer's Indiana Local Government Information Web site

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11-25-09

Editor's Note: Larry DeBoer will present a free workshop, “On Local Government: Recession, Recovery and Indiana Government Budgets,” on Wednesday, Dec. 16, from 2-4:30 p.m. EST, 1-3:30 p.m. CST. The program will be delivered via video streaming at Purdue Extension locations around the state. It can also be viewed online via computer at https://gomeet.itap.purdue.edu/localgov12-16-09/. Contact Jenna Wargo in the Purdue University Office of Engagement, 765-496-6491 or jwargo@purdue.edu for a list of locations where the program may be viewed. Media may contact Olivia Maddox maddoxol@purdue.edu to arrange an interview with Dr. DeBoer.

Property Tax Reform Results


It's been 20 months since the Indiana General Assembly passed the big property tax reform, back in March 2008. Now, thanks to the Legislative Services Agency, we've got some numbers about how the reforms are working out. You can see the LSA's reports on 2009 property tax bills at http://www.in.gov/legislative/publications.

We had reports on homeowner tax bills in 2008. But that was a transition year, with tax relief provided by a temporary homestead credit. The big changes in property taxes took effect this year. The state took over the school general fund and county welfare funds, so they are no longer supported by property taxes. That cut property tax rates. Homeowners got a new 35 percent deduction, reducing the taxable value of their homes by more than one-third.

The reforms eliminated the property tax replacement credits. They substantially phased out homestead credits, too. And tax bills were limited by the circuit breaker property-tax caps.

Statewide, the average homeowner saw a tax cut of about one-third between 2007 and 2009. More than 95 percent of homeowners saw tax reductions.

Despite these big tax cuts, homeowners in about a third of the counties may be feeling grumpy. Their taxes went down in 2008 and are lower now than they were in 2007. But their tax bills went up from 2008 to 2009. In some counties, they went up a lot.

This is an illustration of the old saying, "no good deed goes unpunished." The governor and the legislature wanted to deliver tax relief to homeowners in a new way, by eliminating whole functions from the property tax. They couldn't do that for 2008, because the local budget year was already underway. So, they gave homeowners a temporary tax credit in 2008 and set the big changes for 2009.

Statewide, about the same amount of relief was provided in each year but with different formulas in 2008 and 2009. Homeowners in some counties fared better under the 2008 formula. When the 2009 formula kicked in, their taxes went up. If these homeowners are unhappy, it's because the legislature decided to provide tax relief in 2008, rather than waiting for 2009.

There may be some other grumpy taxpayers out there: owners of non-residential property. Taxes on commercial, industrial and agricultural land and buildings are up about 10 percent since 2007. That's mainly because the new 35 percent homestead deduction directed most of the added property tax relief to homeowners.

The circuit breaker tax caps went into effect in 2009. Homeowner tax bills were limited to 1.5 percent of assessed value before deductions. Farmland and rental housing was limited to 2.5 percent and all other property to 3.5 percent. Next year, those limits will be 1 percent, 2 percent and 3 percent, respectively. Taxpayers got circuit breaker credits to hold their bills to these caps.

Homeowners, farmland owners, and commercial and industrial business owners got little in credits in 2009. Homeowners got so much tax relief from their deductions that few had tax bills high enough to qualify for credits. Farmland is located in rural areas where tax rates are low, so most of it did not qualify either. Commercial and industrial businesses had a 3.5 percent cap, too high to limit tax bills in most places.

Owners of rental housing got more than 80 percent of the tax cap credits in 2009. That's because rental housing does not get the deductions that owner-occupied homes get, and because most rental housing is located in cities and towns, where tax rates are higher, and because it has a 2.5 percent cap, lower than other types of businesses. The credits are a reason why rental-housing owners saw tax decreases of about 10 percent from 2007 to 2009.

Of course, qualifying for a circuit breaker credit is a mixed bag. Taxpayers get relief--but only because their tax bills were so high in the first place.

Tax relief was just one part of the 2008 tax reforms. Reforms also centralized assessing with the counties. They introduced capital projects referenda to Indiana voters. They changed the source of funds for operating schools. They reduced revenues for many local governments. We've got a pretty good idea about how the reforms affected taxpayers, but there's still a lot to learn.

 

 

Writer: Larry DeBoer,
Editor: Olivia Maddox,