SEPTEMBER
2010

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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9-23-10

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What We Know About the Property Tax Caps


On Election Day, Nov. 2, Indiana voters will decide whether or not to amend our property tax caps into the state's constitution. The tax caps limit property tax bills to fixed percentages of gross assessed value, which is assessed value before deductions. Homesteads have their tax bills limited to 1 percent of gross assessed value. Rental housing, second homes and farmland have a 2 percent limit and all other property has a 3 percent limit. Taxpayers whose bills exceed the caps receive tax cap credits. Tax cap credits are lost revenue for local governments.

The caps are already in law, and we used them to set property tax bills this year. We now know something about how they work, based on data for 90 counties (all but Lake and LaPorte). The Legislative Services Agency has published county reports on the Indiana General Assembly's website, at http://www.in.gov/legislative/publications/County_Report_2010.pdf.

The tax caps are just that—caps, or upper limits, on tax bills. Taxpayers with higher tax bills are more likely to benefit from the caps. Most homeowners are not in this category. The 2008 tax reform cut tax rates and increased homeowner deductions, which has reduced homeowner tax bills by about one-third since 2007. Most homeowners have tax bills under the 1 percent cap. Homesteads have received only about one-quarter of all the tax cap credits and only about 12 percent of homeowners qualified. Many were located in places with high tax rates. Others were owners of expensive homes, which tend to have higher tax bills because the fixed homestead deductions provide them with less tax relief.

Owners of rental housing tend to have higher tax bills. This is because rentals don't receive the big deductions that homesteads do. At 2 percent, rental housing has a tighter cap than other business property. It's no wonder, then, that about half of all tax cap credits statewide have gone to rental housing owners. Taxes on rentals have dropped by about 20 percent since 2007.

Farmland also has a 2 percent tax cap, but few farmers have received credits. This is because farmland is located in rural areas where tax rates are usually less than $2 per $100 assessed value. Almost all farmland tax bills are too low to qualify for tax caps. Taxes on agricultural property have increased since 2007 because of rising farmland assessments.

The land, buildings and equipment of commercial and industrial businesses have a 3 percent tax cap. This means that the tax rate must be at least $3 per $100 assessed value for a business to qualify. There are plenty of counties that don't have any tax rates that high, so there are no businesses in those counties that receive credits. In a few counties, all or most tax rates are above $3. Businesses can receive substantial tax relief from the caps in those places. About a quarter of all tax cap credits have gone to businesses. But statewide, business property taxes are higher in 2010 than they were in 2007.

If a tax bill is higher than the cap, the taxpayer receives a credit. The credit represents part of the tax bill that is unpaid. Tax cap credits for taxpayers are revenue losses for local governments.

In total, local governments have lost about 6 percent of their property tax levies to the tax cap credits. Some governments in places where tax rates are high have lost much more. Others, where tax rates are low, have lost little or nothing.

Cities and towns have lost nearly 10 percent of their property tax revenue to the caps. More taxpayers qualify for credits in cities and towns, because they pay all the taxes that people in rural areas pay, plus the city or town rate. School corporations or library districts that share taxpayers with cities or towns lose more revenue than those in rural areas. More than 90 percent of the tax cap revenue losses are in places that include cities or towns.

The effects of the tax caps on taxpayers and governments will be pretty much permanent if voters put the tax caps into the constitution. Now that we've got the results for 2010, we've got some idea about what that would mean.

 

 

Writer: Larry DeBoer
Editor: Olivia Maddox