Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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Maybe Tax Bills Shouldn't Be So Complicated

Indiana is making big changes in its property tax. That's the tax on land, buildings, equipment and inventories that pays for the things that counties, cities and schools do. The biggest change is in how property is valued for taxes. We're basing taxes on market value starting this year, meaning the assessment on your house should look a lot like what you could sell it for.

Market value is a simplification of the assessment system, from the taxpayer's point of view. Under the old system, to know if your assessment was correct, you had to know the rules that assessors used. Under market value, you only have to compare the assessment to your property's value. That should improve our assessment system. Property owners can be on the lookout for assessor mistakes. That was hard to do under the old rules.

Unfortunately, not all the big changes in Indiana's property tax are simplifications. Take the homestead credit. Until this year, the homestead credit was a straight percentage reduction in a homeowner's property tax bill. If the tax rate times assessed value produced a tax bill of $1,000, last year's 10 percent homestead credit would reduce that bill by $100. Simple.

It's not so simple anymore.

Last January, an alert Statehouse analyst found that the state had been figuring the credit wrong for 17 years. The law actually said that the percentage credit was supposed to be applied to only part of the taxpayer's tax bill, not the whole thing. It was not supposed to reduce the parts of the bill that went for debt service (to pay off loans for infrastructure, buildings and schools), for cumulative funds (to save for future equipment and structure purchases) and for capital project funds (to buy equipment). Across the state, only about 70 percent of property taxes were supposed to be eligible for homestead credits. For 17 years, the state paid credits on the entire bill. That was a break for homeowners, but, since the law said otherwise, that break had to stop. At least they didn't ask homeowners to pay all those extra credits back.

There's more. Last year's tax restructuring changed the link between the homestead credit and another tax break called property tax replacement credits (PTRC). Until this year, the homestead credit was applied to the whole levy, before PTRC was subtracted. Now, the homestead credit will be applied to the levy after PTRC is subtracted.

Tax restructuring increased the homestead credit rate from 10 to 20 percent, but restricted the part of the tax bill to which the rate is applied. This year, the homestead credit will be 20 percent of the eligible levy after PTRC is subtracted. Suppose a homeowner's tax bill is $1,000. Only 70 percent of this bill is eligible for credits. That's $700. The PTRC percentage might be another 30 percent, or $300, and now we subtract that before figuring the homestead credit. That means only $400 of a homeowner's tax bill would be eligible for the 20 percent credit. That's an $80 homestead credit--less than last year's $100, even though the rate doubled from 10 percent to 20 percent. Tax restructuring increased the amount of PTRC taken out of tax bills, so the total amount of tax relief has gone up. We just call less of it "homestead credit."

It's complicated, and it got the state into trouble. The Department of Local Government Finance told counties in February to apply the credit to the levy after PTRC was subtracted. But then this spring, they calculated the homestead credit rates to be applied to the whole levy. That made the homestead credit rates too small, and meant homeowners would not receive their full tax break. Fortunately, they caught the mistake before very many counties had sent out tax bills.

Assessment is simpler for taxpayers now. The assessed value of a house should match its potential selling price. But the system of credits is now so complicated that even state agencies can make mistakes. It is unlikely that taxpayers can know whether or not their tax bills are calculated correctly. We've got assessment simplification. Tax bill simplification is yet to come.




Writer: Larry DeBoer
Editor: Olivia Maddox