Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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Tax Relief: When, Who and How?

The Indiana General Assembly is going to debate property tax relief. The question is when. Debate may start on Nov. 18, when the General Assembly meets for organization day before the 2004 session. Ordinarily, it's a one-day meeting, but, if they want, legislators can stick around and debate bills. The Ways and Means Committee already has begun hearings, so there could be bills ready to go, if the legislature decides to act.

The regular session starts in January 2004. The General Assembly is sure to begin debate on tax relief then, if they haven't already.

Then the questions will be: Who? And how?

We're reassessing property based on market value this year, under court order. The General Assembly passed a property tax relief package as part of tax restructuring back in June 2002. The results are trickling in now. We haven't seen data from very many counties yet, but, so far, about half of all homeowners are seeing tax cuts, because of reassessment and restructuring. Most manufacturers, utilities, many commercial businesses and some farmers also are seeing cuts.

That leaves a bunch of taxpayers with increases, some of them big increases. Owners of well-maintained older homes are seeing tax hikes. So are farmers who own a lot of land. Owners of rental housing are, too. Some of these properties, which had low assessments under the old rules, have much higher assessments under the new rules. Some taxpayers, like landlords and farmland owners, don't qualify for the extra tax relief that homeowners get.

If that's who might get relief, then the next question is how to deliver it. A lot of people agree that the deadline for filing for homestead credits should be extended, so that those who are eligible, but didn't file last spring, can still reduce their taxes in 2004. That one may be easy. Everything else is hard.

Tax relief comes in three flavors. A tax bill can be reduced by exempting part of a taxpayer's property from taxation. There are a lot of exemptions. The big one is the homestead exemption, which subtracts $35,000 from the taxable value of a home. But exempting part of a government's tax base means that the tax rate must be higher to raise the same revenue. All the taxpayers who don't qualify for a new exemption will pay higher taxes. Exemptions simply shift property taxes from one group of taxpayers to another.

A tax bill can be reduced by offering a tax credit. This is a reduction in the tax bill after assessments and rates are set. The biggest tax credit Indiana has now is the property tax replacement credit, which reduces tax bills on land and buildings by one-quarter to one-third in most counties. A credit costs local governments revenue; the state makes up the difference from its own budget. Indiana budgeted more than $2 billion to pay for such credits this year. That's nearly 20 percent of the entire budget, the second-biggest item after aid to local schools.

A tax bill can be reduced by reducing the tax rate. That can happen if local governments raise less revenue from the property tax. This year, counties, schools, cities, towns and other local governments have been increasing their property tax revenues by more than usual, maybe to make up for declines in local income tax revenue or maybe because, during a reassessment, taxpayers can't tell who to blame for higher taxes. Tax controls could be tightened to stop local taxes from rising so much.

You see the problems. If we deliver tax relief using exemptions, those who don't get the exemptions pay more. They may object. If we deliver tax relief using credits, the state must come up with the money from its budget. It doesn't have any to spare. If we deliver tax relief by tightening tax controls, local governments may have to cut services. Those who use these services may miss them.

Whenever it happens, whether in November or January, the debate over the who and the how of property tax relief will not be easy.




Writer: Larry DeBoer
Editor: Olivia Maddox