Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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What We Know About the Property Tax

We probably know more about the Indiana property tax now than we ever have. That's because this year the Legislative Services Agency and the Indiana Fiscal Policy Institute finished a couple of big studies about the tax.

The Legislative Services Agency is the fiscal analysis and bill drafting arm of the General Assembly. LSA's study answers the question, "How did the 2003 property reassessment and tax restructuring affect taxpayers?" Maybe you recall those events. In December 1998, the Indiana Supreme Court found the old property assessment rules to be unconstitutional . The state rewrote the rules, requiring assessors to measure property values based on their potential selling prices, a system called "market value." The new rules were applied to assessments in 2002, for taxes in 2003, though it took longer in many counties. Then, the General Assembly passed tax restructuring in June 2002, to offset the tax shift to homeowners that reassessment created.

LSA's study reveals the source of the tax shift. Under the old rules, business property was assessed much closer to market value than was residential property. When we moved to market value, the total assessed value of commercial property rose 46 percent, total assessments on industrial property rose 17 percent and total assessments on utility property remained unchanged. Residential total assessed value, though, increased 106 percent. It more than doubled. Agricultural total assessments rose 92 percent.

The state controlled the tax levy. Property tax revenues didn't rise nearly as much as assessments. So property tax rates dropped. What happened to taxpayers depended on how much their rate fell compared to how much their assessment rose.

Residential and agricultural property saw bigger increases in assessed value, so those property owners paid more in taxes. The average residential owner saw an 11 percent tax hike; the average agricultural owner a 6 percent hike. Business property owners saw tax cuts, on average. Industrial property owners saw their tax bills fall by 22 percent.

LSA's study offers more detail. About 59 percent of residential property owners saw tax increases, and 41 percent saw tax decreases. Owners of farmland, older homes and rental property saw the biggest tax increases. And, without tax restructuring, which added almost a billion dollars to state property tax relief, the average homeowner would have seen a 46 percent tax increase.

You can see LSA's results on the General Assembly's Web site, at http://www.in.gov/legislative. Click on "Indiana County Property Tax Summaries".

The Indiana Fiscal Policy Institute is a think tank that works on Indiana budget issues. The state commissioned the institute to do an "equalization study," which looked at the accuracy of the reassessment results.

The study compares the assessed values and selling prices of properties that have been sold recently. If our market value system works, the assessments and selling prices should be nearly the same. Are they?

Not often enough, says IFPI's study. A statistic called the "coefficient of dispersion" shows how much the average home's assessment varies above or below the typical assessment in the county or township. The state would like counties to have a COD of 15 percent or less. At 15 percent, a $100,000 house typically would be assessed at $85,000 or $115,000.

The IFPI found 74 counties with COD's higher than 15 percent. That's too much variation. It means that assessments in Indiana are not very uniform. Tax bills on similar houses are not similar.

Suppose the COD is 25 percent. One $100,000 house might be assessed at $75,000, another at $125,000. If both homeowners get the usual deductions and credits, in a typical county the low-assessed homeowners might pay $550 in property taxes, the high-assessed homeowner $1,300. One homeowner pays more than double the other, on a house with the same value. That's too much variation.

You can see the results on IFPI's Web site, at http://www.indianafiscal.org/study.html. The news release sums it all up.

There weren't reports like this about assessing problems under the old rules. That's not because the old system worked better -- the Supreme Court tossed it out because it wasn't working. What's different is, under market value, there are ways to measure how well or poorly assessing is done. And, if we can measure the problem, maybe we can fix it.




Writer: Larry DeBoer
Editor: Cindie Gosnell