Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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February No Tax Sales

For years, I've wondered whether Indiana auto dealers would hold February inventory tax sales if there was no inventory tax. Now we know the answer: absolutely. Some are rolling out their old ads, showing the masked tax man. I've seen ads that shout, "We must sell our inventory or pay a huge tax!" Others are more clever (and more accurate), advertising a "no-tax sale" or even "the event formerly known as the Indiana tax sale."

In fact, as of March 1, the inventory tax is no more. The inventory tax was the property tax applied to the assessed value of inventories. This is the same property tax that homeowners pay on their houses, that farmers pay on their land, and that businesses pay on their buildings and equipment. The assessment date is March 1; in the past, as of that date, the value of inventories on the shelves or on the lot would be reported to the assessor, to be taxed the following year. This was why the inventory tax sales had to be held in February.

But, in June 2002, the Indiana General Assembly created a 100 percent exemption for inventories, effective in the 2006 assessment year, for taxes in 2007. Legislators weren't sure the exemption would be constitutional, but we voters nailed that down by passing a constitutional referendum in November 2004.

There are good reasons to do away with the tax. Few states still tax inventories, so Indiana stood out. We'd like to take advantage of our central location and our many interstate highways to become a center for goods distribution. The inventory tax stood in the way.

The General Assembly gave counties the option of eliminating the inventory tax sooner than 2006, and 41 counties took the legislature up on it. The other 51 counties include most of the big ones, such as Marion , Lake and Vanderburgh, so most taxpayers will experience the effects of the exemption for the first time with next year's taxes.

Effects? What effects? If auto dealers and others don't pay taxes on their inventories, everyone else must pay more. The state's property tax controls tell local governments how much they can collect in property taxes. The tax rate is set by dividing this number by the previous year's assessed value. If assessments are lower because of the inventory exemption, then the tax rate must be higher to collect the same revenue. Other property owners pay the higher tax rate.

The average Indiana homeowner probably will see his or her tax bill rise an extra four percent in 2007 because inventories are exempt.

Of course, local governments don't have to collect taxes at the maximum. They could drop their collections so tax rates don't rise. Most local governments probably won't do this. Under the tax controls, if a government collects less than the maximum, this lower amount becomes the new maximum. A government loses the ability to raise this extra money forever.

Counties have another option for defending homeowners from the tax hike. They can increase the homestead credit, a percentage subtracted from homeowner tax bills. The credit cuts the amount collected from taxpayers, but the state replaces this money. In 2005, the state paid local governments $230 million so homeowners could pay less property tax.

The state's not going to pay for the extra homestead credit, though. Counties will have to fund it themselves, with a local income tax. An extra tenth or two on the economic development income tax rate is usually enough. Twenty-four of the 41 counties that exempted early also adopted an income tax to fund a higher homestead credit.

So, there's a lot going on. The airwaves are full of "no-tax sales." County councils in many of the 51 counties are debating whether to adopt a homestead credit and higher income tax-or they soon will be. Taxpayers in 24 counties are turning to page 21 of their IT-40 booklets to see the county income tax rates, and many are thinking, "Isn't this higher than it used to be?"

And members of the General Assembly are getting reports on how much homeowner property taxes are likely to rise in 2007. And many are concerned-or they soon will be.




Writer: Larry DeBoer
Editor: Cindie Gosnell