Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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Trending and Two Percent

There are two new features of our property tax system in the news. One worries property owners. The other worries local government officials.

Here's what worries property owners. For the first time, assessors will be adjusting assessed values in-between statewide reassessments. It's called "trending." The assessor looks at sales prices in your neighborhood, and adjusts the assessments of all the land and buildings based on this evidence of market value. If it's done right, it should keep our assessments close to selling prices year after year. This means that there should only be small adjustments when the next reassessment comes in 2012. In the past, reassessments usually meant big changes in tax bills.

The trouble is, current assessments are based on selling prices as of 1999. This year, trending will advance this date to 2005. That's six years of price change in one shot. A lot of property owners will see big assessment changes. Remember, though, a big increase in countywide assessed value means a drop in tax rates. Your assessment may be higher, but your tax rate will be lower. Therefore, your tax bill won't change as much as your assessment. Next year, we'll be making only a one-year price adjustment, so the assessment and tax bill changes should be much smaller.

Here's what worries local government officials. As of taxes in 2008, homeowners will benefit from a ceiling on their tax bills. It's called the "two-percent credit," or sometimes the "two-percent circuit breaker." The tax bill is divided by the market value, before deductions. Homeowners will not have to pay any amount above two percent. As of 2010, all property owners will be eligible. Lake County homeowners are already eligible.

Indiana has other credits. The homestead credit and property tax replacement credit reduce property taxes, but the state pays local governments about $2 billion a year to make up the lost revenue. The state won't fund the two-percent credit, so the locals won't recover the lost revenue. And, the way it's set up, governments won't know how much they'll lose until after their budgets are written. The two-percent credit could create budget shortfalls.

Both new features have people worried. Together, though, trending and the two-percent credit may improve our assessment system.

This is an election year. Imagine the pressure that assessors face, sending out assessment notices with higher values just a few months before facing the voters. It's a danger to the quality of our assessment system; assessors have a terrific incentive to under-assess property, so the voters won't be so angry.

Property owners might think that's just fine. Maybe they think that lower assessments mean lower taxes. Not necessarily. When total assessed value is lower, tax rates must be higher to raise revenue for local governments. Further, what if your property is assessed low, but your neighbors' are assessed lower? Your taxes will be higher than theirs, but you won't be able to make a case that your assessment is higher than it should be. It's better if the assessor aims for accuracy.

The Department of Local Government Finance is the state oversight agency that tries to keep assessors from under-assessing. But the DLGF is headquartered in faraway Indianapolis. The property owners and voters are lined up in the assessors' offices. And they look mad.

Now, the two-percent credit has created a new group interested in assessment accuracy: every other government official in the county. The county commissioners, council members, sheriff, mayors, and school board members and superintendents all now have an interest in preventing under-assessment. That's because low assessments mean higher tax rates. When tax rates are higher, there's a better chance that property owners will top the two-percent limit, and that's what creates budget shortfalls.

This hasn't been the case in Indiana since the early 1970s. Gov. Otis Bowen's property tax controls limited tax revenue, not tax rates. Low assessments were offset by higher rates, so assessment quality didn't matter much for local revenue. Now, with the two-percent credit, quality matters.

Property owners will pressure assessors against over-assessment. Local government officials will pressure assessors against under-assessment. Between the two, maybe we'll get more accurate assessments.




Writer: Larry DeBoer
Editor: Cindie Gosnell