Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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Homeowner Property Taxes

Here's why I think homeowner property taxes are going to increase more than usual in 2007.

Let's take a house assessed at $120,000. Last year, it received the homestead deduction of $35,000. Suppose it also got the $3,000 mortgage deduction. After deductions are subtracted, the remaining $82,000 is the "net" assessed value subject to taxes.

A typical tax rate could be $2.75 per $100 assessed value, or 2.75 percent. You can see your tax rate on the Department of Local Government Finance's Web site, at Multiplying this rate by the net assessed value gives a $2,255 "gross" tax bill.

Now, we subtract the property tax replacement credit (PTRC) and the homestead credit. A typical PTRC rate is 25 percent, which reduces the tax bill to $1,691. A typical homestead credit is 15 percent. It's applied to the tax bill after PTRC, reducing the tax bill to $1,437. That's what this homeowner would have paid in 2006.

This tax bill will change pretty substantially in 2007. There are five major policy changes that will affect this bill: trending, the inventory exemption, an increase in the homestead deduction, a reduction in the homestead credit, and a cap on state payments for property tax relief.

Trending takes effect for the first time for taxes in 2007. The idea is to keep assessed values closer to selling prices by making annual adjustments. This year, assessments will be updated from their current values, based on selling prices from 1999, to values based on selling prices from 2005. That's six years of change, all at once. Suppose this house sees an increase to $140,000, about 17 percent.

Trending will affect tax rates. All land and buildings will be trended, so each jurisdiction's assessed value will increase. The tax rate can be lower and still raise the revenue that local governments need. How much tax rates fall also depends on new construction and changes in the amount of tax revenue collected. Let's say that this homeowner's rate falls to $2.65.

It would have fallen more, but, this year, inventories are exempt from property taxes in every county. The 2002 General Assembly voted to eliminate the inventory tax, and, in 2004, we voters approved a constitutional amendment that ratified its decision. Forty-one counties eliminated the tax before this year; now, the remaining 51 will get rid of it. That reduces the total assessed value available to tax, so the tax rate must be higher to raise revenue. If we still taxed inventories, this homeowner's tax rate might have fallen as low as $2.50.

In 2006, the legislature offered homeowners a tax break by increasing the homestead credit. It cost the state budget about $100 million dollars to replace the revenue that local governments lost from this increase. The budget couldn't afford that for a second year, so this year, the rate is back where it started. Instead, the homestead deduction will rise to $45,000, for 2007 only.

The state property tax relief cap will also affect the credits. The state pays more than $2 billion a year to local governments to replace property tax revenue lost to the two credits. The General Assembly put a cap on the amount of tax relief paid, to help keep the state budget in balance. For the taxpayer, this means a reduction in the PTRC and homestead credit rates. Looks like these rates will be reduced by about 8 percent this year.

So, the tax bill: the newly trended gross assessed value of $140,000, less the homestead and mortgage deduction of $45,000 and $3,000, leaves $92,000 to tax. The new lower tax rate of $2.65 yields a gross bill of $2,438. It would have been less if we were still taxing inventories. The PTRC rate is down to 23 percent, because of the tax relief cap, and the homestead credit drops to 10 percent, because of the cap and the 2007 rate reduction. This homeowner pays $1,689 in 2007.

That's a tax bill increase of 17.5 percent, $252 more.

It's a bigger increase than usual. The General Assembly will feel pressure from taxpayers to do something. And, looking at all these calculations, let's hope they feel a little pressure for tax simplification, too.




Writer: Larry DeBoer
Editor: Cindie Gosnell