2007: perfect storm for Indiana property taxes

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2007: The "Perfect Storm" for Property Taxes By Gary Malone, CPA, Executive Partner Second in a series of articles about Indiana's property tax changes. Some characterize 2007 as the "perfect storm" for property tax. Just as colliding weather fronts stir up spring tornados in Indiana, trending, reduced property tax credits, shifting of tax burden to homeowners, elimination of the inventory tax, overall reductions in assessed value all hit at the same time - and measures enacted to provide tax relief had not yet taken effect to calm the storm. When "trending," the annual adjustment of assessed values to adjust for changing market values, kicked in with 2007 tax bills, six years' worth of market price inflation (from 1999 to 2005) increased homeowners' assessments all at once. Going forward from 2007 these adjustments will happen annually - and hopefully more gradually. But if you got "sticker shock" with your home's assessment in your taxes payable in 2007, you didn't care. You just wanted relief. At the same time trending sticker shock hit, a cap on the growth of property tax relief enacted in the 2005 General Assembly became effective. The result was a 24% increase in the average homeowner's property tax bill. What exactly made up that 24% increase? While some blame property tax increases on out-of-control spending by local governments and schools, local government increases averaged 6%, while changes enacted by the General Assembly make up the remaining 18% of the average residential property tax increase. According to analysis by Dr. Lawrence DeBoer, professor of agricultural economics at Purdue University: 10% Is due to trending from 1999 to 2005 prices (and a possible business trending error) 4% Is due to elimination of the inventory tax in 51 counties that had not already done so 4% Is due to the cap on state property tax relief 6% Is due to increases in local government tax collections 24% (TOTAL) Average increase in homeowner property taxes (before rebate) Growth in Indiana's property tax base has been stagnant since 2002, partially because of changes in property tax legislation since 2002. These changes include: automatic investment deductions, reduction in minimum assessment values for abated equipment, elimination of business inventory from assessments, reduced assessments of agricultural land and increases in homestead exemptions. As a result, total assessed values increased an average of less than 1% annually from 2003 through 2006. When property assessments do not grow as quickly as property tax levies, tax rates increase. Equally important in explaining homeowners' tax increases, the changes in the property tax base shifted the majority of the property tax burden from businesses to homeowners. While the six-year difference in tax responsibility for homeowners is "only" 12% (from 39 to 51%), in actuality it represents a 31% increase in homeowners' share of the property tax responsibility. Shift in Property Tax Responsibility Property Type 2001 2007 % Change Residential 39% 51% +31% Business Real 34% 33% -3% Business Personal 27% 16% -41% Source: Central Indiana Corporate Partnership Enacted remedies hadn't gone into effect for 2007 The General Assembly enacted legislation in 2007 allowing local governments to create new local option income taxes to reduce the dependence on property taxes, and at least ten counties have adopted some of these property tax replacement taxes. But the new local option income taxes adopted in 2007 won't reduce property taxes until 2008; too late to provide property tax relief in 2007. The General Assembly also enacted $300 million in supplemental homestead credits. Funded by "racino" payments, the credits were not distributed to counties until November 2007 and are only now being distributed to homeowners. The effect will reduce the 24% average residential property tax increase to 8%. But homeowners' were unable to enjoy that relief this past summer. The General Assembly enacted property tax caps - known as Circuit Breaker tax credits - in both the 2006 and 2007 sessions, but those caps were not yet in effect for 2007. Unfortunately, these enacted remedies may have been sufficient to address many of the public's concerns. They were simply too late in coming. What lies ahead? Can lawmakers' tax plans produce sufficient relief for property taxpayers without drastically reducing funds for local services? It is a difficult balance. The current session will change the Circuit Breaker credits yet again. Circuit Breaker credits enacted in House Bill 1001 expand the credits through 2010 to 1% for residential homesteads, 2% for residential rental property and 3% for all other property taxpayers. The expanded Circuit Breaker credits may produce more than $500 million in property tax relief for taxpayers by 2010, but they will reduce annual income for cities, towns and special units by $244 million, for school corporations by $159 million and for counties by $74 million. Also under HB 1001: Certain school funds, pre-1977 police and fire pensions, and county child welfare funds would move from local property tax to state levies Property tax replacement credits and state homestead credits would be eliminated State sales tax would increase from 6% to 7% New rules for the issuance of debt HB 1001 contains a very new approach to funding local governments and schools. It is the most comprehensive change since Governor Bowen's property tax reform efforts in the 1970's and will take all of us quite some time to fully understand its long-term effects. If you have questions or need additional information, please contact us at footnotes@umbaugh.com. In an upcoming issue: What the General Assembly passed in 2008 and what it means for local governments and schools.