Why are property taxes going up? Once again, Larry DeBoer, everybody’s favorite economist, has the answers.
Step One: For decades prior to 1998, Indiana had given homeowners a tax break by under-assessing houses relative to business property. The Town of St. John challenged this practice, and the Supreme Court required assessments based on market value.
Step Two: In 2002-03, reassessment was based on market value and tax bills on older homes jumped. The General Assembly provided about a billion dollars in property tax relief to ease the pain.
Step Three: The General Assembly found this level of property tax subsidy unsustainable for the State budget and decided to cap it. According to Prof. DeBoer, the cap accounts for about 4% of the recent 24% increase.
Step Four: Part of the 2002 tax reform with the huge property tax subsidy was elimination of the inventory tax. The last 51 counties eliminated their inventory taxes this year. (Other counties had done so in prior years.) The inventory tax shifted to other taxpayers and hit particularly hard in places, such as Indianapolis, with a lot of inventories. On average, the inventory tax reduction accounts for another 4%.
Step Five: Trending. Trending requires assessors to keep up with assessed value. In the past few years, assessed values were to be based on what a property was worth in 1999. This year, residential property values were to play catch up by going from 1999 levels to 2005 levels. Business property values were already subject to trending and, therefore, the changes in assessed value for business property values were not as dramatic. In Marion County and some others, however, business assessments were not trended. According to Prof. DeBoer, trending accounted for about 10% of the 24% statewide increase.
Step Six: Rising local tax collections account for about 6% statewide. Places with big government construction projects have higher increases and those without tend to have lower increases.
Homeowner tax bills are increasing mostly because of tax shifts, from businesses to homeowners, and from the state budget to local taxpayers. In most places, big homeowner tax hikes are not the result of large increases in tax collections. Big increases in government spending are not the main problem.
. . .
Property assessment is the way we divide up the cost of local government among taxpayers. Market-value assessment says that homeowners should pay more than they did under our old system. Homeowners don’t think that’s fair.Perhaps it’s time to step back from the year-to-year tax crises and ask ourselves, “What is a fair way to divide up tax payments?” Perhaps that’s one topic the governor’s new commission will take up. If so, the question will be, “Can we agree on what’s fair?”
(Emphasis added).
[tags]property taxes[/tags]
4+4=8=tax shift
10=trending
10>8
What am I not seeing?
Finally! Some clarity and circumspection about the issue. I’ve been waiting for something like this (rather than simplistic partisanship). Thanks for posting this, Doug.
Not sure Frank –
4% – State cap on property tax relief
4% – Inventory tax elimination
10% – Trending
6% – Local increases
—
24%
My post was in response to this statement –
“Homeowner tax bills are increasing mostly because of tax shifts, from businesses to homeowners, and from the state budget to local taxpayers.”
By my math, trending accounts for the largest increase.
Ah, I see. My understanding is that trending is effectively a shift from business to homeowners.
A county’s tax levy is basically for a fixed number of dollars. If the total assessed value rises, then the tax rate goes down so that
(Assessed Value * Tax Rate) = Fixed Number of Dollars.
In that context, where Taxpayer 1’s assessed value rises faster than Taxpayer 2’s assessed value, the effect is essentially a shift from Taxpayer 2 to Taxpayer 1. This year, for a couple of reasons, residential property values are generally rising a lot more than business property values. So, it ends up being a shift from business to residential.
Then the contrary must hold true that since 1999 there was a shift from residential to business since business was getting reassessed yearly while residential wasn’t.
So what you’re calling a shift from business to residential is more likely an equalization (without regard to the inventory tax).
Regardless of the method of determining who is going to pay what is the unanswered question of how much is too much. In Daviess County, we have a county income tax that is currently at 1.75% and rising. Our rate just happens to be the highest in the state. Now property taxes are on the rise. When is enough, enough? Even though 1.75% of your income doesn’t sound like a lot, let’s throw in the new increases in property tax, and who knows what tax is going to levied next. When is enough, enough? And what do we do about excessive taxation?
It all depends on when you start the clock running, I suppose. It’s my understanding that, prior to the Supreme Court case, businesses paid a lot more because of how the assessment rules were set up.
At this point, however, I’m not really trying to argue what the policy ought to be with respect to taxation — just trying to provide an explanation of why dramatic increases for homeowners are occurring this year.
Taking my previous thoughts a step further, had counties opted to phase-in the elimination of the inventory tax, would much of the brunt of that have been felt disproportionately by business themselves since they were being reassessed yearly?
I’m not sure if it was mandatory or not, but one option, at least, provided to counties that phased out the inventory tax was to replace the funds through an income tax. Counties that went ahead and did that don’t seem to be feeling the pain nearly as much as counties like Marion which did not.
how to decimate the property tax base in Indiana
http://x-wire.blogspot.com/2007/08/how-to-decimate-property-tax-base-in.html
In states with “market-based” property taxes, assessment values are normally put up against the combined budget dollar value of the jurisdictions sharing the tax revenues.
The resulting rate is compared to growth from the last tax bill. If a permitted cap is breached, it is back to the drawing board for all of them.
The fly in the ointment in Indiana is that the state chooses to be big brother, doling out credits direct to the taxpayer instead of to the political jurisdictions that require the funding. This independent action by the state dumps on the taxpayer when credits are reduced.
Let’s become the first state to adopt a consumption-based tax to fund all government. It will be cheaper to administer and bring far less stress.
I love the way you broke this down into steps, Doug. It should illustrate how the “fixes” can have a more damaging effect than the “problems”.
I liken government responses and economic interventions to driving a car on ice- the harder they jerk the wheel to straighten it out, the more it spins out of control. Simpler methods of taxation are better.
Mike Kole: Outstanding analogy!!!