Purdue Cooperative Extension Service

On Local Government

Property Tax Reform, 2008

Larry DeBoerPurdue University

April 25, 2008

HEA 1001: Property Tax Reform• Eliminate Property Tax Levies• State Assumes Local CostsState takeover of school general fund and county

welfare• Property Tax Relief• State Sales TaxAdded state costs paid with existing property tax

credits, added sales tax; homestead deductions direct relief to homeowners

HEA 1001: Property Tax Reform• State Balances and Revenue DistributionsSchool rainy day fund to sustain spending in recessions• Circuit Breaker Property Tax CreditsLimits property taxes to fixed percentage of gross

assessed value; local revenues are reduced• State Income TaxesProvisions to partly offset tax hikes to renters, low

income households

HEA 1001: Property Tax Reform• Local Option Income TaxesAll three 2007 LOITs still available• Referenda for Capital Projects and BudgetsFor larger projects, replaces the remonstrance process;

referendum-passed taxes are outside the circuit breakers• Township Assessors and Assessment AdministrationPuts most duties in the county assessor’s office• Review of Taxes, Budgets and Capital ProjectsNew responsibilities for the county council

HEA1001 Directs Tax Relief to Homeowners

Before After1. LevyHEA1001 state takeovers

$9.2 $9.2-2.86.4

2. Net Assessed Value New homestead deductions

$296.9 $296.9-48.2248.7

3. Gross Tax Rate $3.09 $2.56

HEA1001 Directs Tax Relief to Homeowners

Before After4. State CreditsPTRC / Homestead eliminated

$2.0 none

5. Net Levy $7.1 $6.46. Net Tax Rate $2.41 $2.56

HEA1001 Directs Tax Relief to Homeowners

Before After7. Percent Change in Net Rate

6%

Percent Change in Homeowner AV

-37%

Approximate Change in Avg. Homeowner’s Tax Bill

-31%

Estimated Impact of Indiana's New Tax Reform (HEA 1001) on Property Tax Payments, 2010

 

Home-steads

Non-Home-

stead Res-

idential

Com-mercial Apart-ments

Other Real

Property

Per-sonal Prop-

erty Total

Change from Taxes Under Current Law due to:Levy Takeovers, 35% Hmstd. Deduction -31.7% 6.1% 7.3% 6.5% 0.0% -10.4%

Source: Legislative Services Agency, "Estimated Impact on Net Property Tax, HB1001 (2008) CC08 Update", March 13, 2008.    

Homeowners, 2008Why Property Tax Bills Change

Change Change Change Changein in in in

Property = Assessed + Property - PropertyTax Value less Tax TaxBill Deductions Rate Credits

Tax billsfall

Addedhomestead credits

Homeowners, 2009Why Property Tax Bills Change

Change Change Change Changein in in in

Property = Assessed + Property - PropertyTax Value less Tax TaxBill Deductions Rate Credits

Most credits eliminated

State levy takeovers

Added homesteaddeductions

Tax billscould riseor fall

Circuit Breakers

Tax Bill LimitsHomesteads: 1% of Gross Assessed ValueRental Housing, Farm Land: 2% of Gross Assessed

ValueOther Real and Personal Property: 3% of Gross

Assessed ValueIf your house has an assessed value of $120,000

before deductions, you cannot pay a tax bill of more than $1,200

Estimated Impact of Indiana's New Tax Reform (HEA 1001) on Propert y Tax Pa y ments, 2010

 

Home-steads

Non-Home-

stead Res-

idential

Com-mercial Apart-ments

Other Real

Property

Per-sonal Prop-

erty Total

Change from Taxes Under Current Law due to:Levy Takeovers, 35% Hmstd. Deduction -31.7% 6.1% 7.3% 6.5% 0.0% -10.4%Circuit Breaker Limits -4.6% -18.7% -21.3% -4.3% -4.4% -7.2%Total -36.3% -12.6% -14.0% 2.2% -4.4% -17.6%Source: Legislative Services Agency, "Estimated Impact on Net Property Tax, HB1001 (2008) CC08 Update", March 13, 2008.    

The Median HomeownerIncome 55,634    Home Value 120,700          Dollar Pct.  Before After Change Change

Property Tax 1,326 906

(420) -32%

Sales Tax 1,200 1,392 192 16%

Income Tax 2,192 2,210 18 1%

State Excise Taxes 717 718 1 0%

Federal Income Tax 3,149 3,209 60 2%

Federal Other Taxes 4,661 4,661

- 0%

Total Indiana Taxes 5,434 5,226 (209) -4%Total Taxes 13,244 13,095 (149) -1%

The Median RenterIncome 24,992    Home Value none          Dollar Pct.  Before After Change Change

Property Tax - - -

-Sales Tax 894 1,034 140 16%Income Tax 693 622 (71) -10%State Excise Taxes 567 567 - 0%

Federal Income Tax (1,638) (1,638) -

0%

Federal Other Taxes 2,246 2,246 -

0%

Total Indiana Taxes 2,154 2,224

69 3%

Total Taxes 2,762 2,831

69 3%

60 Households (with 3 people)

Household Income

15,000

27,500

42,500 6

2,500

87,500

150,000 Renter 17 69 144 175 213 297

Home 15,000 (1) 67 126 164 203 294 Value 40,000 (66) 2 61 108 148 245

6 0,000 (118) (50) 9 64 104 206 75,000 (157) (89) (30) 31 71 177 85,000 (183) (115) (56) 9 49 158 95,000 (222) (154) (95) (24) 16 128 150,000 (508) (440) (299) (267) (228) (86)225,000 (929) (862) (657) (626) (586) (402)375,000 (2,145) (2,078) (1,691) (1,659) (1,620) (1,314)

Estimated Households with Tax Cuts and Tax Hikes

All Households  Tax Cuts of More Than $50 57%Changes of Less Than $50 21%Tax Hikes of More Than $50 23%   Homeowners  Tax Cuts of More Than $50 78%Changes of Less Than $50 13%Tax Hikes of More Than $50 8%   Renters  Tax Cuts of More Than $50 0%Changes of Less Than $50 40%Tax Hikes of More Than $50 60%

Circuit Breakers

Circuit Breaker credits for taxpayers are revenue losses for local governments

Estimated Losses:2008 $4 million, a small fraction of budgets2009 $229 million, 2% of budgets2010 $524 million, 5% of budgets

W hat’s Next ?Adopt Local Option Income Taxes?• By the end of the year• Three LOIT options• Three distribution options

– To homeowners only– To homeowners and owners of rental housing– To all property owners

• W hich option will reduce circuit breaker credit losses the most?• Is additional relief needed for homeowners to smooth out

“boomerang ” tax increases in 2009?• How will net taxes on homeowners and other taxpayers change

with an income tax increase and a property tax cut?

W hat’s Next ?Postpone 2008 State Homestead Credits?

• For counties that adopted the new LOIT taxes in 2007• Homeowners will receive significant property tax relief in

2008 with the property tax replacement income tax• Taxes “boomerang” in 2009 in some counties• Should the county petition to postpone some or all of the

additional 2008 state homestead credits to 2009 or 2010, to smooth homeowner property tax changes?

W hat’s Next ?Budget Process — how to handle interdependent budgets?

• “No one can budget until everyone budgets ”• HEA1001 re quires that all civil units submit their tax, levy and

budget proposals to the county council at least two weeks before they are fixed

• County council is to make non-binding recommendations• County council could act as a clearing house for the

information needed for each unit to budget• Analysis would re quire simulated tax bill runs for all county

property taxpayers, to estimate circuit breaker credits for each jurisdiction