Property Tax Assessment

In December 1998, the Indiana Supreme Court declared Indiana's real property tax assessment rules to be unconstitutional. Real property is land and buildings.  The rules for personal property, which is business equipment and inventories, were not challenged.  The Department of Local Government Finance (formerly the State Tax Board) rewrote the assessment rules to try to satisfy the Court's objections.  But these new rules would have created large shifts in property tax bills, increasing homeowner taxes and decreasing business taxes.  On June 22, 2002, the Indiana General Assembly addressed this problem, passing a bill that restructured Indiana's tax system.  Now, many homeowners will see property tax reductions in 2003.  That is, they will once tax bills are mailed.  The reassessment process had been so delayed that almost all counties will be late in sending their May 2003 tax bills.  They won't receive their June property tax revenue on time, either.  Special efforts to keep Indiana local governments operating. 

Note:  On January 1, 2002, the State Board of Tax Commissioners, or State Tax Board, was abolished.  It's assessment oversight functions were taken up by the new Department of Local Government Finance (DLGF).  It's property tax appeal function was assigned to the new Indiana Board of Tax Review.  References to the State Tax Board in documents published prior to 2002 usually apply to the new DLGF.  

Links to More Information

To Find: Go To:
A 2-page handout summarizing Indiana's reassessment issues This website:  Reassessment handout (PDF file)

 

Contents
Indiana's Assessment Standard
The Indiana Supreme Court Decision, December 4, 1998
Assessment Uniformity
Tax Shifts Under Market Value
The New Assessment Rules
Where Are We Going?
 

 

Indiana's Assessment Standard
The assessment standard is a statement of what the assessor and the assessment rules are aiming to measure.  In most states the standard is "market value."  That means the assessor tries to assign a value to each parcel of property reflecting what the property could sell for in the market.  

In Indiana, the standard has not been so clear.  It is defined on three levels:  the State Constitution, the Indiana Code, and the Assessment Regulations.  

State Constitution Article 10, Section 1(a)
Article 10 of the state constitution defines the standard for property assessment this way:  "The General Assembly shall provide, by law, for a uniform and equal rate of property assessment and taxation and shall prescribe regulations to secure a just valuation for taxation of all property, both real and personal."  The key words are "uniform", "equal" and "just."  These words are too vague to provide guidance to assessors, however, so the General Assembly has added text to the Indiana Code to help define what assessors are supposed to do.

Indiana Code 6-1.1-31-6(c)
This section of the Indiana Code says, "With respect to the assessment of real property, true tax value does not mean fair market value. True tax value is the value determined under the rules of the state board of tax commissioners."  Other parts of this section give more detail, but in the end the law assigns the task of defining Indiana's assessment standard to the Indiana Department of Local Government Finance, formerly known as the State Tax Board.

Indiana's Assessment Rules
The assessment rules are changing.  Until the reassessment of 2002-03, structures were assessed based on the cost of replacing the structure, at 1991 construction costs.  Depreciation was subtracted, based on the age of the structure.  There are also adjustments for condition, neighborhood quality and other factors.  Non-farm land was assessed based on its predicted selling price without the structure.  Farm land was assessed based on its "use value," meaning its value varied with the land's productivity in agriculture.  The result was called "true tax value."  Before March 1, 2001, assessed value was one-third of true tax value.  Since then true tax value and assessed value have been the same, and tax rates were reduced by two-thirds.

For the reassessment of 2002-03, the Department of Local Government Finance (DLGF) provided local assessors with a manual, and with guidelines.  The manual defines true tax value as "value in exchange," which is the market value or predicted selling price of the property.  There are a few exceptions to this definition, such as farm land.  The manual tells local assessors that they may use any approved method for predicting selling prices.  Local assessors and DLGF will then evaluate the results of the assessment, by comparing assessed values with the prices of properties that are sold.  If criteria for accuracy are not met, assessments will be "equalized," which means that all property within a property type will be adjusted so that total assessed value equals the sum of predicted selling prices.

The guidelines are a method of mass appraisal acceptable to DLGF.  They are based on the familiar true tax value replacement cost method, with one crucial change.  Costs will be adjusted by a neighborhood factor, which is developed by comparing replacement costs with sales prices for properties in a particular neighborhood.  Replacement costs will be adjusted upward or downward with the neighborhood factor, so that the resulting assessment reflects sales prices.

 

Links to More Information

To Find: Go To:
Full text of the Indiana Constitution, Article 10, Section 1 This website: Indiana Constitution on Assessment
The Indiana Constitution, all of it General Assembly website
Full text of the statute, Indiana Code 6-1.1-31-6 This website:  Indiana Code on Assessment
The Indiana Code, all of it General Assembly website
Overview of the assessment standards used in all 50 states, plus D.C. This website:  Property Assessment Standards in the United States
Department of Local Government Finance, information on Indiana assessment practices Department of Local Government Finance website
Information from the Vanderburgh County Assessor on how property taxation works Vanderburgh County Assessor's website

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The Indiana Supreme Court decision, December 4, 1998
The court case was called "Town of St. John," because it originated in that town in Lake County.  Homeowners filed suit against the assessment system in the Indiana Tax Court in 1993.  After 5 years and many court decisions, the Supreme Court finally decided the case.  They found the true tax value assessment system used in Indiana to be unconstitutional.  But the statute (6-1.1-31-6(c)), the one that says "true tax value does not mean fair market value," was found to be constitutional.  Here are the quotes:

The General Assembly's statute is Constitutional
"If interpreted as an absolute prohibition upon considering fair market value as "true tax value," subsection 6(c) would be constitutionally infirm. However, we observe that the language of this subsection is not unambiguous. Two reasonable interpretations are possible. It may be read either to command that "true tax value" may never consist of fair market value or to instruct that "true tax value" is not exclusively or necessarily identical to fair market value."

". . .Because a reasonable, constitutional interpretation of this statute is available, we construe Indiana Code section 6-1.1-31-6(c) to mean that "true tax value" is not exclusively or necessarily identical to fair market value. This provision does not prohibit the State Board from promulgating regulations in which "true tax value" is based, in whole or in part, upon property wealth. The apparent failure of the State Boardís present regulations to have determined that fair market value is "just and proper" does not render the statutory provision unconstitutional."

The Tax Board's assessment regulations (cost schedules) are Unconstitutional
". . . the cost schedules lack sufficient relation to objectively verifiable data to ensure uniformity and equality based on property wealth. . . . We affirm the Tax Courtís determination that the existing cost schedules, lacking meaningful reference to property wealth and resulting in significant deviations from substantial uniformity and equality, violate the Property Taxation Clause of the Indiana Constitution."

Note that references to the State Tax Board in this decision now apply to the Department of Local Government Finance (DLGF), the Tax Board's successor agency.

What does this mean?  
The court seemed to provide a "back-door" endorsement of market value assessment.  They said that if fair market value was prohibited by the phrase "true tax value does not mean fair market value," then the statute would be unconstitutional.  If it means that true tax value is not exclusively market value, but market value ideas could be used, then it is constitutional.  If market value is prohibited, it's unconstitutional; if market value is okay, it's constitutional.  Sounds like market value would be a constitutional standard.

Pretty clearly, though, the court is saying that market value is not the only constitutional standard.  They said as much in an earlier St. Johns decision, in December 1996.  Then they had a chance to uphold a Tax Court ruling that Indiana's assessment system was unconstitutional because it was not market value.  They refused.  

The court seems to have said:  market value would be a constitutional system, but it is not the only constitutional system.  What are the other constitutional systems?  We don't know.  Probably, any system the state adopts other than market value will require more court tests.

One thing's for sure, the non-market value system Indiana used until 2002 is not constitutional.  The court threw out the Department of Local Government Finance's existing "cost schedules," meaning the current true tax value assessment regulations.  The two key objections to the regulations are that they "lack sufficient relation to objectively verifiable data," and they lack "meaningful reference to property wealth."  These phrases might mean that the numbers which are placed in the assessment regulations must be from the real world, observable and measurable by taxpayers.  The numbers must also bear a relation to wealth, though the court leaves "wealth" undefined. 

Links to More Information

To Find: Go To:
The Supreme Court's decision on Town of St. John, Dec. 4, 1998 This website, Supreme Court decision, 12/4/98
Indiana Tax Court decision, Dec. 22, 1997, to which the Supreme Court's decision refers This website, Tax Court decision, 12/22/97
Subsequent Tax Court decision, May 31, 2000 This website, Tax Court decision, 5/31/00
Link to all Indiana Judicial opinions--search with the name "Atherton", who's one of the lawyers, to find St. John decisions. Indiana Judicial Opinions website
Link to Indiana Supreme Court website Indiana Supreme Court website
Link to Indiana Tax Court website Indiana Tax Court website

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Assessment Uniformity
Uniformity means "like property is assessed alike."  When one property is "like" another, though, is open to interpretation.  

In market value states, uniformity requires that assessed value is the same proportion of selling price throughout the state and for all property types.  One property is like another if it has the same selling price.  

In Indiana, under the old true tax value rules, uniformity meant that the Department of Local Government Finance's assessment rules had been applied accurately.  One property was like another if, under the rule, it had the same true tax value.  There was no objective standard outside the rules themselves.  That was one thing that the court objected to.

Much research shows that states that attempt to set assessments at 100% of market value have more uniform assessments than states that do something else (like 33% of true tax value).  This was one justification for Indiana's move in 2001 to stop dividing true tax value by three to get assessed value.

Why does an assessment standard at 100% of market value produce more uniformity?  For two reasons.

Links to More Information

To Find: Go To:
A definition of market value This website, IAAO market value definition
Indiana is not alone:  news about reassessment problems in Nassau County, New York This website, Nassau County news
And we think we've got problems:  astounding assessor corruption in New York City This website, New York City news

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Tax Shifts Under Market Value
Market value assessment appears to be consistent with the Court's decision, and research shows that it likely would improve assessment uniformity.  Why not simply adopt market value assessment?

Because the true tax value system was so far from market value, that reassessing on a market value basis would have created large shifts in property tax payments. Homeowner tax payments would have increased substantially; business tax payments would have fallen substantially. This would have happened because true tax value under-assessed residential property relative to selling prices by more than it under-assessed business property.

There are two ways to think about this.

The "Market Value Project," completed in 1999, estimated how tax bills of different property owners would change in the average county, if the state switched from true tax value to market value.  This table shows the result.

 

Market Value Assessment of Real Property, Farm Land at $990 per Acre, No Other Changes.

Agricultural

Residential

Business

Utility

Average Taxpayer

3.2%

32.8%

-17.9%

-28.9%

Maximum County

30.7%

91.7%

-3.3%

-4.7%

Minimum County

-16.1%

4.9%

-30.4%

-46.5%

 

The key number is what happens to the Residential Average Taxpayer--a 32.8% increase, usually rounded in news reports to 33%.  This means that the average homeowner would see an increase in his or her tax payment of about 33%, if Indiana switched to market value assessment of real property and made no other changes.  The average business owner would see an 18% tax payment decline.  Utilities would see even bigger tax cuts, and farmers small tax increases, under this scenario.  Experiences across counties would vary widely.  Homeowners in one county would see their tax bills nearly double (91.7%), in others the increase would be modest (4.9%).  Experiences of owners of homes of different types (bigger, smaller, newer, older) would also vary.

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The New Assessment Rules

To its credit, the (then) State Board of Tax Commissioners began work on new assessment regulations early in 1999, after the December 1998 Supreme Court decision.  By November they had a new regulation, and held a hearing for public comment, as new administrative regulations require.  The new regulation generated so much controversy that in December Governor O'Bannon suspended work on the assessment regulation.

The Indiana General Assembly considered several reassessment proposals during the 2000 short session, but did not pass any bills.  In May, Judge Fisher of the Indiana Tax Court (apparently quite unhappy that both the executive and legislative branches were not making progress) ordered the Tax Board to resume work on a constitutional regulation.  He set a deadline of June, 2001, for a new regulation to be written, and a deadline of March 1, 2002 for the reassessment.  By March 1, 2002, assessments based on a new regulation must be in place.  The Tax Board resumed work.

In May 2001 the Tax Board adopted new regulations.  The new assessment manual allowed local assessors to choose any assessment method they liked, so long as it produced a prediction of the property's selling price.  The Tax Board would monitor the results.  The Tax Board also adopted guidelines, which were detailed instructions for a method a county could use to meet the predicted selling price goal.  The guidelines are much like the old true tax value system, with some added factors which would turn the construction costs into approximations of market value.  Judge Fisher's first deadline was met.

The Tax Board created a non-market value feature to be used in any assessment method a county chose, called the "shelter allowance." This was a fixed dollar amount ranging from $16,000 to $22,000 to be subtracted from the market values of homeowners' primary residences.  The shelter allowances differed among counties, but were to be the same for all homes within a county.

In Fall 2001 the Tax Board adopted a new regulation for personal property assessment. Personal property is primarily business equipment and inventories.  It was not included in the Supreme Court's 1998 decision, and so its assessment regulations did not have to be changed.  Usually, in reassessment years personal property assessment regulations are not changed.  The adopted changes included removing a tax break for inventories, and lessening the depreciation businesses can subtract from the value of equipment.  In addition, the "30% floor" was removed, meaning firms would not be required to pay taxes on a minimum of 30% of the initial value of their equipment, in total.  On average across the state, these changes would have increased assessments of personal property by about one-third.

The base rate for farm land was set at $1,050.  The base rate of farm land is the value of each acre, before adjustments for soil productivity and other "influence factors" affecting the land's ability to grow crops (like forest cover or flooding).  The base rate had been $495.

The shelter allowance and the increase in personal property assessments were designed to reduce the tax shift to homeowners.  Under these rules the tax bill increase for the average homeowner would have been about 13%.  Many state legislators thought this was still too much.  In addition, many businesses objected to the new personal property rules.  The new depreciation schedules especially increased assessments of new equipment, which could have discouraged new investment.  The elimination of the inventory tax break ran counter to the long-time efforts to do away with taxes on inventories.  Further, the Apartment Association of Indiana filed a court case challenging the constitutionality of the shelter allowance, since it did not apply to rental property.  The court challenges to Indiana's assessment standard would continue.

The reassessment problem was one of the main reasons why tax restructuring was considered by the 2002 General Assembly.  A state budget shortfall and economic development were other reasons.  No agreement was reached during the regular session ending in March.  Governor O'Bannon called a special session, and on the last day, June 22, 2002, the General Assembly passed a tax restructuring bill.

The General Assembly told the Department of Local Government Finance (the renamed Tax Board) to drop the shelter allowance and to return to the old personal property rules.  Dropping the shelter allowance was easy.  Local assessors simply could be told not to subtract it from home values.  Returning to the old personal property rules was a problem.  The assessment date, March 1, had already passed, and businesses had submitted their personal property assessments using the new depreciation schedules, without the inventory tax break, and without the 30% floor.  It was too late to fully assess under the old rules.  Instead, the General Assembly told local assessors to make what changes could be made without having businesses re-file their returns (local assessors will grant businesses the inventory tax break, for example).  In 2003 taxes will be based on this old-new rule hybrid; in 2004 taxes will be based on the old personal property rules again. 

Without the shelter allowance and the new personal property rules, though, the tax shift to homeowners would be back to 33%.  The General Assembly enacted several changes to prevent this increase.  First, they reduced the total property tax levy (total revenue collected) by about a billion dollars.  This was done by replacing 60% of school corporation general fund property taxes with new state funds.  The sales tax was increased from 5% to 6% to generate the revenue to replace school property taxes.  Cigarette taxes and gaming taxes were also increased. Second, the homestead standard deduction was increased from $6,000 to $35,000.  This deduction is subtracted from the assessed value of homes.  It has an effect similar to the shelter allowance.  Third, the homestead credit was increased from 10% to 20%.  This credit is a percentage subtracted from the homeowner's tax bill once it is calculated.  Lost local revenue is replaced by state aid.

Another important change in property taxes was a phase-out of the property tax on inventories.  A 100% deduction will be applied to the assessed value of inventories for taxes payable in 2007.  Counties were given the option of adopting a 100% deduction for inventories immediately.

All these changes should cause most taxpayers to see property tax reductions in 2003.  The table shows estimates for the average taxpayer.

Estimated Tax Payment Shifts under Reassessment and Restructuring:  Market Value of Real Property; 'Old' Personal Property Rules; Farm Land Base Rate at $1,050.

Agricultural

Residential

Commercial

Industrial

Utility

Average Taxpayer

-13.2% -12.8% -21.4% -26.3% -28.8%

Maximum County

6.4% 16.3% 2.0% -9.5% -5.2%

Minimum County

-24.4% -41.7% -52.4% -62.1% -53.5%

The key number again is the residential shift, -12.8% for the average homeowner.  Restructuring should deliver tax reductions to the average homeowner in 2003.  In a few counties the average homeowner will still see a tax increase, and there will be homeowners in every county who see tax increases.  A new model of the Indiana property tax allowed the business shift to be split between commercial and industrial businesses.  Most businesses, farms and utilities will see tax cuts in 2003, as well. 

Links to More Information

To Find: Go To:
Summary of the Tax Restructuring bill passed by the 2002 special session of the Indiana General Assembly This website:  Tax Restructuring
Department of Local Government Finance's 2002 Assessment Manual and Assessment Guidelines Department of Local Government Finance website
County by County estimates of Tax Burden Shifts for agricultural, residential, commercial, industrial and utility property owners, after reassessment and restructuring This website:  Tax burden shifts
Table showing what shelter allowances would have been, by county This website:  Shelter allowances by county

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Where Are We Going?

Indiana is now effectively a market value state.  Without the shelter allowance, the DLGF's manual for assessing real property aims at predicted selling prices.  How good a market value state will Indiana be?  Will assessments come out close to market values or not?  Indiana is new to market value, and some "growing pains" are to be expected.  It is the DLGF's responsibility to provide oversight, to check the results of the reassessment against the prices of properties that sell, and to help local assessors correct assessment inaccuracies where they occur.

Counties could not meet the Tax Court's deadline for completing reassessment by March 1, 2002. A survey of counties in February 2003 showed that almost half the counties did not expect to finish their assessments until Fall 2003 or later.  Without assessed values, tax rates cannot be calculated, and tax bills cannot be mailed.  As of May 2003 only four counties had set their tax rates.  The May tax payment will be late in almost all counties.  Property tax revenue is usually distributed to local governments in June.  In almost all counties this distribution will be late.  Local governments may have to borrow money to fund their services, either from their own non-operating funds or from private lenders. 

The 2003 General Assembly recognized this costly problem and passed House Enrolled Act 1219, which allows County Treasurers to issue provisional tax bills, equal to the tax bill issued in November 2002.  Once the actual amount owed is calculated (when assessments are finished and rates are set), the November tax bill will be adjusted so that the year's total payment is correct.

With the shelter allowance gone, the Apartment Association of Indiana dropped their court challenge.  The series of court cases that started in 1993, challenging the assessment rules, appears to have come to a close.  This may not be the end of litigation, however.  In particular, the new deductions that the General Assembly invented may be challenged.  The Constitution says that there must be a "uniform and equal rate of property assessment and taxation."  We assess homes and inventories uniformly, based on predicted selling prices, but then we deduct $35,000 from the value of homes, and (in 2007) 100% of the value of inventories.  Is this uniform and equal taxation?  Quite possibly, the next round of court challenges to Indiana's property tax system will be about our many deductions and exemptions.

The 2003 General Assembly passed a resolution for a Constitutional amendment to head off this problem.  This was the second legislature to pass the resolution, so it will go to a statewide referendum in November 2004.  If the voters approve, the constitution will be changed to allow inventories to be exempt, and allow deductions for residential property.

Links to More Information

To Find: Go To:
The text and fiscal note of HEA 1219 The General Assembly's website
The text of the Constitutional amendment resolution This website:  Property assessment amendment

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