Indiana's 2002 Tax Restructuring
On June 22, 2002, the Indiana General Assembly made sweeping changes in Indiana's tax structure. The Tax Restructuring bill, known as House Bill 1001, special session (HB1001ss), changed, among other things, the sales tax rate, the cigarette tax rate, the gasoline tax rate, the rules for property assessment, the amount of revenue raised by the property tax, several property tax breaks for homeowners, the corporate income tax structure, the limits on state and local budgets, and the rules under which riverboats operate. The following is an outline of all that HB1001ss did. The bulleted statements are taken directly from the bill's official "Bill Digest." Text in italics are explanatory comments. Links to more information are also included.
Links to More Information
|To Find:||Go To:|
|The Bill Digest for House Bill 1001, special session, from which this outline was taken||This website, Bill Digest, HB1001ss|
|The Fiscal Note for HB1001ss, describing the effects of tax restructuring on state and local revenues and spending, from the Indiana Legislative Services Agency||This website, HB1001ss Fiscal Note (PDF)|
|The Legislative Services Agency's website with information on General Assembly legislation||Indiana Legislative Services Agency bill information website|
|A brief pamphlet from the Association of Indiana Counties describing the provisions of tax restructuring||This website, AIC Tax Restructuring pamphlet (PDF)|
|The Association of Indiana Counties website||Association of Indiana Counties website|
Taxing and Spending Limits
In the long run, these may be among the most significant parts of tax restructuring. Until now there haven't been limits on state spending increases. In the next biennium, spending increases will be limited to 3.5% per year; after that, to the six year average rate of increase in Indiana personal income. For the past 20 years, local non-school property tax increases have been limited to five to ten percent, depending on growth in local assessed value. Now all non-school units will face the same personal income limit, which works out to just over five percent.
State Sales and Excise Tax Increases
The sales tax and cigarette tax increases pay for the property tax relief and fill in part of the budget gap that developed during the 2001 recession. The gasoline tax increase will fund added road spending by state and local governments.
Property Tax Changes
Eliminating the shelter allowance effectively makes Indiana a market value state. Assessments of land and buildings will be based on their predicted selling prices for taxes payable in 2003. The Department of Local Government Finance adopted new assessment rules for personal property (business equipment and inventories) for the March 1, 2002 assessment. The General Assembly wants to go back to the old rules, but must do so in two steps, because it's too late to fully change the March 1, 2002 assessments.
The 60% credit for school general fund property taxes is a major change in the way Indiana finance schools, as well as the main source of property tax relief in HB1001ss. It amounts to a one billion dollar property tax cut. PTRC is property tax replacement credits. This is a state aid program established in 1973 during the Bowen administration (a product of the last time Indiana restructured taxes). The credits are paid by the state to all local governments, and reduce property taxes dollar for dollar. Until now, they've been based on the amounts of real and personal property; now they will be based only on real property, plus the small amount of non-business personal property still in the tax base. This will reduce PTRC payments by about $300 million. The net levy effect from these two changes is less than one billion dollars.
Homeowner Deductions and Credits
This is property tax relief directed at homeowners. The standard homestead deduction is subtracted from the assessed value of a house before the tax rate is applied. The homestead credit is a percentage subtracted from a homeowner's tax bill. It is being increased from 10% to 20%. The state replaces the revenue that this credits costs local governments out of state revenues.
This is the beginning of the end of Indiana's inventory tax. Starting with inventories assessed in 2006, for taxes payable in 2007, there will be a 100% deduction applied to the assessed values of inventories. Inventories will be assessed, but they won't be taxed. Until then a more generous exemption will be applied to certain types of inventories. Counties can decide to impose an income tax, and use the revenue to end the inventory tax sooner. The $37,500 credit was an earlier inventory tax break that will be obsolete now that inventories won't be taxed.
TIF is tax increment financing. It's an economic development tool that pays for infrastructure with the extra property taxes that the new development creates. A city or county draws a boundary around an area where they want to encourage development. They install infrastructure (like roads or sewers) to help bring this development about. The infrastructure is usually paid for by issuing bonds. The bonds are repaid using the added property tax revenue on the assessed value of the new development. However, tax restructuring could reduce the amount of property tax revenue raised from TIF areas, because tax rates will be reduced. If this jeopardizes bond repayments, the restructuring bill provides remedies.
Links to More Information
|To Find:||Go To:|
|More details on how tax restructuring changes Indiana property tax assessments||This website, Property Tax Assessment|
|Information about how restructuring will change the property tax bill on your house||This website, Property Tax Bill|
State Corporate Income Tax Changes
We've been working on this one for almost 30 years. Indiana has had a complex system of three interrelated corporate income taxes. One of these taxes was a corporate gross income tax, meaning businesses paid based on their revenue, not their profits. No other state has such a tax. The Bowen tax restructuring tried to phase out the corporate gross income tax starting in 1973, but the phase-out was cancelled in the mid-1980s. Now the gross income tax has been repealed (except for utilities, who will continue to pay it). The two net income taxes (profits taxes) will be combined into one. The supplemental net income tax will be repealed, and its rate combined with the adjusted gross income tax. The combined rate of the two is currently about 7.75%. The adjusted gross rate will be increased to 8.5%. Without the gross tax, though, this is an overall tax cut for businesses. Indiana now resembles most other states, with a single corporate net income tax.
State Individual Income Tax Changes
Not much was done with the individual income tax. Some added revenue is raised by taxing gambling winnings. Renters will get a $17 tax break (the 3.4% tax rate times the added $500 deduction). Perhaps most significant, though, is the expanded earned income tax credit. This is a tax break for low income people with children. Under the old rules, only families with incomes less than $12,000 could take this credit. The Federal rules are more generous, allowing families with incomes over $20,000 to take the credit. By making Indiana's credit a fraction of the Federal credit, more low income families will be eligible.
Business Investment Incentive Changes
These are tax breaks offered to businesses to encourage them to expand, locate in Indiana, or conduct research and development in Indiana.
Riverboat Gaming Provisions
An awful lot of the debate in the General Assembly was about gaming. It was finally agreed that riverboats could use "flexible boarding," also known as "dockside gaming." This means they don't have to cruise, or close their doors as if they were cruising, but can allow people to enter and exit as they like. This should increase riverboat revenue. Riverboat taxes will be increased on riverboats that adopt flexible boarding (as of August, 2002, all riverboats have adopted flexible boarding and will pay the higher tax rates). Some of the added revenue will be distributed to all Indiana county and municipal governments, rather than to the host jurisdictions and the state.