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September 2008

Tax Relief Results

The big tax reform and relief bill proposed by the Governor and passed by the General Assembly this past March will make major changes in Indiana property taxes in 2009. It will eliminate property taxes for the school general fund and county welfare funds, increase deductions from the assessed value of homes, and impose fixed limits on the total tax bills of all taxpayers. It pays for all this partly with the one point hike in the sales tax, which started on April 1.

These are big reforms that will reduce property taxes. But none of them delivered property tax relief for homeowners now, in 2008. You know, before the election.

So, legislators passed a temporary homestead credit, using money from that sales tax increase to pay for it. The homestead credit is a percentage subtracted from homeowner tax bills. This year’s $620 million in new sales tax revenue will increase that percentage, a lot. Add the $250 million in new credits appropriated last year, and the fiscal analysts figured that the average homeowner property tax bill would drop by about a third from last year’s tax bills, not counting the tax rebate that arrived later.

That’s what’s happening. We’ve now got results for 41 counties, and everywhere tax bills have dropped for almost all homeowners. The Legislative Services Agency--the research arm of the General Assembly--has posted analyses of homeowner tax bills on their website, at www.in.gov/legislative/publications.

In 31 of these 41 counties the average homeowner saw a tax bill decrease between 20% and 50%. The smallest decrease was in Hancock County, at 11.5%; the largest was in Wabash, at 81.7%. Even in Hancock, though, 85% of homeowners saw tax decreases, and more than half saw tax cuts of 10% or more.

What accounts for the wide variation in homeowner tax cuts? Mostly, it’s different changes in property tax collections by local governments between 2007 and 2008. Tax bills can’t drop as much when governments collect more. In Hancock local government levies went up 15.5%, mostly because of new school corporation debt service levies to pay for building projects. In Wabash levies went up only 0.5%.

In a typical county with a levy increase of about 5%, homeowner tax bills decreased between 30% and 35%. That’s a one third cut, just what the fiscal analysts predicted. It warms my number-cruncher’s heart.

There’s another reason for the variation in tax bill cuts. Six of the 41 counties adopted local income taxes for property tax relief which took effect this year. All of those counties saw homeowner tax bill cuts of at least 50%. Wabash County is one of them.

Those are homeowners. LSA didn’t analyze other taxpayers, since the tax reform didn’t do anything with their property taxes in 2008. Probably the typical commercial or industrial taxpayer is paying two or three percent more this year, more in counties where the levy increased a lot. Farm land owners are paying 20% to 30% more, because of a big increase in the assessed value of farm land.

Since this is policy, not magic, there’s a downside to the homeowner tax upside. Sales taxes are higher. Most homeowner households are probably paying less in taxes overall. That’s because the sales tax hike also is paid by renters and businesses, while homeowners get all the property tax relief. Renters and businesses are paying more in total taxes as a result of tax reform.

In 2009 tax relief will be delivered in a different way. The added homestead credits will mostly disappear, and state levy takeovers, the new homeowner deduction and tax bill limits will go to work. Statewide this will deliver about the same amount of tax relief to homeowners. But in some counties the 2008 version of tax relief treats homeowners better than the 2009 version. In those, homeowner taxes will go up in 2009. Taxes will still be a lot lower than in 2007, but homeowners may be grumpy, anyway.

Results for more counties will come out as they issue tax bills and deliver their data to the State House. But it’s very likely that homeowners will see significant tax cuts in those counties, too.