Property Tax Assessment Policy in Indiana

Revised July 2006

 

Contents
Introduction
Indiana's Assessment Standard
The Constitution and the State Code
The Indiana Supreme Court Decision, December 4, 1998

The Struggle for a Constitutional Assessment Standard
A Constitutional Amendment
Reassessment Troubles
Continuing Changes in Property Assessment

 

Introduction
Property tax assessment policy has undergone big changes in Indiana in the past few years. A decision by the Indiana Supreme Court in December 1998 effectively forced the state to adopt market value assessment in 2002. The legislature enacted the biggest tax restructuring in 30 years partly in response to the challenges of market value reassessment, in June 2002. A constitutional amendment confirming these changes was passed in November 2004. The market value reassessment itself commenced in mid-2002, but took so long that most counties saw their tax bills delayed in 2003. The state assessment oversight agency was reformed, the first statewide equalization study was conducted, and starting in 2006 assessments will be adjusted annually to account for market value changes.

This essay offers a history of the changes in Indiana's assessment standard and practices since the court decision in 1998.

Links to More Information

To Find: Go To:
An essay on the assessment notice that taxpayers receive when their assessments change This website: How To Read Your Assessment Notice
An essay on property assessment from the homeowner's point of view This website: How Your House is Assessed

 

Indiana's Assessment Standard
An assessment standard answers the question: "If we're going to have a property tax, what should it tax?" The obvious answer is "the value of property," but that poses a problem. What is the value of property? An obvious answer is the price at which the property sold, but this poses another problem. Most properties do not sell each year. Some don't sell for decades at a time. The normal course of business produces no record that taxpayers or governments can use to measure the value of all of the property to be taxed. This is in contrast with the income tax and sales tax, where the normal course of business produces payroll records and sales receipts that measure the value to be is taxed.

State and local governments solve the property tax value problem by hiring assessors to measure the value of taxable property. The assessors must be told how to value property. What rules and methods should be used? What is the ultimate goal? The assessment standard is a statement of what the assessor and the assessment rules are aiming to measure. 

Indiana's assessment standard is effectively market value. Market value is defined by the International Association of Assessing Officials this way:

Market value is the most probable price expressed in terms of money that a property would bring if exposed for sale in the open market in an arm's length transaction between a willing seller and a willing buyer, both of whom are knowledgeable concerning all the uses to which it is adapted and for which it is capable of being used.  

Under market value, property assessments are predictions of what a property would bring if it were sold. Market value assessments are based on predicted selling price. There are three methods that assessors use to value property based on market value.

The sales comparison method compares the characteristics of properties, and values those that did not sell based on the prices of similar properties that did sell. The sales comparison method is preferred for properties that have frequent sales, and are relatively “homogeneous,” that is, all have similar characteristics. Residential property, some commercial property and vacant land are often assessed using the sales comparison method.

The replacement cost l
ess depreciation method adds up the costs of the materials, equipment and labor required to build a structure, subtracts depreciation, and adds the value of land. Resulting values are usually adjusted upward or downward by county, region or property type, to reflect regional variations in construction costs and the supply of and demand for property. These adjustments are derived by comparing sales prices to the replacement cost estimates of sold properties, or by using other cost indexes. The replacement cost less depreciation method is preferred for property that is unique (that is, not homogeneous), or not frequently sold. Complex manufacturing and commercial property is often assessed using this method. It is also frequently used for residential and simpler commercial property, and in some states it is the only method used.

The income capitalization method estimates sales prices by dividing the net rent or income earned on a property by a rate of return. This method is based on the idea that investors will demand a rate of return on property comparable to rates earned on other assets. An investor will look at the income or rent that can be earned from a property, and offer a price which makes the rate of return comparable to those on stocks, bonds or bank accounts. The income capitalization method is often used for properties that are rented, mostly residential apartments and rented business property.

A version of this method is used for farm land, which is the only big part of taxable property that is not assessed using market value. Farm land is assessed based on its "use value," which means that assessments vary only with their productivity in agriculture. The value of the land for residential or business development is not considered, even it it influences the price for which the land could be sold.

The Department of Local Government Finance (DLGF) is the state agency that oversees property assessment in Indiana. The DLGF is responsible for providing guidance and education to local assessors on proper assessing methods. It is also responsible for measuring the results of local assessment efforts, and helping local assessors make corrections where needed. For the last reassessment in 2002-03, the DLGF provided a short assessment manual, that described the assessment standard and suggested methods that might be used to meet this standard. The DLGF also provided a much longer set of assessment guidelines, which described in detail the replacement cost less depreciation method.

 

Links to More Information

To Find: Go To:
The web site of the International Association of Assessing Officials (IAAO), based in Chicago The IAAO web site.
Overview of the assessment standards used in all 50 states, plus D.C., as of 2000 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

 

The Constitution and the State Code
We say that Indiana's assessment standard is "effectively" market value because Indiana law doesn't say so directly. The standard is defined by the state's Constitution, by state law, by a decision of the Indiana Supreme Court, by the rules of the Department of Local Government Finance, and by the practices of Indiana's assessors.

Article 10, Section 1(a) of the state's 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 section goes on to allow exceptions to this rule, for the property of charities, intangible property, homes, motor vehicles and business inventories, among others.

The key words, though, 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.

Unfortunately, the code is also vague. Indiana Code 6-1.1-31-6 tells the state's Department of Local Government Finance (which oversees the property tax) to create rules for assessing land and buildings. The result will be "true tax value," Indiana's name for the assessed value of property. As for the rules, the code says that true tax value shall be based on "the factors listed in this subsection and any other factor that the department determines by rule is just and proper." And then, section (c) says "With respect to the assessment of real property, true tax value does not mean fair market value. Subject to this article, true tax value is the value determined under the rules of the department of local government finance." 

The code really provides no standard at all. It gives the job to the Department of Local Government Finance, which can set the rules based on any factors it sees as necessary. And, the code says, the rules do not have to base assessments on market value.

Before 2002 the Department of Local Government Finance (then known as the State Board of Tax Commissioners) did not base the rules on market value. Until the reassessment of 2002-03, buildings were assessed based on replacement cost, the construction costs of replacing the building. As of 2001 replacement cost was based on construction costs from 1991. 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 only with the land's productivity in agriculture. 

Then came the Town of St. John court case.

 

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

 

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)) that says "true tax value does not mean fair market value," was found to be constitutional.  Here are the quotes:

"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 Board’s present regulations to have determined that fair market value is "just and proper" does not render the statutory provision unconstitutional."

So, the court found that the code is constitutional, as long as it doesn't prohibit true tax value from being based on market value. The rules for determining construction costs--which the court called "cost schedules"--were a different matter.

". . . the cost schedules lack sufficient relation to objectively verifiable data to ensure uniformity and equality based on property wealth. . . . We affirm the Tax Court’s 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." (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.

The court was clear about one thing, though. The non-market value system that Indiana used until 2002 was not constitutional.  The court threw out the existing "cost schedules," meaning the true tax value assessment rules then being used. 

The court said that the rules were unconstitutional because they lacked "sufficient relation to objectively verifiable data," and they lacked "meaningful reference to property wealth."  These phrases seemed to mean that the numbers which are placed in the assessment rules must be from the real world, observable and measurable by taxpayers.  The numbers must also bear a relation to wealth, however "wealth" is defined.  It was the objections that the court made to the existing assessment rules that made Indiana a market value state.

Pretty clearly, though, the court decided that market value is not the only constitutional standard.  They said as much in an earlier St. John decision, in December 1996.  In that decision 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.  

Indiana's assessment rules must be based on objective data about property wealth. Market value is a constitutional way of achieving this goal. But, the court said, market value is not the only constitutional system.  Could there be other constitutional systems? 

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 Indiana Judicial Opinions website
Link to Indiana Supreme Court website Indiana Supreme Court website
Link to Indiana Tax Court website Indiana Tax Court website

 

The Struggle for a Constitutional Assessment Standard
Indiana could have adopted market value as its assessment standard. It didn't. By 1999 a study sponsored by the General Assembly had predicted that market value would result in a huge increase in homeowner taxes. Policymakers wanted to avoid this tax shift.

So early in 1999, shortly after the December 1998 Supreme Court decision, the State Board of Tax Commissioners began work on new non-market value assessment regulations.  By November 1999 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 assessment rules.

The Indiana General Assembly considered several assessment proposals during the 2000 short session, but did not pass any bills.  In May 2000, Judge Fisher of the Indiana Tax Court (who was 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 a reassessment under the new constitutional rules.  The Tax Board resumed work.

The Tax Board met the first deadline. In May 2001 it 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 were much like the old true tax value system, with some added factors which would turn the construction costs into approximations of market value.  

Assessments started with predicted selling prices, but they were not based on market value. The Tax Board created a non-market value feature 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 was then 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 could 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.  These changes would have increased assessments of personal property for most businesses.

The shelter allowance and the increase in personal property assessments were designed to reduce the tax shift to homeowners.  But 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.  It looked like 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 (which had succeeded the State Tax Board on January 1, 2002) 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.  Judge Fisher's reassessment date, March 1, 2002, 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.  In 2003 taxes would be based on this old-new rule hybrid; in 2004 taxes would 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 huge.  The General Assembly enacted several changes to prevent a homeowner tax 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 had 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 tax assessment was a phase-out of the property tax on inventories.  A 100% deduction would 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.

A Constitutional Amendment
With the shelter allowance gone, the Apartment Association of Indiana dropped their court challenge.  There was a danger, though, of more litigation. The enormous new homestead deduction looked like it might be challenged. The Constitution said that there must be a "uniform and equal rate of property assessment and taxation."  Homes might be assessed uniformly, based on market value. But before tax rates were applied, homeowners would deduct $35,000. Was this uniform and equal taxation? Further, the Constitution required uniform assessment and taxation of "
all property, both real and personal." Inventories were personal property. They were not going to be exempted from assessment, but with a 100% deduction, they were certainly going to be exempted from taxation. It seemed quite possible that another round of court challenges would be needed to test the constitutionality of the new assessment rules.

The 2003 General Assembly wrote and passed a resolution for a Constitutional amendment to head off this possibility.  That was the second meeting of the 112th General Assembly. The next year was the first meeting of the 113th General Assembly, and it also passed the resolution. That's what's needed to put a constitutional amendment on the ballot. On November 2, 2004, the voters were presented with the question, "Shall Article 10, Section 1 of the Constitution of the State of Indiana be amended to allow the General Assembly to make certain property exempt from property taxes, including (1) a homeowner's primary residence; (2) personal property used to produce income; and (3) inventory?" The voters said yes, 71% to 29%. The Constitution was amended.

Specifically, the amendment crossed out a requirement that inventories and equipment be assessed and taxed. It added the option to exempt all or part of a building and land being used as a residence. Both the inventory deduction and the new big homestead deduction are constitutional under the amended Article 10. There will be no court challenge.

 

Links to More Information

To Find: Go To:
The Constitutional amendment on property taxes passed by Indiana voters on November 2, 2004 This website: Constitutional amendment, 11/2/2004
Results of the vote on the amendment, from the Indiana Secretary of State Indiana Secretary of State's website (click on Constitutional Amendment Question)

 

Reassessment Troubles
By summer 2002 the new assessment rules had been written, the General Assembly had made modifications to try to protect homeowners from tax hikes, and a Constitutional amendment process had been started to head off further court challenges. Now all that was required was to put these new rules into practice. A reassessment was in progress, updating the assessed values of property as of 2002, for taxes payable in 2003.

 

Unfortunately, township and county assessors, and their consultants, could not meet the Tax Court's deadline for completing reassessment by March 1, 2002. No wonder, of course. The rules hadn't been finalized by then. The counties had been asked to apply very new reassessment rules in less time than they usually took to complete reassessments under the old rules. Not one county finished on time.

 

Even a year later, 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 could not be calculated, and tax bills could not be mailed.  Taxes based on the new assessed values were to be collected in the first 2003 billing in May.

 

Property tax bills usually are paid in two installments, due in May and November. Property tax revenue usually is distributed to local governments in June and December.  In 2003, in almost all the counties, the June distribution was late.  Local governments scrambled to make do, by drawing down balances, shifting money from other funds and borrowing from private lenders.

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

As the chart shows, the May tax billing was late in almost all the counties.  Only three counties collected their property taxes in May 2003. Half the counties postponed the May collection until November or December, when the second installment is normally due. Thirty counties did not get tax bills issued in 2003 at all (though half used the provisional billing option). By October 2004 all but one county (Brown) had finally issued and collected their tax bills for May 2003.

Links to More Information

To Find: Go To:
Technical information about the 2002-03 reassessment from the Department of Local Government Finance The DLGF web site.

 

 

Continuing Changes in Property Assessment
Most of the effects of the 2002-03 reassessment are now history. But Indiana has been modernizing its assessment practices apart from the market value effort since 2001.
Changes in Indiana assessment practice continue.

Until 2001 true tax value was calculated using the replacement cost less depreciation method, then the results were divided by three. Starting with assessments in 2001 and taxes in 2002, the state no longer divided by three. To make sure that this did not result in a tripling of tax bills, the state mandated that all tax rates be reduced by two-thirds.

This had little effect on understanding of the assessment process at first. However, in the new market value system, assessed values are predictions of selling prices. Had the state continued to divide by three, assessments would be only one-third of selling prices. This would have obscured one of the most important features of market value assessment, the ability of property owners to decide whether their property is assessed correctly by comparing the assessment to their estimate of selling price.

On January 1, 2002, the old State Board of Tax Commissioners was was replaced with two new bodies, the Department of Local Government Finance and the Indiana Board of Tax Review. DLGF handles the assessment rules, reviews budgets of local governments and sees that the property tax controls are enforced.

The Board of Tax Review is a the state property tax appeals body. The process for appealing an assessment takes the property owner first to a local body, the County Property Tax Assessment Board of Appeals (PTABOA). The appeal from there is to the Board of Tax Review. From there, appeals enter the court system, to the Indiana Tax Court.

Prior to 2002 state appeals were handled by a division of the State Board of Tax Commissioners. The General Assembly decided that the body that made the rules and assisted the assessors should not also be the body that reviewed their appeals of the assessors' work. The state appeals process was was placed with the new Board of Tax Review.

The state commissioned an “equalization study” to measure at the accuracy of the reassessment results. Assessments are supposed to be predictions of selling prices in a market value system. An equalization study compares assessments to the prices of properties that sell. Under a market value system there is objective data (sales prices) to which assessments can be compared. The performance of assessors can be measured. This was not true under the old true tax value system.

The Indiana Fiscal Policy Institute completed the statewide equalization study in Fall 2005. The study found that assessments were accurate in some counties, but not so accurate in more. The IFPI found that 74 counties failed to meet the DLGF's expectations for a standard measure of assessment accuracy. Assessments in Indiana were not very uniform.

This is an "equalization" study because the results are intended to be used to correct problems. Assessments can be equalized by raising or lowering the values placed on particular classes of property in particular locations. It is not clear at this writing what use the DLGF will make of the equalization results.

Indiana has assessed property at long intervals during the past 25 years. There were reassessments for taxes payable in 1980, 1990, 1996 and 2003. The next reassessment will be for taxes payable in 2012. When property is so seldom reassessed, the assessment changes that occur during reassessments are often large. Taxes shift a lot among businesses and homeowners, usually increasing homeowner taxes substantially. Furthermore, since market values change annually, waiting six or ten years between reassessments may violate the Supreme Courts requirement that assessments be based on "meaningful reference to property wealth."

To remedy these problems, the assessments of land and buildings will be updated each year starting with assessments in 2006 and taxes in 2007, through a process called "trending." It will not be a full-blown reassessment, merely the application of a trend factor to the assessed values of properties. The factors will vary in different locations within a county. Factors will be calculated based on changes in sales prices from year to year.

The first annual update, in 2006 for 2007 taxes, may cause big changes in tax payments, because the base year for assessed values will be moved forward from 1999 to 2005. After that, though, the trend factors will be based on one-year changes in sales prices. The effect on taxpayers will be smaller. Come the next general reassessment, most of the changes in assessed value should already be accomplished, and the size of the "reassessment shock" should be much reduced.