An Overview of the Indiana Property Tax
Revised August 2006
Property Tax Terminology
Exemptions, Deductions and Credits
Local Levies and State Controls
Property Tax Rates
Indiana local governments collected more than $5 billion in property taxes in calendar year 2006. More is collected from the property tax than any Indiana local tax.
In the past few years there have been great changes in the Indiana property tax. An Indiana Supreme Court decision in December 1998 threw out the old rules used for assessing property. The state adopted assessment based on market value for the reassessment of 2002-03. The created big shifts in tax payments among taxpayers, especially from business taxpayers to homeowners. The General Assembly's tax restructuring effort in June 2002 was largely an attempt to shelter homeowners from these big tax shifts. The reassessment was so difficult for local assessors to complete that tax billing in 2003 was delayed in almost all the counties.
There have been more changes since. The state tax controls, that determine the maximum amount local governments can raise with the property tax, have been changed twice in the past few years. New and altered deductions, credits and other tax limits will take effect. Assessments will be updated annually, before the next reassessment for taxes in 2012.
This website has a number of essays about the Indiana property tax. This overview provides a guide to the Indiana property tax, and a guide to the more detailed information in the rest of this website.
Links to More Information
|To Find:||Go To:|
|Department of Local Government Finance, the state agency that oversees the Indiana property tax||Department of Local Government Finance website|
|A brief explanation of the Indiana property tax from the Department of Local Government Finance||DLGF's website|
The tax base of the Indiana
property tax--the thing that is taxed--is the assessed value of
property. The total revenue
collected is called the levy. The property tax rate is calculated by dividing the levy by the
assessed value in each jurisdiction each year. Rates usually change each year, and are different in every tax
Assessed value includes real and personal property. Real property is land and buildings; personal property is mostly business, farm and utility depreciable equipment. Personal property used to include business inventories, but as of 2006 inventories will be exempt, and as of 2007 they will no longer be taxed.
Gross assessed value is the assessment determined by the assessor, based (mostly) on the predicted selling price of the property. Net assessed value is this amount minus deductions. Net assessed value is the amount that is actually taxed. Deductions are dollar amounts or percentage amounts that are subtracted from gross assessed value, before tax bills are calculated.
Credits are amounts or percentages subtracted from tax bills after they are calculated. Important credits include the property tax replacement credit and the homestead credit. Credits reduce the bills taxpayers pay, and the state appropriates money from its budget to replace the revenue lost by local governments.
Property tax dates are often written like 2006 pay 2007. The first year is the assessment year, when the property was assessed. The assessment date is March 1. Land, buildings and equipment in existence on that date are assessed and taxed. Taxes are paid on this assessed value in the next calendar year, known as the pay year. The phrase "2006 pay 2007" means property assessed as of March 1, 2006, for taxes payable in May and November, 2007.
Reassessment is a statewide inspection and revaluation of all parcels of real property. It is done periodically, the last time in 2002 pay 2003, the next scheduled for 2011 pay 2012. Reassessment is done so that the assessed values of land and buildings will stay consistent with the market values of property, as measured by selling prices. Starting in 2006 (for taxes in 2007), local assessors will annually update real property assessments, a process called trending. Trending does not include an inspection or pricing of individual property parcels, only the updating of valuations by local area and property class, based on changes in average sales prices.
True tax value is the name Indiana uses for assessed value. However, the term is often associated with the assessment rules that were used prior to the 2002 pay 2003 reassessment. The pre-2002 system is sometimes called the true tax value system, in contrast to our new market value system.
A taxing unit is a local government which collects property taxes. These are counties, townships, cities and towns, school corporations, library districts and other special districts (such as fire protection districts or transportation districts). The local government sets its tax levy through the budget process, with oversight from the Department of Local Government Finance. It sets its tax rate by dividing that levy by the assessed value of property within its borders.
A taxing district is an area where all the taxing units are the same. Since all the units are the same, within a district the tax rate paid by taxpayers is the same, because that rate is the sum of the rates of all the overlapping units.
Property is assessed locally, by township and county officials and their contractors, using rules established by the Department of Local Government Finance (DLGF). DLGF's rules are guided to a degree by the State's Constitution and statutes. Some industrial real property and utility personal property is assessed by the state.
The Town of St. John court case challenged Indiana's assessment rules, and in December 1998 the Indiana Supreme Court found the rules to be unconstitutional. The court said that the old rules lacked "sufficient relation to objectively verifiable data," and they lacked "meaningful reference to property wealth." Ultimately, the state decided to reassess property based on market value, meaning predicted selling prices. The reassessment of 2002 pay 2003 was based on market value rules.
The old true tax value rules for buildings were based on the estimated cost required to replace the structure, less depreciation based on age, with modifications for condition and quality. Assessment of residential, commercial and industrial land was based on estimates of land sales prices. Farm land was assessed based on a statewide fixed price per acre, called the "base rate," modified by the land's productive capacity, forest cover, grade, and other factors. The last reassessment based on these rules took place in 1995 pay 1996.
The assessed values that this system produced were not meant to reflect the value of property as measured by selling prices. The Supreme Court found them unconstitutional, but did not mandate market value assessment in its decision. Market value was a system that met the requirements for objective data and reference to property wealth, however, so it was adopted for the 2002 pay 2003 reassessment.
The new market value rules attempt to value all real property except farm land based on a prediction of its selling price. These predictions can be made using a number of methods: by comparison to prices of similar property that has recently sold; by measuring the cost of construction, less depreciation, with an adjustment for selling prices in the local area; by dividing the annual income from the property by a rate of return, a method called capitalization. In the 2002-03 reassessment most Indiana counties used the second method, cost of construction less depreciation, with a market adjustment. This was used because it is the method closest to the old true tax value method.
Farm land continued to be assessed at its "use value." Use value is the value of the land in its use in agriculture, without regard for its potential commercial, industrial or residential development value. Indiana modified its use value method to meet the court's new standards, by using a capitalization formula to establish the base rate. The base rate was $495 per acre after the 1995-96 reassessment. It rose to $1,050 per acre with the 2002-03 reassessment. The annual adjustment process has since reduced the base rate to $880. The other adjustments to farm land assessments, for productivity and other factors, were not changed in 2002-03.
Personal property is now just business depreciable equipment (and a smattering of other property, such as recreational vehicles). It is assessed by its owners at its initial purchase price, less an allowance for depreciation. Depreciation allowances increase with the age of the equipment. A "30% floor" places a lower limit on this depreciation. The sum total of all of a business's equipment cannot be valued at less than 30% of the sum of its initial purchase prices.
Until 2006 pay 2007 business inventories were part of personal property assessments. Tax restructuring in June 2002 began a phase out of the taxes on inventories. This was confirmed by a constitutional amendment approved by the voters in November 2004. Counties were allowed to exempt inventories prior to 2006, and 41 counties did so. As of 2006, for 2007 taxes, inventories are not taxed
Figure 1 shows what kinds of property comprise net assessed value in Indiana. The data are from 2002 pay 2003, which is the most recent breakdown of property available. This was just after the most recent reassessment, so (with the exception of inventories) it probably represents the current property shares.
Real property is shown in solid colors on the pie, and personal property is shown with stripes. Real property--land and buildings--comprise about 82% of Indiana net assessed value.
Homesteads, which are owner-occupied homes, make up the largest part of real property, but are slightly less than half the total. Other residential real property is mostly rental property with four units or less, vacation or second homes, and the value of the parts of homes that don't qualify for the homestead exemption, like sheds and swimming pools. Together, residential property makes up a bit more than half of all net assessed value in Indiana.
Business real property includes office buildings, factories, wholesale and retail stores, land including farm land, and other land and structures. It is the second largest category of property, with 28% of the total.
Personal property was depreciable equipment and inventories in 2002 pay 2003. In 2006 pay 2007, net assessed value will not include inventories. This implies that personal property will drop to about 13% of net assessed value, and real property will rise to about 87%, as of 2006-07.
The "other" category includes personal property owned by individuals, exempt property, and property that could not be assigned to a category because of data problems. Note that this exempt property is not all of the untaxed property in Indiana--most exempt property is not included in net assessed value.
Figure 2 shows a different breakout of net assessed value, by taxpayer type instead of property type.
Residential property is shown in solid colors; business property in stripes. In total, residential property makes up slightly more than half of all net assessed value. Residential homestead is the biggest category, at 38% of the total. This is slightly less than the total for all homesteads in figure 1, because about 2% of net assessed value is agricultural homesteads, included here with agriculture.
Commercial businesses make up the largest business slice of the net assessed value pie. Commercial businesses include buildings like rental apartments, offices, stores, hotels, bowling alleys, and their equipment (and for 2002-03, their inventories). Industrial property is the second largest business category, and agricultural is third. Of course, in many rural counties agriculture is by far the largest business category. Utilities, which include power plants and railroads, are the smallest business category.
Once inventories are eliminated from net assessed value, the residential share of net assessed value will grow from 51% to about 54%, and the business share will drop from 49% to about 46%.
Links to More Information
|To Find:||Go To:|
|An essay on changes in Indiana assessment policy since 1998||This website: Property Tax Assessment Policy in Indiana|
|Two essays on assessment from the homeowner's point of view||This website: How Your House is Assessed and How to Read Your Assessment Notice|
|An essay on how farm land is assessed in Indiana||This website: Farmland Assessment for Property Taxes|
|A spreadsheet showing statewide assessed value and tax levy by property and taxpayer type||This website: Statewide Assessed Value and Levy Table|
|Information about assessing practice in Indiana from the state's oversight agency, the Department of Local Government Finance||Department of Local Government Finance website|
|Vanderburgh County Assessor on how property is assessed in Indiana||Vanderburgh County Assessor's website|
Exemptions and Deductions are the difference between gross assessed value and net assessed value. Exempt property may or may not be assessed, but it is exempt from taxation. Property owned by governments, not-for-profit organizations, educational, charitable, scientific or religious groups and others is exempt. Assessors valued about $24 billion in exempt property in 2004 pay 2005. This is not all exempt property. Since assessors know exempt property won't be taxed, sometimes it is not assessed.
Deductions are dollar amounts or percentages subtracted from the assessments of otherwise taxable property. Sometimes deductions are called exemptions--the two terms often are used interchangeably. By far the biggest deduction is the homestead standard deduction. The deduction is $35,000 ($45,000 in 2006 pay 2007), an amount subtracted from the gross assessed value of an eligible homestead. Property is considered to be a homestead if it is a primary residence owned by its occupant. Rental property and second homes are not eligible. About $50 billion in homestead standard deductions were subtracted from assessed value in 2002 pay 2003.
Other deductions include the mortgage deduction ($3.1 billion in pay '05), a deduction for people aged 65 and over ($1.4 billion), several deductions for veterans ($849 million) and a deduction for blind or disabled people ($469 million).
Some deductions are available for businesses. The largest is the Economic Revitalization Area (ERA) Deduction for business equipment and buildings. These are usually known as "tax abatements." Abatements are granted by local officials on new buildings and equipment. They start at 100% of assessed value, and phase out over one to ten years. About $7 billion in abatements were subtracted from assessed value in 2004 pay 2005.
There are other business deductions, for locating in an enterprise zone ($416 million), and for new energy systems ($72 million) or fertilizer storage systems ($14 million).
Overall, gross assessed value in Indiana was $366 billion in 2004 pay 2005. About $86 billion was exempt or subject to deductions, leaving net assessed value of $280 billion. A little less than one-quarter of gross assessed value is exempt or subject to deductions. Exempt property, the standard homestead deduction, and the economic revitailization business deductions are by far the largest subtractions from gross assessed value. Figure 3 shows the breakdown of gross assessed value into net assessed value and the various deductions.
Two newer business deductions may come to rival the ERA abatements in size. As of 2006 pay 2007 business inventories will not be taxed. This will be accomplished by applying a 100% deduction to the assessed value of inventory. There were about $16 billion in inventories assessed in 2002 pay 2003. In pay 2005 31 counties had adopted the inventory deduction early, and this reduced assessed value by $3.4 billion. This figure is not included in the pie chart.
A new deduction for business buildings and equipment is available starting in 2006 pay 2007, which will deduct 75% from assessed value in the first year, 50% in the second, and 25% in the third. It is available only to taxpayers who do not take other deductions, and is limited to $2 million for real and $2 million for personal property.
Exemptions and deductions reduce a unit's assessed value, and so increase the tax rate that must be charged to raise a particular tax levy. If one taxpayer gets a deduction, rates rise and other taxpayers foot the bill.
Property tax credits are a percentage reduction in the tax bill, after assessed values and tax rates have been set. Credits reduce the tax bill without affecting assessed values or rates. This would reduce the amount of revenue local governments collect, except the state replaces the lost revenue with an appropriation from its budget. In 2006 the state paid about $2.2 billion to local governments for property tax credits. The state capped the total amount of property tax relief it will pay, starting in fiscal 2006.
There are two main property tax credit programs. By far the largest are Property Tax Replacement Credits (PTRC). The PTRC program has two parts. The state pays local governments PTRC equal to 20% of taxes levied on real property (not personal property), excluding cumulative funds, debt service incurred after 1984, and some other levies. In addition, the state pays PTRC on 60% of school corporation general fund levies, on both real and personal property. PTRC cost the state about $1.8 billion in 2005.
If homeowners are eligible for the homestead standard deduction, they are also eligible for the homestead credit. The credit reduces tax bills on owner-occupied primary residences. Only a fraction of a unit's levy is eligible for credits. Debt service is the main levy that's excluded. The credit is calculated at 20% times the eligible fraction of the levy. For pay-2006 only, the credit is 28%. The homestead credit cost the state budget about $230 million in 2005. In 2006-07, with the higher rate, it will cost about $100 million more.
Links to More Information
|To Find:||Go To:|
|A list and description of Indiana property tax deductions||This website: Property Deductions in Indiana|
|The source of this list of deductions, the Legislative Services Agency's Handbook of Taxes, Revenues and Appropriations||Legislative Services Agency's website|
|A spreadsheet showing gross assessed value, exemptions, deductions and net assessed value for Indiana for 2001 through 2005||This website: Deductions spreadsheet|
|The source of this data, a huge report by the Department of Local Government Finance called Property Tax Exemptions, Deductions and Abatements, published in May 2006||DLGF website|
Local Levies and
Tax levies are collected by local governments, including counties, townships, cities and towns, school corporations, library districts and other special districts. Figure 4 shows which units collect property taxes. School corporations collect more than half of total property taxes. Counties, cities and towns together collect another 37%. Together, schools, counties and municipalities collect 91% of all property taxes. Townships, library districts and other special districts collect the rest.
Local governments traditionally set their property tax levies by calculating what each of their departments need to spend during the year. Non-property tax revenues are subtracted from this spending amount, and the remainder is the amount that needs to be collected from property taxes.
However, local governments are subject to a complex set of tax control rules set by the state. A maximum levy applies to property taxes for civil government operating costs (civil governments are all governments except school corporations). Levy increases are limited to the 6-year average increase in Indiana personal income. This increase has averaged around 4% in recent years. Governments can "bank" half of their unused maximum levy authority, if they tax at less than their maximum. Civil government cumulative funds have maximum rate limits, and most are also included within the levy ceiling. Debt service levies are outside the maximum levy, though the Department of Local Government Finance can approve or reject local bond issues. County welfare levies are also outside the levy limits.
School corporation general fund levies are limited by the state school aid formula, which usually changes every two years. School debt service levies are uncontrolled, though both the Department of Education and the Tax Board can approve or reject bond issues. The school capital projects fund has a maximum rate that varies by school corporation. Increases in school transportation operating taxes are limited to 5% per year, though levies for bus purchases are not controlled.
Once the levy is set by local governments, after application of the control rules, and once local assessors have calculated assessed value, less exemptions and deductions, property tax rates can be set. Rates are re-calculated each year by dividing the levy by assessed value. The result is multiplied by 100 and presented as "dollars per $100 assessed value," but the figure shown is essentially a percentage. The rate is multiplied by the net assessed value owned by each taxpayer to calculate the taxpayer's liability.
The rate the taxpayer pays is the sum of the rates of the local government in which his or her property is located. All taxpayers pay a county rate, a township rate and a school corporation rate. Most taxpayers live in a city or town and a library district, and so pay those rates too. There are also rates for other special districts, such as solid waste management districts, transportation districts or fire protection districts. Taxpayers receive one combined tax bill from the County Treasurer, and make a payment twice a year for all the local units. The county divides the revenue among the local units.
Figure 5 shows the range of tax rates paid by taxpayers in the 1,961 taxing districts in Indiana. These are the sums of the rates of the overlapping jurisdictions in which property is located. Shown are the gross rates, which appear on tax bills, and the net rates, calculated by dividing the levy after credits are subtracted by net assessed value. The median gross rate--the middle value among all the rates--is $2.44 per $100 assessed value. The median net rate is $1.49 per $100 assessed value. The highest gross rate is in a taxing district in Lake County, Gary City, Gary School Corporation, Calumet Township. The rate is almost $8.95 per $100 assessed value. The highest net rate is in an adjascent Lake County - Gary City district, at $5.36. The lowest gross rate is $1.25, in Kosciusko County, Turkey Creek Township. The lowest net rate is $0.69, in Steuben County, Otsego Township.
Statewide, the average property tax rate was $2.75 per $100 assessed value in pay 2005. That is the same as saying that the average taxpayer payed 2.75% of his or her net assessed value in property taxes, before tax credits. The net rate was $2.11 for pay 2005. The average taxpayer paid 2.11% of his or her net assessed value in property taxes.
Tax rates are calculated by dividing the levy by the net assessed value. Levies usually rise by four or five percent per year. Since the controls are unrelated to assessed value, levies do not tend to rise more when assessed values rise more. This implies that reassessments tend to reduce tax rates. Assessed values rise a lot, levies rise a normal amount, so tax rates fall. Figure 6 shows how the statewide average "net rate" has fallen in every reassessment year since 1979 pay 1980.
Links to More Information
|To Find:||Go To:|
|Tax rates, PTRC rates and homestead credit rates for every taxing district in Indiana||Department of Local Government Finance website|