Results of the 2002-2003 Reassessment in Indiana

New July 2006

Contents
Introduction
Assessment Changes and Tax Shifts
Residential Tax Shifts
Agricultural Tax Shifts
Business Tax Shifts
Tax Shifts for Individual Counties
The Effect of Tax Restructuring

Introduction
The 2002-2003 property tax reassessment caused major shifts in tax payments among taxpayers. It also resulted in major changes in state policy, mostly designed to dampen the tax shifts for homeowners.

The Town of St. John court case challenged Indiana's assessment rules, and in December 1998 the Indiana Supreme Court found that the rules were unconstitutional. Ultimately, the state decided to reassess property based on market value, meaning predicted selling prices. This caused big increases in the assessed values of most property, but also big decreases in tax rates. Those properties with bigger assessment increases saw tax bill increases; those with smaller assessment increases saw tax bill decreases.

Homeowners would have seen the biggest tax bill increases. But in June 2002 the General Assembly passed a tax restructuring bill with several provisions to lessen the impact on homeowners. Restructuring had an enormous effect, reducing the taxes of most homeowners. But the changes in assessed value were so large that hundreds of thousands of homeowners still saw huge tax bill increases.

The 2002-03 reassessment also was difficult for county officials. The new assessment rules were issued less than a year before the court-imposed assessment deadline, and all but a very few counties missed it. Tax billing in 2003 was delayed in most counties. Local governments had to shift funds, borrow or make do with less.

In July 2005 the Legislative Services Agency--the bill drafting and research arm of the General Assembly--published an enormous study of the results of this reassessment. It was enormous because it used individual parcel data collected from the assessors and auditors in 72 Indiana counties for both 2002 and 2003--several million parcels in all. Additional data on personal property were obtained. The data were classified by property type, agricultural, residential, commercial, industrial and utility, and several sub-categories, and the changes in their assessed values and tax payments were measured. A model of the local property tax was constructed to answer "what if" questions, such as "what if tax restructuring had not been passed."

The author of this website was privileged to be one of the authors of LSA's study.

The results of this study give us a comprehensive picture of the effects of reassessment. This essay offers a summary of these results. In a nutshell, here are the findings:

The move to market value assessment increased residential assessed values more than business assessed values, causing a shift in tax payments from businesses to homeowners.

The classes of property that saw the biggest tax bill increases were older homes, rental property and farm land.

Statewide, more than half of all homeowners saw tax bill decreases.

The classes of property that saw the biggest tax bill decreases were utility property, industrial property and commercial property aside from rental apartments.

Most large counties saw changes like those for the state as a whole. In several rural counties, the average tax bills for all classes of property decreased.

Lake County saw much bigger increases in homeowner tax payments, and much bigger decreases in business tax payments, compared to the rest of the state.

Tax restructuring made an enormous difference in the tax payments of homeowners, reducing the average tax increase by almost fifty percentage points.

Readers will note that only 72 of the 92 counties were included in the study. The other twenty counties were unable (or, in some cases, unwilling) to deliver the parcel data needed for the study. The results for these 72 counties are very likely representative of the state as a whole, however, because they include all the largest counties, and comprise about 90% of statewide assessed value.

Most of the he statewide results presented here exclude Lake County. Lake's experience was very different from the rest of the state. Because the county has so much assessed value, including it distorted the results for the other 71 counties. Excluding Lake makes the statewide results more representative of the experiences in most Indiana counties. Results for Lake are presented in the Tax Shifts for Individual Counties section.

Assessment Changes and Tax Shifts
Assessments of almost all property increased during the reassessment. Yet, not all property owners saw tax bill increases. Some saw significant decreases.

Tax bills can rise and fall because big increases in assessed values cause tax rates to fall. Property tax rates are calculated by local governments every year. Each government takes the levy (the property tax revenue) which they are allowed to raise by the state tax controls, and divides by the total assessed value within its jurisdiction. If assessed value rises a lot, and the levy rises by the limited amount allowed by the state controls, the tax rate must fall.

Most taxpayers saw both an increase in their property's assessed value, and a decrease in the tax rate they had to pay. The tax bill is assessed value times the tax rate. Those taxpayers whose property assessments rose a lot relative to the fall in the tax rate, saw tax bill increases. Those taxpayers whose property assessments rose only a little relative to the fall in the tax rate, saw tax bill decreases.

Some kinds of property usually had bigger increases in assessed value, and some kinds had smaller increases. This resulted from the change in the way assessments were calculated. Under the old true tax value assessment system, almost all property was under-assessed compared to market values. But residential property--particularly older residential property--was under-assessed more. The change to market value brought these assessments up to their selling prices, causing a big increase in assessed value.

Other property was assessed closer to market value. Many commercial and industrial properties were already near their predicted selling prices under the old true tax value system. The assessment increase under the market value system was small.

Figure 1 shows the changes in gross assessed value, net assessed value and tax payments by major class of property. Those classes of property with increases in net assessed value that were more than average saw tax payment increases. Thoses classes with increases in net assessed value that were less than average saw tax payment decreases.

Figure 1.

Tax payment changes also were affected by the way classes of property were treated by tax restructuring. The gross assessed value increases show the results of the market value reassessment. The net increases are much less than the gross increases for most agricultural and residential property. This is because tax restructuring increases the homestead exemption from $6,000 to $35,000. The exemption (also called the homestead deduction) is subtracted from the gross assessed value of homestead property. Homesteads are owner-occupied primary residences. Agricultural property includes farm homesteads. Residential property includes all non-farm homesteads, but also rental property with four units or fewer, and vacation homes. The former are not owner-occupied, the latter are not primary residences. Neither qualify for the homestead exemption.

Reassessment caused a statewide property tax shift from businesses to residential and agricultural property owners. Results varied by county and taxpayer, but for the state as a whole the tax bills paid by residential and agricultural property owners increased, while tax bills paid by commercial, industrial and utility property owners decreased. The reason for these shifts between classes of property was that the net assessed values of residential and agricultural property increased more than the net assessed values of business property. Gross assessed values of residential property doubled. Gross assessed values of agricultural property nearly doubled. Commercial and industrial assessments rose much less, and utility assessments were almost unchanged. Tax rates fell, and those with smaller assessment increases saw tax payment reductions, while those with bigger assessment increases saw tax payment increases.

Residential Tax Shifts
Total residential tax bills increased because of the 2002-2003 reassessment. The graph shows that owners of residential homesteads saw their tax bills increase by a smaller amount than the tax bills of all residential property. The reason for the reduced impact is that homestead property is eligible for the increased homestead deduction and homestead credit. The increase in the homestead deduction from $6,000 to $35,000 is the reason that residential net assessed value rose so much less than gross assessed value. The net assessed value of non-homestead residential property increased much more than did homestead property. This is primarily rental property. Net assessed value increases for rental property were large because this property did not receive the increased homestead deduction.

Table 1 below shows changes in tax payments in more detail. Under the heading "Housing," the table shows that residential and agricultural homesteads saw small increases in tax payments, statewide. But the tax payments by owners non-homestead residential property increased significantly. This is primarily rental property. The large gross assessed value increased experienced by all residential property was not offset by an increase in the homestead deduction for rental property. The net assessed value increase was greater. Rental property does not receive the homestead credit, either, which also added to the tax payment increase. Reassessment increased the gross assessed values of commercial apartments by an amount similar to the gross assessed values of residential property. Since commercial apartments are not eligible for homestead deductions or credits, the tax bill increase was larger than for residential property.

Table 1.

Older houses saw the biggest tax bill increases. Table 2 below shows the results of a study of Marion County residential assessments. Gross assessed values of homes built in 1960 and after increased only 73.7%. Gross assessed values of homes built before 1940 increased 170.5%--they almost tripled. This difference is reflected in tax bill changes. Tax bills on older homes increased substantially; tax bills on newer homes hardly at all.

Table 2.

The reason for this difference was that the old true tax value assessment system applied depreciation rates to assessed values based on age, regardless of the potential selling price of a property. The move to market value thus increased the assessments of well-maintained older homes more than the assessments of newer homes.

Many factors influenced the tax bill changes of residential property owners. The age of the house was important, but so was the composition of property in the taxing district. Areas with lots of industrial and utility property saw relatively small increases in assessed value in total, because the assessments of these business properties did not rise much with market value. That meant a relatively small decrease in the tax rate, which meant a bigger increase in tax bills for homes with increased assessed values. Areas with lots of residential or agricultural property saw smaller tax increases, or even tax decreases.

The quality of assessment mattered, too. If the house was located in an area where assessors had under-assessed residential property under the old true tax value system, the move to market value increased the home's assessment more. Homeowner tax bills would increase by more.

And, of course, non-reassessment factors influenced tax payments, as they do every year. Homes in jurisdictions that issued debt for new facilities saw bigger increases, because debt service tax rates increased. Homes in jurisdictions that had new industrial construction saw smaller increases, because industrial assessed value increased more.

Figure 2.

Figure 2 shows the distribution of tax bill changes for all residential property, and for homesteads only. These data include only "comparable" properties, which are those that saw no physical changes between 2002 and 2003. With no additions, improvements or demolitions, the changes in tax bills more closely show the effects of reassessment (though tax levy changes also matter).

Clearly, homesteads saw smaller increases than all residential property. Again, this is because rental property is not eligible for the homestead exemption or credit. More than one-third of residential properties saw tax bill increases of 25% or more. Less than one-fifth of homesteads saw such increases. More than 40% of homesteads saw decreases of at least 10%. Barely 30% of all residential property saw such decreases.

In total, 59% of all residential properties saw tax bill increases, while 41% saw tax bill decreases. In total, 43% of all homestead properties saw tax bill increases, while 57% saw tax bill decreases.

Agricultural Tax Shifts
Agriculture is the most complex property category. A large part of its real property is homesteads, property that would be classed as residential if it were not part of a farm parcel. Another part of real property is business buildings. And then there is farm land, the only large category of real property that continues to be assessed on a non-market basis. Agriculture also includes some personal property.

Table 1 shows the tax bill changes for the categories of agricultural property under the heading Agricultural. The net assessed value and tax payments on non-homestead real property increased the most. This category includes farm land and farm business buildings. It is most influenced by the change in the base rate of farm land which occurred with reassessment, a 112% increase from $495 per acre to $1,050 per acre.

Taxes on agricultural non-homestead real property increased while taxes on personal property decreased. The sum of these two is agricultural business taxes on land, farm buildings, and equipment. Personal property is a relatively small share of the total, so agricultural business taxes increased. Total taxes paid on agricultural homesteads were almost unchanged. Agricultural homesteads are eligible for the homestead deduction and credit, which accounts for most of this difference. Agricultural property taxes as a whole increased. Clearly, the main reason for this increase was the increase in the base rate of farm land.

Business Tax Shifts
Both gross and net assessed value of business property increased much less than that of residential or agricultural property, as shown in Figure 1. The smaller increases in net assessments occurred even though business property was not eligible for new deductions, such as the homestead deduction. The explanation is that business real property was assessed closer to market value under the old assessment rules than was residential property. The shift to market value assessment increased business assessments less.

Commercial property saw a bigger net assessed value increases than did industrial or utility property, and this explains why the tax bill decrease on commercial property was so small. Commercial apartments in particular saw big tax bill increases (see Table 1). The small increases in industrial and utility net assessments account for the large drop in these tax bills. The overall assessed value increase across Indiana caused a drop in property tax rates. Those property owners whose assessments rose more saw tax bill increases, and those with assessments that rose less—like businesses—saw tax bill decreases.

Reassessments generally change the assessments of real property, not personal property. While assessment regulations and tax restructuring did alter personal property assessments somewhat, this was true during the 2002-03 reassessment as well. Real property assessments rise; personal property assessments do not. The tax rate fall reduces taxes paid on personal property.

Almost all personal property is business property, and this is another explanation for why businesses saw tax bill decreases. Table 1, under the heading Personal Property, shows the substantial decreases in tax bills on personal property. Both inventories and depreciable equipment saw decreases.

Residential personal property tax bills decreased the most. However, this property is a very small share of total residential property--recreational vehicles are a large part of it. Personal property makes little difference in residential tax bills overall.

Contrast this with utilities. Most utility property is depreciable equipment, electricity generating equipment is an example. The decline in the tax bill on utility personal property is the main reason why utility tax bills fell more than for any other class of property.

Tax Shifts for Individual Counties
Table 3 shows the results for 72 Indiana counties. These were the counties for which property parcel data were available. They include more than 90% of statewide assessed value.

Table 3.

Taxpayers in different counties had different experiences. A detailed explanation for each county's results is available in the individual county reports on the Legislative Services Agency's website. Most county's results, however, fall into one of just three categories. The categories are shown in Table 4.

Table 4.

Of the 72 counties, 30 reflected the state pattern of tax increases and decreases by property type. In these 30 counties, tax payments by the average residential and agricultural property owner increased, while tax payments by the average business property owner decreased. In 12 other counties, agricultural, residential, and commercial property owners paid more, while industrial and utility property owners paid less. Commercial property assessments statewide increased more than other business assessments, and in some counties the increase was enough to turn a tax cut into a tax hike.

Fourteen of the 15 largest counties in the state, measured by assessed value, were in these two groups. Such counties had substantial amounts of business assessed value, which increased the size of the tax shift to residential and agricultural taxpayers. Many of these counties also had a large number of rental apartments included in their commercial assessed value. Apartments were the type of commercial property that saw the largest increases in assessed value. In some of these counties the increase in commercial assessed value was large enough to produce an overall increase in commercial taxes.

In 10 counties, all property types saw tax cuts. These were mostly rural counties, and all had below-average countywide levy increases. With little business property, there was little tax shift to residential and agricultural property. The small tax shifts plus the small levy increases were more than offset by the large increase in state property tax replacement credits (PTRC) that resulted from tax restructuring (see below).

These three categories include 52 counties, 72% of the counties with results. Twenty other counties had different results. Many factors combined to produce these results, including the size of the local levy change; the composition of assessed value by property type; the location of property in tax districts with larger or smaller tax rate changes; the age of residential structures; the accuracy of assessment; new construction, demolition, and remodeling of property; or changes in the composition of property that were large enough to offset the effects of reassessment.

Lake County saw tax bill changes far different from those in the rest of the state. The average Lake County residential property owner saw a 44.4% increase in property taxes in 2003, compared to 11.4% in the other 71 counties. Were Lake added to the 71-county total, the state average residential increase would be 15.1%. Likewise, the average Lake County industrial property owner saw a 50.3% tax bill decrease in 2003. The average decrease for the other 71 counties was 21.5%. If Lake’s industrial tax change were added to the state total, the state average decrease would be 27.9%.

The main difference between Lake and the other counties was in the assessment of residential property. Where the average gross assessment of residences doubled in the other 71 counties, in Lake it nearly tripled. Lake County’s residential property was assessed further below market value than in the other counties, so required a much bigger increase during reassessment. This made for a bigger shift in taxes away from business property, towards residential property.

The Effect of Tax Restructuring
Well before the 2002-03 reassessment, the governor and the legislature recognised the potential large effects on tax payments. They were particularly concerned with the large tax increases predicted for homeowners. So, in a special session in June 2002, the General Assembly passed a tax restructuring bill. Many of the bill's provisions addressed reassessment and the resulting changes in tax bills.

The Department of Local Government Finance (DLGF) had proposed a new "shelter allowance", which was a fixed amount, different in each county, to be subtracted from homestead assessments. The assessed value of houses would have been reduced below market value, which is the predicted selling price. The shelter allowance was replaced with a higher homestead exemption, which increased from $6,000 to $35,000. This is a deduction subtracted from the home's market value assessment.

Tax restructuring raised the homestead credit to 20%. The credit had been scheduled to revert to 4% in pay-2003. Restructuring also applied the homestead credit to the gross levy less PTRC, rather than the gross levy itself. These changes largely offset, so that total homestead credits did not change very much from 2002 to 2003.

Tax restructuring added a new property tax replacement credit (PTRC) equal to 60% of school general fund levies, and restricted the existing PTRC to levies on real property. The contribution to local levies in all 92 counties by PTRC and state homestead credit payments increased by about two-thirds, from $1.1 billion to $1.9 billion. This large added state expenditure was paid for primarily with an increase in the sales tax from 5% to 6%, effective in December 2002.

The DLGF had put in place several changes in the assessment of personal property, which is almost entirely business equipment and (at the time) inventories. Restructuring reversed these assessment changes. It restored the 30% floor on depreciable equipment assessments, returned to the more generous depreciation percentages for depreciable equipment, and restored the 35% inventory adjustment and the 10% assessment on construction work-in-process. For 2002- pay-2003, however, the 30% floor elimination and higher “percent good” percentages remained in effect, because it was too late to change assessments that had already been made by March 2002.

Table 5 shows estimates of how tax bills statewide would have changed for each property type had tax restructuring not been adopted. Tax increases for residential property owners would have been particularly large. The increases in the homestead deduction and PTRC in the tax restructuring reduced the size of this tax increase. Residential property taxes still increased because the reassessment business-to-residential tax shift plus the increase in the tax levy was not fully offset by the rise in the homestead deduction and higher state PTRC payments. PTRC payments were larger, but payments of the original 20% PTRC were eliminated for personal property, which meant that restructuring had only small effects on commercial and industrial taxes.

Table 5.