Hot Topic: Indiana's Property Tax Reforms

 

Contents
The Big Picture
Homeowner Tax Relief
Circuit Breakers
The Potential "Tax Echo" in 2009
Revenue Losses and Taxpayer Savings
Circuit Breakers and Local Government Interdependence
Local Option Income Taxes
Household Tax Changes


Indiana's 2008 property tax reform contains the most sweeping changes of property taxes and local government finance in at least 35 years.  There's quite a bit on this website about the reforms, and more on other websites. Here is an outline of what's available.

The Big Picture
The act is House Enrolled Act 1001 (HEA 1001-2008). It was called "ten-oh-one" in the State House all through 2008, but now in 2009 there's a new House Bill 1001 (it's the state budget bill). We'll have to call it 1001-08 or perhaps just "the big property tax reform."

The original version was passed by the House by 93 to 1 on January 24, 2008. The Senate amended the bill and passed its version on February 26, 33 to 14. The bill went to conference committee, and a compromise version was passed on March 14, 82 to 17 in the House and 41 to 6 in the Senate. It was signed by Governor Daniels on March 19, and became Public Law 146.

Links to More Information

To Find: Go To:
The full text of HEA 1001, on the General Assembly's website. Indiana General Assembly website, HEA 1001
A 6-page outline of HEA 1001, with references to section numbers in the act.
This website: HEA1001 Outline
The Legislative Services Agency Fiscal Note for HEA 1001. This website: HEA1001 Fiscal Note.
A link to Larry DeBoer's streaming video presentations on HEA 1001 (click on "Local Government Finance") Purdue Extension website: Streaming Video for "On Local Government" presentations.
Parts 1 and 2 of an Purdue Agricultural Economics Report article summarizing the results of HEA 1001. PAER, May 2008 (part 1) and PAER, August 2008 (part 2)
A Capital Comments column summarizing HEA1001. This website: "Property Tax Reform: What Have We Got? " (Capital Comments, March, 2008)


Homeowner Tax Relief
One of the main purposes of the tax reform is to provide property tax relief to homeowners. This was achieved in 2008 with a big increase in homestead credits, and will be achieved in 2009 and after mainly by eliminating property taxes for the school general fund and county welfare funds, and increasing homeowner deductions.

Links to More Information

To Find: Go To:
The Legislative Services Agency's summary analysis of changes in property tax bills in 2009. LSA's website: Statewide Property Tax Report, October 2009
The Legislative Services Agency's county-by-county analysis of the effect of the property tax reform on homeowners in 2008. LSA's website: County Property Tax Studies
The Legislative Services Agency's analysis of the tax shifts likely to be created by HEA 1001. This website: LSA Analysis of Tax Shifts
A two-page explanation of the statewide changes in levies and assessed values resulting from the tax reform. This website: Before and After: Property Tax Reform Arithmetic, Projected to 2010 Using Statewide Data
A Capital Comments column on the effects of the tax reform on homeowner taxes in 2008. This website: "Tax Relief Results" (Capital Comments, September 2008)


Circuit Breakers
The circuit breakers limit the tax bills of property taxpayers to a fixed percentage of gross assessed value (assessed value before deductions). The limits in 2009 will be 1.5% for homesteads, 2.5% for other residential property, farm land and nursing homes, and 3.5% for all other property. In 2010 and after the limits will be 1%, 2% and 3% respectively. The circuit breakers will provide some added tax relief for homeowners, and more for owners of rental housing. The circuit breaker limits are included in HEA1001, but also in a joint resolution to amend the Constitution, also passed by the General Assembly. If the resolution passes again in 2009 or 2010, and passes a state referendum in 2010, the Constitution will be amended to include the circuit breakers.

Links to More Information

To Find: Go To:
The Legislative Services Agency's January 2009 analysis of the revenue losses created by the circuit breakers in 2009, 2010 and 2011, for all local governments. This website: LSA January 2009 Analysis of Circuit Breaker Losses (includes analysis of added state aid to schools)
Description of the methodology used in LSA's January 2009 analysis of circuit breaker losses. This website: Circuit Breaker Model Methodology
Discussion of the reasons for the changes in estimated circuit breaker losses to local governments from LSA's March 2008 estimates to LSA's January 2009 estimates. This website: Circuit Breaker Model Update
The Legislative Services Agency's March 2008 analysis of the revenue losses created by the circuit breakers in 2008, 2009 and 2010, for all local governments. These estimates were updated in January 2009. This website: LSA March 2008 Analysis of Circuit Breaker Revenue Losses
The Legislative Services Agency's March 2008 estimates of the distribution of state circuit breaker offsets to school corporations, 2009 and 2010. These estimates were updated in January 2009. This website: LSA March 2008 Analysis of School Corporations Circuit Breakers
The Joint Resolution to Amend the Constitution, passed by the General Assembly in March 2008. General Assembly's website: Senate Joint Resolution 0001
A Capital Comments column discussing the implications of the circuit breakers. This website: "Circuit Breakers: A Simple Idea with Complex Results " (Capital Comments, April, 2008)

 

The Potential "Tax Echo" in 2009
In 2008 homeowner property tax relief will be provided with an added homestead credit. In 2009 and after it will be provided with rate reductions through levy takeovers, an added homestead deduction, and circuit breaker credits. Statewide, both methods provide about the same amount of homeowner property tax relief.

But some counties fare better with one method and some fare better with the other.  In counties where PTRC and homestead credits are relatively high, but the school and welfare share of the tax levy is relatively low, homeowner taxes will increase between 2008 and 2009.  In all counties homeowner taxes will still be lower than they were in 2007. But in some counties, the tax break in 2008 will be greater than the break in 2009.

Links to More Information

To Find: Go To:
The Legislative Services Agency's analysis of the tax shifts created by HEA 1001. See year-to-year changes starting on on page 33. This website: LSA Analysis of Tax Shifts
A Capital Comments column on the "tax echo." This website: "A Tax Echo in 2009" (Capital Comments, May, 2008)

 

Revenue Losses and Taxpayer Savings
The circuit breaker credits are the first property tax credits Indiana has ever offered that are not funded by the state out of its revenues.  The earlier property tax replacement credit and the homestead credit reduced property tax bills, but the revenue lost by local governments was replaced by state funds.  The circuit breaker revenue losses will not be replaced. LSA estimates that local governments will lose $229 million in property tax revenue in 2009, and $524 million in 2010, as a result of circuit breaker credits.

Links to More Information

To Find: Go To:
The Legislative Services Agency's analysis of the revenue losses created by the circuit breakers in 2008, 2009 and 2010, for all local governments. This website: LSA Analysis of Circuit Breaker Revenue Losses
The Legislative Services Agency's estimates of the distribution of state circuit breaker offsets to school corporations, 2009 and 2010. This website: LSA Analysis of School Corporations Circuit Breakers

 

Circuit Breakers and Local Government Interdependence
In counties with significant circuit breaker credits, policy changes in one jurisdiction can affect the revenues of others. This could be a new challenge for the budgeting process.  Where there are lots of circuit breaker credits, each jurisdiction cannot know how much property tax revenue it will receive in the coming year until it knows the rates that will be charged by the other jurisdictions who share its taxpayers.  No one can budget until everyone budgets.  Local officials may need to consult with one another before setting their budgets, something that has not been necessary in the past. 

Links to More Information

To Find: Go To:
A three page explanation of how circuit breakers make local government budgets interdependent, using a taxpayer example. This website: Why Circuit Breakers Make Local Government Policy Decisions Interdependent
The text of HEA1001, Section 148. This website: HEA1001, Section 148.
A Capital Comments column on Section 148 of HEA 1001, and how it could solve the challenge of interdependent budgets. This website: "A Non-binding Recommendation" (Capital Comments, June, 2008)
A 12-step method for estimating circuit breaker credits for local governments. This website: Estimating 2009 Circuit Breaker Credits: A 12-Step Guide for Indiana Local Governments
An application of the 12-step method, estimating circuit breaker credits in Fayette County, Indiana This website: Projections of Assessments, Levies and Tax Rates for Fayette County Governments, 2008-2010

 

Local Option Income Taxes
In 2007 the General Assembly created three new local income taxes, two for property tax relief and one for added public safety funding. Fourteen counties adopted one or more of the new income taxes in 2007. Adopting the the property tax relief income taxes can reduce losses from circuit breakers. They could also be used to offset the 2009 "tax echo" described above.

Links to More Information

To Find: Go To:
An essay on Indiana's local option income taxes, including the 2007 taxes for property tax relief. This website: Indiana's Local Option Income Taxes
A link to Larry DeBoer's streaming video presentation on the 2007 local income taxes, from June 18, 2007 (click on "Local Government Finance") Purdue Extension website: Streaming Video for "On Local Government" presentations.
A Capital Comments column about the 2007 local option income taxes. This website: "Counties Must Decide: Property Taxes or Income Taxes?" (Capital Comments, June, 2007)

 

 

Household Tax Changes
Property taxes will fall.  Sales taxes have increased.  Will household taxpayers pay more or less overall?

Links to More Information

To Find: Go To:
An analysis of the "tax incidence" of HEA1001 for homeowners and renters. This website: Estimated Effects of Indiana's New Tax Reform on the Median Indiana Homeowner and Renter
A link to an Indiana Business Review article on the tax incidence of an earlier version of HEA1001, which includes a more complete description of the method. IBR website: The Impact of Property Tax Legislation on Indiana Households, Spring 2008
A Capital Comments column about the effect of sales tax increases and property tax cuts on households. This website: "Property Taxes Down, Sales Taxes Up" (Capital Comments, February 2008)