Report of the Indiana Fair Market Value Study
Presented to the
Interim Study Committee on
Real Property Assessment Practices
Indiana General Assembly
State Board of Tax Commissioners
Fair Market Value Study
Larry DeBoer, Project Director
December 10, 1996
This is the summary of the research project on market value assessment established by the Indiana
General Assembly in 1993. Public Law 63-1993 directed the State Board of Tax Commissioners
to "conduct a study to determine the impact of converting the current property tax assessment
system to a system based on fair market value." The board assembled the study team of David
Good of Indiana University, Craig Johnson of Indiana University, and Joyce Man of Indiana
University-Purdue University Indianapolis. Larry DeBoer of Purdue University was appointed
PL63-1993 established three areas of study. First, the project was to study "the assessing
systems, including the methodology, structure, and procedure, in other states that use a property
tax assessment system based on fair market value." On September 26, 1996, the project
presented the Interim Study Committee on Real Assessment Practices with a paper titled
"Property Tax Assessment in Indiana and Other States," which detailed the systems used in
market values states and compared them to practices in Indiana.
Second, the project was to "determine the fiscal, legal, and administrative impact on state and
local government." On October 31, 1996, the project presented the Interim Study Committee
with three papers, titled "Assessment Sales Ratio Studies," "The Organization of Local
Assessing Districts," and "Use Value Assessment of Agricultural Land," which detailed three
aspects of the administration of market value systems on the state and local level.
Third, the project was to determine "the fiscal impact on the owners of the various classifications
of property in Indiana." These impacts, commonly known as the tax burden shifts, are presented
in this summary. They include burden shifts among the agricultural, residential, business and
utility classes of property. In addition, this summary presents information on further
administrative and fiscal issues, including the impact of the burden shifts on economic incidence,
their impact on economic development, their impact on capital financing, their impacts on
business tax abatements and tax increment financing districts. Also discussed are the effects of
market value assessment on growth and stability of the property tax base, and effects on Indiana's
property tax controls. Finally, the summary reports the results of a survey of Indiana citizens
about property tax assessment issues.
PL63-1993 also directs the tax board to make "recommendations for the implementation of a
property tax system based on fair market value." Recommendations will be reported on
December 10, 1996, under separate cover.
These reports fulfill the requirements made of the study by PL63. By mid-January the supporting
technical documents for this summary will be available. By March, data and analyses for
additional counties should be complete. In addition, the General Assembly may consider policy
changes during the 1997 session which will affect tax burdens, tax administration and fiscal
capacity. The study team stands ready to use the information, techniques and models developed
for this project to assist in the analysis of future policy proposals.
Tax Burden Shifts Among Property Classes 4
Comparison to Ohio: An Independent Check on Sales Disclosure Results 10
Residential Real Estate 11
Who Bears the Burden of the Property Tax? 14
How Do Business Property Taxes Affect Firm Location and Expansion? 16
Debt Issuance and Management 17
Tax Increment Financing 20
Property Tax Abatements 21
Assessed Value Growth and Stability 22
Property Tax Controls 23
A Survey of Indiana Residents 24
Appendix: Methodology for Calculating Tax Burden Shifts 27
The foundation for all of this analysis is the data on selling prices, true tax values and property
In PL63-1993 the General Assembly required that the selling price for all non-exempt real estate
transactions be provided to the State Tax Board through the Sales Disclosure Form. The
purchasers of real estate were required to answer several questions about the buyer, seller, the
identification of real estate, the nature and conditions of the transaction as well as its net sale
price. This process led to the collection of information on approximately 380,000 transactions.
These transactions occurred at approximately the time in which the appraisals for the 1995
general reassessment were occurring. They needed to be matched to our second primary data
source, the computerized property record card data base which is maintained by either township
or county assessors. Property record card data contain measures of the physical characteristics of
parcels used in assessment under Indiana's current system.
To some extent, the data collection process replicated a part of a system that would have been
used under market value assessment to establish market values in a particular jurisdiction. A
number of problems emerged. First, information on sales disclosure forms was not validated after
the forms were completed by buyers and sellers. About ninety percent of the sales disclosure
forms lacked some crucial piece of information on identification, selling price or condition of sale.
Second, the physical characteristics of the parcel at the time of sale had to be matched with its
characteristics as assessed on the property record card. It is important that this match be
validated, since it is quite common for the characteristics of the parcel to change near the time of
sale, altered either by the old owner or the new one. Third, as parcels are discarded for lack of
information or lack of matching characteristics, the sample of sales may become unrepresentative
of the population of parcels. Procedures were established to remedy these three problems,
including elimination of problematic sales and parcels, and weighting the sample using statistical
methods so that it better reflected the parcel population.
Revaluing all the parcels in a county is a major undertaking. Revaluing all the parcels in the entire
state is a very major undertaking. To keep the work manageable, we constructed a stratified
sample of twenty counties representative of the state both geographically and by county type
(urban, suburban or rural). Our choice of counties was limited by several factors. The county had
to be willing to cooperate with the study. The county's computer vendor had to be willing to
cooperate. Many counties were late in completing their reassessments. Some computer vendors
were unwilling to expend any effort in providing us with data until all of their regular customers
(the county assessors) had completed their work. The counties in our sample are: Brown,
Crawford, Decatur, Dekalb, Floyd, Hamilton, Harrison, Jay, Jennings, Johnson, Kosciusko,
Marion, Morgan, Ripley, Scott, Shelby, Starke, Vanderburgh, Wabash and Wells. These 20
counties comprise approximately one quarter of the parcels in the state and should provide a good
basis for the analysis of within and between class tax burden shifts. We are in the process of
obtaining and converting data from many more counties to be used in further analysis.
Tax Burden Shifts Among Property Classes
A fundamental purpose of this study is to estimate the shifts in the burden of the property tax
should Indiana move from its current true tax value system to a fair market value assessment
system. This section describes estimates of how tax burdens might shift among four groups of
taxpayers: owners of agricultural, residential, commercial/industrial, and utility property.
Methodology. The methodology for estimating tax burden shifts is discussed in more detail in the
appendix to this summary. Briefly, residential, agricultural, commercial and industrial real
property characteristics from property record cards were compared to sales prices from sales
disclosure forms. Agricultural land assessments also were estimated using a use value assessment
formula patterned after those of other states, and the results compared to existing assessments.
These sales comparisons allowed calculation of assessment sales ratios by property class. The
inverses of these ratios are multipliers, that is, the number which multiplied by current assessed
value gives an estimate of market value. Data from personal property returns was used to
estimate the distribution of depreciable property by age and expected life. This allowed
simulations of several policy alternatives for personal property. The tax levy is assumed to remain
the same, meaning the simulations are "revenue neutral." This levy was allocated to property
types by shares in assessed value under each system, and the resulting levies by property type
were compared to show the burden shifts.
Assessment Sales Ratios. Assessment sales ratios were calculated for fourteen property types. A
selection of median ratios--on a true tax value basis (assessment ratios times three)-- are shown in
the table. The lower the assessment sales ratio, the more assessments will rise in a switch to
market value assessment. Among real property, agricultural property under market value
assessment, and residential property have the lowest ratios. These properties would see the
largest increases in assessments. Commercial, manufacturing and agricultural property under use
value assessment have the highest ratios. These would see the lowest increases in assessments.
Among personal property, the "small" change in personal property assessments, described below,
produces the smaller increase in personal property assessments. The "large" change for other
personal property, and the move to unitary assessment of utility property, produce the larger
increases in assessments.
These changes are significant because those properties with smaller ratios require larger increases
in assessments to reach market value, and so will probably pay a greater share of the tax levy
under a market value system. Properties with higher ratios require smaller market value increases,
and so will probably pay a lesser share of the property tax. Below are six scenarios which use
these ratios to estimate tax burden shifts under market value assessment. They are designed to
show a range of possible choices policy makers might make within a market value system.
Median True Tax Value Sales Ratios for Selected Classes of Property
Scenario 1. Baseline. The baseline scenario assumes that residential, commercial and industrial
land and structures are assessed based on market value, that is, they are valued at their predicted
sales prices. Agricultural land is assessed based on a use value formula. Personal property true
tax value assessments are unchanged. Residential deductions and exemptions, most of which are
denominated in fixed dollar amounts, are assumed not to change. Business abatements and other
deductions, most of which are denominated as percentages of assessed value, are assumed to
increase in proportion with the rise in assessed value.
The baseline scenario is in no way a recommendation, nor is it a prediction of how Indiana's
assessment system will eventually look. It is merely a convenient starting point to which other
scenarios can be compared.
In this scenario and all others, virtually all classes of property see assessed value increases. What
counts for changes in taxes paid by each group, however, is the property's increase relative to all
others. A taxpayer's share of the tax levy is approximately his or her share of assessed value. If
market value increases a property's value by more than those of other properties, it will make up a
larger share of total assessed value, and hence will pay a larger share of the levy. This means that
in the first scenario table, the decline in agriculture's tax payment does not mean that agriculture's
assessed value declines. It increases, but less than that of residential property, so agriculture's
share in the total levy decreases. The table shows the median change in the tax levy borne by each
group of property owners, that is, the change for the county at the mid-point of our sample of
counties. The table also shows the maximum and minimum changes among our sample of
As might be expected, the first scenario produces a marked shift in property taxes towards
residential property owners, and away from owners of all other property types. The tax declines
for business and utility owners are especially large. Residential property assessments require the
largest increase to reach market value, so the residential share in assessed value increases
considerably. Personal property, which is primarily commercial, industrial and utility equipment
and inventories, is assumed to be unchanged from current true tax value assessments (they
increase three fold if assessments are moved to 100 percent of market value, rather than one-third). The shift towards real property taxpayers, primarily homeowners, is like that in the
reassessments since 1980. Also, agricultural land is assessed at its use value, which produces
average land assessments well below market values.
Homeowner deductions remain unchanged, because they are denominated in fixed dollar amounts,
so they become less significant relative to new, higher market values. This causes a further
increase in the residential share of taxes.
Scenario 1: agricultural use value,
constant deductions, no personal property change.
Percent Changes in Net Levies Paid by Property Type
In every county in our sample, this scenario showed homeowners with tax increases while other
property owners saw tax decreases. There is a considerable range in the size of these tax changes,
however, particularly for homeowners. In suburban counties, were a large portion of property is
residential, the tax increase for homeowners is smaller. With much residential property, a shift of
taxes to homeowners is shared more widely, so that each homeowner bears a smaller share of the
Scenario 2. Highest and Best Use for Agricultural Land. The second scenario keeps all the
assumptions of the baseline, except that agricultural land is assessed based on its highest and best
use value. That is, farm land's predicted sales price including potential development effects is
taken as its assessed value.
Scenario 2: agricultural highest and best use value,
constant deductions, no personal property change.
Percent Changes in Net Levies Paid by Property Type
There is still a large shift in taxes to residential property, though the median shift is about 8
percentage points smaller than in the baseline scenario. Agricultural property owners see a
substantial tax increase, where in the baseline scenario under use value assessment agricultural
taxes fell. Business and utility taxes again fall, by more than in the baseline scenario, because
more taxes shift to agriculture.
Again, in every county agricultural and residential property saw increases; business and utility
property saw decreases. In urban counties the increase in agricultural taxes was enormous--a
maximum of 259%--because urban development opportunities increase land prices. The increase
in agricultural taxes in suburban counties was greater than in rural counties, both because
suburban land prices are higher, and because in rural areas there is more farm property, which
spreads the burden of farm tax increases more widely.
Scenario 3. Proportional Increases in Residential Deductions. The deductions and exemptions
that apply principally to residential property--the standard deduction and mortgage deduction are
the most important--are increased to maintain the same proportion of deductions to residential
assessed value as currently exists.
At the median, a proportional increase in residential deductions reduces the shift to residential
property to 31 percent from 39 percent in the baseline scenario. The increase in residential
deductions reduces the tax cuts to other sectors. Business and utility taxes still decline
substantially in every county in the sample; in some counties, agricultural taxes increase slightly.
Scenario 3: agricultural use value, proportional
homeowner deductions, no personal property change.
Percent Changes in Net Levies Paid by Property Type
4. A "Small" Change in Personal Property Assessments. The fourth scenario keeps all the
assumptions of the baseline, except for a change in personal property assessment. The "30%
floor" is eliminated. Firms are assumed not to be required to value their depreciable personal
property at a minimum of 30% of acquisition cost, but are taxed on the fully depreciated value of
their property. In addition, the 35% inventory exemption is eliminated. Firms are assumed to pay
taxes on the full value of their inventories.
This "small" change in personal property assessments has little effect on overall burden shifts.
Tax increases for residential property are slightly lower; decreases for business and agricultural
property slightly smaller. Utility property sees a bigger tax break, because the elimination of the
30 percent floor dominates in an industry with relatively few inventories.
Scenario 4: agricultural use value, constant
deductions, "small" personal property changes.
Percent Changes in Net Levies Paid by Property Type
Scenario 5. A "Large" Change in Personal Property Assessments. The fifth scenario keeps all
the assumptions of the fourth--baseline real property assessments, elimination of the 30% floor
and the 35% inventory adjustment--and adds three more. Remaining life is calculated based on
the higher percentages used in Ohio. Property is distributed among the four life pools based on
estimated service life, not federal tax life (which includes accelerated cost recovery depreciation).
Past acquisition costs are increased to account for inflation--a practice similar to increasing the
construction costs used to value structures in a reassessment.
Scenario 5: agricultural use value, constant
deductions, "large" personal property changes.
Percent Changes in Net Levies Paid by Property Type
The median residential tax increase is nearly cut in half under this scenario, and business tax cuts
are also reduced by about half. Utility taxes increase, while they decreased in the baseline
scenario. Unitary taxation is estimated to greatly increase utility assessments.
Scenario 6: All Changes from Baseline. Under this scenario, farm land is assessed at its highest
and best use, homeowner deductions are increased in proportion to assessment increases, and the
"large" personal property assessment changes are made.
Scenario 6: agricultural highest and best use value, proportional
homeowner deductions, "large" personal property changes.
Percent Changes in Net Levies Paid by Property Type
The median increase in residential taxes is cut to 4.5% in this scenario. There is still substantial
variation among counties, but for the first time there are counties where homeowner taxes fall
slightly. Business taxes still decrease, though by much less than in the baseline scenario. Utility
taxes increase, again because of unitary taxation. Agricultural taxes increase because land is
assessed at its highest and best use value.
Homeowner Taxes. A survey of 534 Indiana residents taken in October and November, 1996, found that the average property taxpayer paid $1,316 in property taxes. This figure is used to put the median, minimum and maximum percentage increases in homeowner taxes into dollar terms.
Taxes and Tax Changes from Median Payment of $1,316, by Scenario
In the baseline scenario the average property taxpayer in the median county would see a tax
increase of $509, from $1,316 to $1,825. In the county with the minimum increase, the tax hike
would be $189. In the county with the maximum increase, the tax hike would be $760. Other
scenarios show generally smaller increases. In scenario 6, which includes the biggest increases in
farm, business and utility assessments, the median homeowner tax hike is $59, the maximum is
$321, and the minimum shows a tax decrease $29.
Comparison to Ohio: An Independent Check on Sales Disclosure Results
Market value study personnel and tax board employees visited Sandusky County, Ohio, in
November 1996, and gathered a random sample of 266 Ohio property record cards, as an
independent check on the results from Indiana sales disclosure data. Over the following weeks
these parcels were priced under the true tax value system, as if they were located in Indiana. The
results allow a comparison of Indiana's true tax value assessments and the assessments done in a
market value state.
For this part of the study it was necessary to identify a county with a mix of residential,
agricultural and commercial/industrial property. Sandusky County met the criteria and, with the
cooperation of Ohio officials, was selected for study. Sandusky County has an agricultural base
and several municipalities with commercial and industrial properties; Kosciusko and Scott
counties in Indiana are similar. Sandusky County officials provided access to their records,
computer system and field appraisers. Their history indicated a sound assessment practice.
Median Indiana/Ohio ratios thus represent the relationship between Indiana true tax values, as
determined by tax board expert assessors, and Ohio market values, as determined by the Sandusky
County assessor (in Ohio, the county auditor acts as the supervisor of assessments). The
agricultural comparisons used the market value of agricultural land, not the use value. The
following table shows the results.
Ratios of Indiana True Tax Values to Ohio Market Values,
266 Sandusky County Parcels
No. of Parcels
Disclosure Median Ratio
The correspondence is not perfect, of course, but the two commercial ratios and the two
residential ratios are nearly the same. In both the Indiana/Ohio ratios and the Indiana sales ratios,
the commercial and industrial property ratios are higher than the residential property ratio, which
is higher than the agricultural property ratio. As might be expected, industrial property shows the
biggest difference, due perhaps to the small sample size in Ohio, the small number of Indiana
manufacturing sales, and the wide variety of property included in the category.
The Ohio study not only provides supporting evidence for the assessment-sales ratios determined
from Indiana sales disclosure data, it shows reasons why Indiana true tax values are generally
below market values. It became evident that the Ohio market approach included additional
factors that the current true tax value system ignores. For example, in Ohio the assessment of a
fast food chain restaurant would include its franchise value, while a parcel with similar
characteristics and location with no franchise connections would be valued substantially lower.
Indiana's system would value both restaurants the same. In the valuation of an apartment
complex, Ohio's system accounts for the current demand for housing in addition to construction
costs and land values. Indiana's system would not account for housing demand, creating a
substantial difference. The Ohio system also shows substantially lower values on agricultural
structures. Relatively new buildings were valued below the current cost of construction.
Indiana's assessments would be higher. Attributes such as franchise value and estimates of
housing demand introduce elements of subjectivity in market value assessments, which may or
may not ultimately be tested against sales prices.
Residential Real Estate
Criteria for Evaluating an Assessment System. In this section, we describe a set of results from
different analytical models used to assess Indiana's current assessment methods along with some
proposed new methods. To place those results in context, we first describe the criteria for
evaluating the results. These criteria form the core measures of tax policy analysis and serve us
by measuring overall shifts in tax burden. A fair tax provides a socially desirable distribution of
tax burden. There are two traditional criteria characterize fairness: horizontal equity and vertical
Horizontal equity means that "people in equal positions should be treated equally." Or, if two
individuals would be equally well off before taxation, they should also be equally well off with
taxation. We are interested in knowing whether people with the same amount of wealth across
the state will pay the same amount of property tax. The most widely used measure of horizontal
equity is the coefficient of dispersion. This measure is based on the assessment/sales ration for
individual real estate parcels (the amount of assessment, and ultimately tax paid, per dollar of
market value). In an ideal tax system with perfect horizontal equity, all real estate will have the
same value of this ratio. This is impossible to obtain in practice, since it would require the
assessor to perfectly predict the selling price of real estate. While variations in this ratio will
occur, an assessment system which more closely matches the market value of real estate will
produce smaller variability among different tax payers then will a less horizontally fair assessment
system. Formally, the coefficient of variation (COD) measures the average percentage of
discrepancy from the median assessment/sales ratio among a group of tax payers. For single
family residential real estate described at the county level, values for the coefficient of dispersion
of 15% are considered to be quite good. Values in the 20% to 25% range are far more common.
Vertical equity refers to distributing tax burdens fairly across people with different abilities to
pay. In essence, the progressiveness, regressiveness, or neutrality of a tax policy measure the
tax's vertical equity. Vertical equity assesses whether wealthy individuals pay a disproportionate
(high or low) value of the tax. Vertical inequity occurs when the assessment/sales ratio varies
systematically across parcels of different values. A regressive (progressive) tax results if this ratio
decreases (increases) as property values increase. This view of vertical equity is the basis for the
IAAO model of vertical inequity. An alternative conceptualization is to ask if the assessed value
increases more than proportionately or less than proportionately than the sale price increases as
you examine higher and higher valued parcels. This view is the basis behind another group of
models. These models differ in their inherent statistical assumptions and may produce somewhat
different biases toward progressivity or regressivity. These will be discussed along with the
Fairness of Indiana's Current System. There are two ways to view a market value system:
market value as a method, and market value as a standard. The measures of horizontal and
vertical equity discussed in the previous section, when applied to Indiana's current assessment
system view market value as a standard. In effect, we ask, how useful of a predictor, adjusted for
scale, are the assessed values in Indiana today of the selling prices of parcels. As stated
previously, the coefficient of dispersion measures the average percentage of prediction error.
They are considered to be the primary performance measure for how well a market value system
operates. These coefficients of dispersion were calculated for the twenty counties in our sample.
While the median coefficient of dispersion was 30%, high by IAAO standards. However, it is
important to qualify these values by our lack of ability to verify the physical features of the
property at the time of sale. Were observations eliminated which are misrepresented in the
property record card data base, these values would no doubt be lower, perhaps even substantially
lower. Even under these circumstances, these results are interesting because they demonstrate that
true tax assessment appeared to work well in some instances: Four counties had CODs below
25%, one below 15%. These tended to be suburban counties. These suburban counties commonly
have detailed land orders, frequent sales with which to base the land orders, and relatively
homogeneous properties within neighborhoods. The poor performers were all rural and urban
counties, with values as high as 40%. In contrast to the suburban counties, rural counties tend to
have less detailed land orders, while both urban and rural counties tend to have a lot more
diversity making the delineation of neighborhoods difficult. Our results showed the current
system to range from neutral (again performing well in suburban counties), to fairly regressive,
particularly in one rural county.
Several physical characteristics were correlated to the assessment sales ratio. A relationship
indicates that information in the explanatory variable could be used to predict the assessment sales
ratio, and consequently reduce its variability (and lower the COD). We find that older homes are
systematically under-assessed, at approximately .5% per year. This indicates that a 50 year old
home is approximately 30% underassessed relative to a market standard than is a new home. We
find that homes in poor condition, with mobile homes on the lot, are systematically over assessed,
thus explaining one potential source of the regressivity.
Market Value Assessment. In order to determine how much better a market value assessment
system would be, we simulate the CAMA process in three counties: Wells, Hamilton and Brown.
These are three counties with a moderately large amount of data. While there are several possible
modeling strategies, including linear regression with either additive or multiplicative models,
nonlinear regression, adaptive feedback or neural net methods, in addition to a wide variety of
heuristic combinations of these approaches, most comparative studies suggest that a nonlinear
model in which sizes of features enter additively, but quality attributes of those features enter
multiplicatively performs as well as any and is more easily verified by common sense. In addition,
additive disturbance terms describing neighborhood effects are incorporated into the model.
The data were divided into two halves, and market value model estimated using one half.
Predicted values for the other half of the sample were created and used as assessed values. The
resulting COD averaged three points lower when using the estimated selling price rather than true
tax value assessment.
Reliance of Models on Subjective Judgement. One of the motivations for the St. Johns Township
v State Tax Board case was that the belief that the current tax system relied too heavily on the
subjective judgements of assessors, and that these judgements would vary widely. In this section
we examine the extent to which a market value process would lead to assessments that are free
from subjective judgements. There is an expectation that an impartial marketplace allowing
buyers and sellers to compete will generate the one true value which unambiguously represents a
parcels worth. While this theoretical notion has a great deal of political appeal, there are many
factors which suggest that the theoretically perfectly functioning market does not exactly apply to
housing. First, the sale price will not be reproducable, that is, if a house is resold, even quickly
without changes, the second selling price will inevitably be different from the first. This suggests
that even the selling price is not an exact measure of the average value of a parcel over the
assessment period. Second, even if one is willing to accept that the actual selling price is the
correct measure to use for houses that sell, for most parcels no sale will have occurred.
Consequently, even a market value assessment process is inescapably bound by several levels of
judgement the appraiser subjective judgements about what constitute comparable sales must be
made. Are the houses similar enough in style, size, condition, location?
The results from the models in the previous sections do suggest some things that can help reduce
the role that judgements, at least the subjective judgements of individual assessors, play in the
assessment process. They suggest that the single most important variable in the model, after the
gross size of the structure, was the parcel's location. Once included, the importance of other
variables, including the grade, condition and neighborhood quality was greatly diminished. While
this does not suggest that a reduction of the subjectivity can of an assessment process can be
eliminated. It does suggest that a more appropriate place for that subjectivity to take place is in
the definition of homogeneous neighborhoods from which comparable sales will be drawn rather
than fine tuning. This approach lets the average bundle of housing services in a homogeneous
neighborhood be determined in a competitive market by the average selling price. The physical
characteristics and subjective measures would be used only to form adjustments to that value. If
the neighborhood is in fact homogeneous, than these adjustments will not likely be large. This
suggests a shift in the role that the land commissions play in the process from trying to
subjectively set a price for a lot which captures all of the benefits of location (highly subjective),
to one which merely tries to place boundaries around homogeneous neighborhoods or, where
homogeneous neighborhoods are too small to generage sufficient sales, amalgamate
neighborhoods until one of sufficient size can be constructed.
Who Bears the Burden of the Property Tax?
The estimates of tax burden shifts are for the statutory tax liability, meaning the taxpayers that
receive and pay the tax bills. But the statutory taxpayer may not bear the ultimate burden of the
property tax, especially in the case of taxes on business. Business taxes may be shifted to
consumers in higher product prices, or to employees in lower wages and benefits, or they may be
borne by business owners as a reduction in profits. The tax burden after this tax shifting is
sometimes called the economic incidence.
Three views have been advanced over the past century about the economic incidence of the
property tax. The traditional or "old" view contends that the property tax is equivalent to an
excise tax and the tax burden on business property is shifted to consumers. This would make
the property tax regressive, meaning it is borne most heavily by lower income renters. The
"new" view concludes that the property tax is a capital tax which is borne primarily by owners
of capital. Market forces prevent business owners from passing the tax to customers. This
would make the tax progressive, borne by property owners who tend to have higher incomes.
The benefit view argues that the property tax is a benefit tax. Taxes on both residential and
business properties cover the cost of local public services consumed by property owners.
Progressivity or regressivity is irrelevant in this view, since the tax acts as a user fee on public
Each of these views has its uses, and may be correct in particular circumstances. If a single
community such as a county or city raises its property tax rate in order to replace another
revenue loss, so that public services do not change, then the traditional view offers the most
insight. Since taxes remain at lower levels in other places, businesses may choose to locate and
expand elsewhere. This may reduce the supply of goods and services locally, which raises
their prices. Higher taxes are effectively passed on to consumers in higher product prices.
Since one of these products is rental residences, renters bear at least part of the burden of the
property tax hike. The number of job opportunities may fall with the tax hike, reducing wages
and benefits. Employees bear the burden of the tax hike through lower pay. Note that land
owners do not have the option of moving--land is fixed where it is. For this reason, land
owners are thought to bear the full burden of the property tax on land.
If all jurisdictions raise their property taxes at once, or a large, attractive jurisdiction raises its
taxes, businesses will not be able to change their locations to avoid higher taxes. The "new
view" is appropriate in this case. The supply of products or demand for employees will be
unchanged in each locality, so prices and wages will not change. Business owners will bear
the tax burden through lower profits.
Suppose that people can choose where to live according to their preferences for public services
and taxes, and that zoning restrictions require new residents to buy or build houses which add
enough to property taxes to pay for the added services they consume. Then the benefit view is
useful. People who like public services and are willing to pay the taxes required to support them
will live in higher tax and service communities. People who prefer lower taxes and are willing to
give up public services will live in lower tax and service communities.
Research on economic incidence has found that 55 to 70 percent of a property tax change is borne
by property owners, with the remaining 30 to 45 percent shifted to renters of residential or
commercial property. Recent economic analyses suggests that the property tax in the United
States is proportional or slightly progressive. A study of Indiana taxes found that the property
tax is regressive under the assumptions of full or partial tax shifting to consumers in the form
of higher prices. Under the assumption of no forward shifting to consumers, the property tax
is regressive at lower incomes and progressive at higher incomes.
What does economic incidence imply for a shift to market value? In each tax shift scenario a
shift to market value reduces the taxes on commercial and industrial businesses. The
traditional view seems to apply, because Indiana is making a tax change by itself, and it is a
revenue neutral tax change not tied to public service levels. Lower business taxes would
encourage business expansion and location from out of state. This would increase product
supply, lowering prices, and increase job opportunities, raising wages. At least part of the
property tax cut to business would be passed on to consumers in lower or less rapidly
increasing prices, and to employees in higher wages and benefits. Research puts the
percentage of tax changes shifted to consumers in Indiana at 32 percent. Thirty-two percent of
the 25 percent commercial/industrial tax cut in the baseline scenario is about 8 percent. If this
cut is shifted to consumers, most of whom are homeowners, the tax shift to residential
property is cut by about one-fifth, but is still substantial. Renters would benefit from lower or
less rapidly increasing rents as the supply of rental apartments increased.
How Do Business Property Taxes Affect Firm Location and Expansion?
The traditional view of economic incidence assumes that businesses respond to local tax
differences in their location and expansion decisions. For years economists were skeptical, for
research showed that state and local taxes had little effect on the economic growth of states or
However, new research in the 1980s and 1990s has found that state and local business taxes do
have an effect on the economic development. Results have shown that if all state and local
business taxes are reduced by 10%, over time local employment, production, business capital
stock, the number of new branch plants and other measures of business activity increase by
between 1.5% and 8.5%.
Changes in business property taxes appear to have greater effects on economic growth than
changes in other business taxes. The location disincentives of property taxes are strongest for
large firms and tend to decrease with firm size. High property taxes represent a significant
disincentive to firm location in an urban area.
Effects of the business property tax on the business growth of different jurisdictions within a
metropolitan area are far greater than the tax effects across metropolitan areas or states. If a
given small suburban jurisdiction within a metropolitan area raises its tax by 10 percent, it can
expect in the long-run a reduction in its business activity by between 10 to 30 percent. If an
entire metropolitan area or state raises its tax by 10 percent, the estimated long-run effect
would be a reduction of business activity between 1 percent and 6 percent. These estimated tax
effects assume that public services are held constant as taxes change.
If tax cuts are financed by cutting public services important to businesses, the net effect on the
state and local economic development could be negative. If high property taxes are used to
finance public services such as fire and police protection, local schools, highways, water and
sewer lines and other types of public infrastructure, or any other public expenditure except for
welfare, the number of small business start-ups increases, state personal income rises and state
private employment grows.
Manufacturing businesses are more sensitive to taxes than other businesses, because they are
"capital intensive," meaning they have more structures and equipment to tax. Metropolitan
areas with higher relative property taxes tend to attract more labor-intensive industries.
Again, what are the implications of this research for Indiana's potential shift to market value
assessment? If commercial/industrial taxes are cut 25 percent, as in the baseline scenario, the
new research implies that Indiana should see an increase in economic activity--production,
employment, firm locations--of 3 to 15 percent, in the long run (that is, one to six percent for
every ten percent cut, statewide). This is a wide range of estimates. Manufacturing firms may
be most likely to respond to the property tax cut. The scenarios also show a wide range of
commercial/industrial tax cuts, from 15 to 36 percent in the baseline scenario. This implies
the potential for shifting of firm locations within the state, since the response of businesses to
local tax differences is greater than to national tax differences. Counties with smaller business
tax cuts could actually lose business location and expansion to counties with bigger tax cuts.
Debt Issuance and Management
This section looks at the impact of fair market value assessment on local government debt issuance and management. The analysis focuses on the capacity of local governments to issue bonds and support debt payments. The results show that conversion to a market value assessment system will likely benefit local governments that sell property tax-backed debt by strengthening repayment security, increasing credit quality, and encouraging issuance of unlimited tax bonds rather than lease rental bonds. Combined, these effects should result in lower borrowing costs. Also, it is clear that conversion to a market value property assessment system will not, in any manner, jeopardize debt service payments on existing general obligation or lease-backed debt supported by an unlimited property tax pledge.
Local governments in Indiana, like most local governments throughout the nation, rely on the
local property tax base to generate revenue to repay debt issued to finance capital improvement
projects. Local governments can sell general obligation (GO) bonds which are supported by the
full, faith and credit, or unlimited taxing power, of the entire taxing unit. But there are state
constitutional and statutory provisions that restrict the ability of local governments to issue GO
debt in Indiana.
Article 13, Section 1 of the Indiana Constitution limits the total principal indebtedness of any
political subdivision to no more than 2 percent of the net assessed valuation of taxable property
within the taxing unit. The debt limitation applies to 2 percent of net assessed valuation, not 2
percent of true tax value. The constitutional debt limit applies to each municipal corporation
individually, and not in the aggregate to municipal corporations which may cover the same area or
include the same taxpayers. This has led to the establishment of many overlapping municipal
corporations (e.g., school, jail) and special taxing units (e.g., special districts such as fire, library,
parks and recreation, sanitation, and redevelopment authorities) that use the same property tax
base as the general government to finance capital improvements.
Local government property-tax backed debt in Indiana consists primarily of non-GO bonds
because of these debt limits. Most local property-tax backed bonds sold in Indiana are lease
rental bonds. During 1992-1995, more than $2.3 billion in lease rental bonds were sold,
compared to only $218 million in unlimited tax (GO) bonds. Lease rental bonds account for 88
percent of all of bonds sold by local entities in the state. Most general governmental and school
corporation lease rental bonds are repaid directly from lease rental payments that are raised from
property tax revenues.
Lease rental bonds are popular with local governments precisely because they are not subject to the 2 percent debt limit. But the levy of taxes by a school corporation to pay the rent due and payable under the lease is mandatory. Unlike most lease rental bonds sold throughout the nation, Indiana lease rental bonds do not contain an annual appropriation-out clause enabling the government to annually withhold debt service payments.
In effect, such lease rental bonds are structured as synthetic GO bonds. This provides Indiana
lease rental bonds with two additional layers of repayment security that is absent most other lease
rental bonds in the nation. The additional layers of security have been fine tuned over the years so
that, research shows, investors favorably view Indiana lease rental bonds since they exhibit
interest costs no different than GO bonds.
Investors measure the credit worthiness of local bond issues with the debt-to-property value ratio.
This ratio measures the impact of the debt burden on the government's tax base. The estimated
full market value of taxable property is used as a measure of local government wealth and,
therefore, is perceived by market participants to reflect the capacity of the local government to
service its debt. In the municipal securities market, the definition of true tax value in Indiana is
universally interpreted as the estimated full market value of all taxable property in the taxing
district -- but it is not. This is important because a debt issuer's taxable property value, as viewed
by the market, has a direct and significant impact on the issuers debt service (principal and
interest) costs. Specifically, research shows that the higher the debt ratio, the higher the
Market value conversion will result in higher assessed property values, holding the current
assessment ratio constant. This should decrease the debt-to-assessed value ratio by an average of
23.5 percent. In addition, without a modification in the 2 percent debt ceiling, the higher assessed
values under a market value system will be large enough to free up additional debt issuance for
some local governments. This could lead to the sale of fewer lease rental bonds and more
unlimited property tax bonds, which would lower overall borrowing costs.
Credit quality generally refers to the ability and willingness of local governments, including school
corporations and special districts, to repay their debts in full and on time. Credit quality is often
measured with a credit rating from one of the major rating agencies, Moody's Investors Service
or Standard and Poor's. Credit rating agencies use symbols to indicate their appraisal of credit
worthiness. For bonds, Moody's uses Aaa, Aa, A, Baa, B and below to indicate the best to
poorest quality. Bonds rated Aaa to Baa are considered worthy of investing in (investment grade)
and bonds rated below Baa are considered speculative.
A rating seeks to answer a simple question for lenders: What is the probability of full and timely
repayment of principal and interest on this debt obligation? Thus, the credit rating is one of the
most significant determinants of the issue's borrowing cost because it differentiates credit quality.
Higher credit ratings result in lower borrowing costs; lower credit ratings result in higher
borrowing costs. For example, in a recent study, the yield spread between Aaa-Aa rated bonds,
Aa-A rated bonds, and A-Baa rated bonds, was 8 basis points, 27 basis points and 80 basis points,
respectively. On a $20 million twenty-year bond issue, the 80 basis point difference between an A
and Baa credit rating could add more than $2 million to the borrowing costs of the Baa rated
issuer. A small interest rate increase results in a large change in interest costs.
The debt ratio is one of the most important determinants of a credit rating. Moody's Investor
Services publishes annual median debt ratios for debt issuers throughout the nation. The medians
are national ratios that are calculated for types and levels of governments and broken down by
size of government. Most local governments in Indiana have a debt ratio higher than the Moody's
median. This indicates that this influential rating firm views Indiana local governments as having
less ability to pay than most similar governments nationwide.
Market value assessment is projected to produce higher property values than true tax assessment.
Debt ratios calculated with market value in the denominator will be markedly lower than debt
ratios with true tax value in the denominator. This will reduce debt ratios significantly across the
board, and the debt ratios of some governments currently above the Moody's median will drop
below the median.
Research shows that issuers with debt ratios above the median get charged higher interest rates
than issuers below the median. Local governments save money (pay less debt service) if they are
below the median, and lose money (pay more debt service) if they are above the median, and the
farther above the median, the more money they lose (the more debt service expense). If credit
rating agencies regard the new debt ratios as new information on credit worthiness, they would
have to reconsider local ratings. True tax value assessment significantly undervalues property-based wealth in Indiana, and that undervaluation has been transmitted into the undervaluation of
local credit quality in Indiana. This has a significant adverse impact on local issuers in Indiana
since lower credit ratings result in higher borrowing costs.
Credit rating companies may argue against considering new market value assessments as new and
significant information, so as not to require a revision of local credit ratings. They may argue that
even though true tax value was shown as equivalent to fair market value on disclosure documents,
they suspected that true tax property values probably did not really equal fair market property
values, but they did not know whether true tax values undervalued or overvalued fair market
values. They probably could not have known that true tax value assessment undervalued market
property values. For, if the rating companies, and other market participants (e.g., financial
advisors, underwriters, etc.), did in fact know, they had a responsibility to record the accurate
figures onto disclosure documents, and incorporate them into the rating analysis and bond prices.
The revised debt ratios under a market value system should reduce borrowing costs for all local
issuers. The biggest reductions will accrue to issuers that are slightly below the Moody's median;
issuers whose property values increase more than the state average; small issuers that currently
fall between credit quality cracks, such as the 24 percent of school corporation bonds rated below
A, despite the state efforts at credit enhancement. Should the 2 percent debt limit remain, market
value will free up debt capacity for general obligation bond issuance and strengthen the repayment
security of the property tax base. This should reduce the overall costs of borrowing to local
governments, including the additional administrative and issuance costs of setting up and
maintaining special financing authorities and special taxing districts merely to avoid the 2 percent
debt limitation rule.
Tax Increment Financing
This section analyzes the impact of conversion to market value assessment on Tax Increment
Financing (TIF) districts. A change to market value will significantly affect TIF districts, and
overlapping taxing districts, throughout the state. The changes can be adequately dealt with,
however, by adapting the current mechanism for handling statewide general reassessments to a
market value assessment system.
Tax increment financing districts pay for infrastructure improvements which enhance development
with the property taxes generated by the development itself. To set up a TIF district a county,
city or town must designate an area expected to realize significant increases in assessed value
from development. An independent district or authority governed by a redevelopment commission
is usually set up to oversee the TIF district. The commission is authorized to issue bonds, which in
most cases are not subject to state debt limitations or public referendum requirements, to finance
development projects. The authority assumes sole responsibility for debt repayment, but has no
Property tax increment (PTI) bonds are commonly sold to generate development funds in TIF
districts. Incremental property taxes are levied only on the districts new assessed valuation after a
given base year is established. The incremental portion of the tax base is derived from the increase
in net assessed real estate valuation in the district. In addition, PTI bonds, though commonly
secured by incremental real property tax revenues, may also be repaid from depreciable personal
property increments in some cases. Tax increment bonds in Indiana are usually secured by the
issuing jurisdictions' general property tax base, where general property tax revenues serve as a
secondary (back up) source of debt service repayment.
The use of TIF funding has grown rapidly in Indiana during the 1990s. Net assessed value taxed
by TIF districts grew from $44.3 million in 1989 to $476 million in 1995--more than a ten-fold
increase in seven years. TIF net assessed value, as a percentage of the total, grew from 0.2
percent in 1989 to 1.6 percent in 1995.
Reassessment can alter the TIF revenue calculation by changing the assessed values and tax rates
that apply in the district. Under current law, the State Board of Tax Commissioners is required to
make a one-time adjustment to the base assessed value to neutralize any effect of reassessment.
The adjustment is based on a comparison of the changes in net assessed value between the TIF
district and the county. The amount of the TIF base assessed value adjustment is computed by
the County Auditor and certified and approved by the State Board of Tax Commissioners. The
adjustment assures that tax increment revenue will equal or exceed the amount that would have
been produced without a reassessment. It also assures that increases in the assessed valuation of
overlapping taxing districts are not automatically, and inappropriately, captured by the TIF
This TIF base adjustment procedure could be applied upon a shift to market value assessment,
either as is or with modifications. A possible modification would be to derive the increment
assessed value by summing debt service, reserve, and previously planned spending requirements
of the TIF district, and setting the increment assessed value at a level to produce this amount.
Market value assessments may prove to be more volatile than true tax value assessments, with
greater potential increases and decreases in assessments. Decreases in the market value of
property in the TIF district will cause a decrease in TIF revenue.
Property Tax Abatements
Many Indiana counties, cities and towns offer property tax abatements to owners of real and
personal property in order to encourage economic development. Real property abatement values
could markedly change under a market value assessment system. If abatements are set as dollar
values, and as expected market values are greater than current true tax values, abatable property
values will not automatically change, and would decrease as a percentage of gross assessed real
estate. However, the legislature may decide that the dollar amount of the abatement should remain
a fixed percentage of the (expected) assessed value throughout the length of the abatement.
Increases in assessments due to the market value shift would then increase the dollar amount of
The following presents the baseline and two other scenarios that illustrate the likely change in real
estate abatements under a fair market value system. The baseline scenario assumes that
abatements do not rise with the change in assessments. Currently, real estate abatements account
for about 1.4 percent of gross real estate value. If real estate values increase, but real estate
abatement values remain unchanged, abatements will decrease to only .35 percent of total real
estate, a 74 percent decrease.
Two scenarios show what would happen if abatements increased proportionately with business
assessed values. If the abated property is primarily commercial, abatements decrease as a percent
of total real property assessments from 1.4 percent to 0.9 percent, a 35 percent decline. This
occurs because total real property assessments grow faster than commercial property assessments,
and therefore commercial property abatements, especially in urban and rural counties. Where
abated property is primarily industrial, the share of abatements in real assessed value increases 10
percent, from 1.4 percent to 1.55 percent.
Therefore, counties where industrial abatements account for most real property abatements will
see their abatements increase as a percent of total real estate under a market value system. These
counties would most likely be suburban and rural counties, where industrial property probably
accounts for a greater share of abatements than commercial property.
If personal property abatements change in proportion to personal property assessments, the result
depends on what assessment policy changes are made. If the "small" changes are made, personal
property assessments increase little, and the increase is due to changes in inventory assessment.
Depreciable property assessments decline because of the elimination of the 30 percent floor. This
market value approach would reduce abated business personal property throughout the state, in
absolute terms and as a percent of gross assessed business personal property. In contrast, if the
"large" changes are made, abated business personal property valuations increase. Abatements
would increase substantially in absolute terms, but only modestly as a percentage of business
Assessed Value Growth and Stability
Assessed Value Growth. Changes in Indiana real property assessments were simulated for the
1973-94 period as if they were on a market value basis. This was done by developing an index of
the amount of real property in Indiana from existing data, and applying pricing indexes from
market sales and cost data for various classes of property.
The results showed that Indiana real assessed values would have grown faster had property been
assessed under a market value system over this period. With annual valuation--that is, new prices
applied to property assessments every year--average growth under market value would have been
nearly eight percent per year, compared to 6.5% under the true tax value system. Over twenty
years, this difference amounts to about 33% more rapid growth under a market value system.
The biggest growth differences between true tax value and market value appear in the 1970s.
High inflation rates are reflected in double digit percent increases in market values, while true tax
values never rose by more than 5% per year. In the mid-80s declining farm land values actually
reduce market value assessments, so that overall 1980s growth in values is similar between the
As a check on these simulation results, Indiana assessed value growth over the 1961-92 period
was compared to growth in other states. Assessed value was divided by population to account
for differences in economic and population growth among the states. Indiana ranked 28th in per
capita assessed value in 1961, and fell to 37th in 1991. Indiana's growth rates ranked in the lower
third of states in the 1960s, 1970s and 1980s. Indiana's per capita assessed value grew 352%
over this period, about half the national median of 722%. While these results do not control for
policy changes that many states made over this period, they are consistent with the simulation
showing more rapid growth under market value systems.
Assessed Value Stability. Stability is more dependent on the length of the assessment cycle than
on the choice of true tax or market value assessment systems. The standard deviation of growth
rates for the actual true tax value system is 12.4%, while for the market value system with annual
valuation it is only 6.3%. A higher standard deviation indicates less stability, so this implies that
growth under the true tax value system is less stable. However, if reassessment years are
excluded, the true tax value system has extremely stable growth rates, typically varying around the
long term average by less than one percentage point. Further, if market values are updated only in
Indiana reassessment years, the standard deviation for the market value system is greater than that
for the actual true tax value system.
Indiana policy makers know that the length of the reassessment cycle influences the stability of
assessments. The large "reassessment shocks" of 1980 and 1990 caused the introduction of new
tax breaks, like the homestead credit and the standard deduction. One justification for moving to
a shorter reassessment cycle after 1990 was to lessen the size of reassessment shocks.
It appears that most of the instability of assessments in a market value system with annual
revaluation results from variation in farm land values. This is due to the run up of farm land
values during the 1970s and early 1980s, and the radical fall of values in the mid-1980s. In farm
dominated jurisdictions with a market value system and annual valuation, during 1974-82 assessed
value would have risen by 15% to 25% per year. In 1986-88, assessed value would have dropped
radically, from 7% to 25% per year.
As a test of this simulation result, assessed value changes in metropolitan and farm dependent
counties in 12 Midwestern states over the 1971-91 period were compared. Farm dependent
counties show less assessment stability than metropolitan counties in market value states, rising
more slowly or even falling during the land value drop of the 1980s. Further, farm dependent
counties under Indiana's true tax value system appear to show greater stability than farm
dependent counties under market value systems in other states. This is true despite the fact that
most market value states used some form of use value assessment of farm land.
Property Tax Controls
Indiana's property tax controls put a floor and a ceiling on the annual percentage increase in a
civil government's maximum property tax levy. The floor is five percent; the ceiling is ten
percent. To determine where in this range a government's levy increase lies, the annual
percentage increases in assessed value are calculated for the past three non-reassessment years. If
the average of these percentage increases is less than five percent, then the maximum levy rises
five percent. If the average is greater than ten percent, then the maximum levy rises ten percent.
And, if the average is between five and ten percent, the maximum levy rises by that amount. Of
course, local governments are not required to increase their actual levies by any amount--they
may tax at less than their maximum levy limits. Most jurisdictions are at or near their maximum
The great majority of jurisdictions saw five percent increases in their maximum levies in 1995.
Only 8% of counties, 10% of townships and 15% of cities and towns had growth limits greater
than 5%. Overall, about 90% of all jurisdictions are at the five percent floor. Many local
officials, in fact, see the five percent floor as an annual five percent ceiling on their property tax
Market value assessment may or may not affect the working of these property tax controls,
depending on the frequency of reassessments or revaluations. In the current true tax value
system, real property reassessments occur periodically (every four years after 1995-96), and the
calculation of the growth factor excludes the reassessment years. Thus, the growth factor reflects
only the between-reassessment changes in real property assessments. Between reassessments,
real property assessments change only with new construction and land use changes, not changes
in property prices.
Assessed value increased an average of 6.5% annually between 1974 and 1994. Excluding the
reassessment years the annual increase was only 2.5%. This is, in fact, exactly the average annual
assessed value growth experienced by 2,033 Indiana civil governments over the 1992-95 period.
The average annual assessed value growth estimated for a market value system over the same
period is 8%, 5.5 percentage points higher than the current annual average for non-reassessment
years. If revaluation was annual, and this amount was used to calculate the growth factors used in
the tax controls, clearly most jurisdictions would be above the five percent floor, and many would
be above the ten percent ceiling. This depends entirely on the frequency of reassessment and
revaluation. If true tax value assessments were revalued every year, so that no reassessment year
was excluded from the growth factor calculation, most jurisdictions would be above the five
percent floor as well. Market value assessment growth is likely to exceed true tax value
assessment growth over the decades, however.
A Survey of Indiana Residents
In October and November, 1996, the Indiana University Center for Survey Research conducted a
telephone poll, contacting a random sample of 534 Indiana residents. Included were questions
about property tax assessment policy commissioned by the Market Value Study. This section
summarizes the results of this survey. Percentages should be accurate within plus or minus 4.5
percentage points. Percentages exclude those who answered "don't know" and those who
refused to answer.
The Tax Court Decision. Indiana residents were asked whether they agreed with the Tax Court
that "the current system for assessing property is unfair."
72.4% agreed with the court.
16.2% disagreed with the court.
11.4% said they didn't know enough about the decision to answer.
Renters, people who paid no property taxes, younger people and lower income people were more
likely to answer that they didn't know enough. Since these people usually do not pay property
taxes directly, they may ignore news reports about property taxes. Property taxpayers, older
people and higher income people were more likely to agree that the assessment system is unfair.
Business Tax Breaks. Indiana residents were asked whether they favored or opposed property tax
breaks for businesses to encourage firm location or expansion.
60.5% favored business tax breaks for development.
39.5% opposed business tax breaks for development.
There were no significant differences in responses among demographic groups. About three-fifths
of all groups favored business tax breaks for development.
Farm Land Assessment. Indiana residents were asked whether they thought that farm land should
be assessed on it use value for growing crops, or on its potential sale price including any
77.3% favored use value assessment based on the value for growing crops.
22.7% favored assessment based on potential sale price.
There were no significant differences among demographic groups. About three-quarters of all
groups favored use value assessment.
Tax Breaks for Retired People. Indiana residents were asked whether the houses owned by
retired people should be assessed at lower rates than other houses, or whether they should be
assessed at the same rate.
56.4% thought retired people's homes should be taxed at a lower rate.
43.6% thought retired people's homes should be taxed at the same rate as others.
People with incomes above $50,000 a year were less likely to favor tax breaks for retired people;
those with lower incomes were more likely to favor such tax breaks. Perhaps the retired people
that upper income people know are more capable of paying property taxes, while those known by
lower income people are less able to pay.
Business Property Classification. Indiana residents were asked whether they favored the
classification of business property, so that business would be taxed at either a higher or lesser rate
than other property owners. Respondents also could answer that all property should be taxed at
the same rate.
58.8% thought business property should be taxed at a higher rate than other property.
38.1% thought that all property should be taxed at the same rate.
3.1% thought that business property should be taxed at a lower rate than other property.
There were no significant differences by demographic group. About three-fifths of all groups
favored classification with higher assessment ratios and taxes for business property.
Acquisition Based Assessment. Indiana residents were asked to imagine two identical houses, one
recently purchased and one purchased years ago at a much lower price. They were asked whether
the property should be assessed at its current potential sale price, or at the price the owners
originally paid. The former option is current value assessment; the latter option is acquisition
67.2% favored current value assessment.
30.7% favored acquisition based assessment.
2.1% gave another answer.
Renters and lower income people were more likely to favor acquisition based assessment;
homeowners and higher income people were more likely to favor current value assessment.
Perhaps lower income renters are looking forward to purchasing a house some day, and are
concerned about the rising property tax burden that could result if their property appreciates.
What Tax to Raise. Indiana residents were asked which tax should be raised in order to reduce
property taxes, with the option of answering that property taxes should not be reduced if another
tax had to be raised.
2.7% favored the individual income tax.
20.8% favored the sales tax.
25.7% favored the corporate income tax.
28.8% favored some combination of taxes.
22.0% said property taxes should not be reduced if another tax had to be raised.
There was little difference by demographic group. There was no statistical difference between
percentages favoring the sales, corporate, combination or no cut options--each had about a
quarter of the respondents. Very few favored raising the individual income tax.
Additional Results. The survey asked a number of other questions relating to property taxes.
75.8% owned their own homes; 19.4% rented; 4.7% lived under some other arrangement.
Higher income people were more likely to own their own homes, lower income people to rent.
21.4% paid no property taxes; 47.4% paid between $1 and $1,000; 31.2% paid more than $1,000.
Higher income people tended to pay more property taxes, lower income people less.
74.4% believed that taxes should be allocated based on the taxpayer's ability to pay; 25.6%
believed taxes should be allocated based on the taxpayer's use of government services. This did
not differ by demographic group.
Appendix: Methodology For Calculating Tax Burden Shifts
Real Property. Sales disclosure data was matched with property record card data for residential,
agricultural, commercial and industrial property. The relationship between assessments under the
current true tax value system and sales prices is established using statistical methods. These
relationships were expressed as assessment sales ratios, that is, dividing the assessed values by
sales prices for each parcel. The median ratio was then found for each county and property type.
This median represents a measure of the overall relationship between assessed value and sales
price for the county and property type. Inverting this ratio gives a factor, which, when multiplied
by total assessed value of a property type, yields an estimate of the market value of that property
A use value formula was developed for farm land, based on the formula used in many other states.
The numerator estimates farm income per acre by multiplying Indiana average corn yield by the
market average corn price, then by the land's productivity index. Costs as calculated by
agricultural economists are subtracted to give net income. This figure is divided by a rate of
return, which is the sum of the Farm Credit Administration long term interest rate and the
statewide property tax rate relative to the market value of land and improvements. The result is
then adjusted for influence factors. The formula is applied to farm land parcels, summed by
county, then divided by existing assessments to derive a use value farm land multiplier.
Personal Property. For depreciable property, data are available from the State Board of Tax
Commissioners from 1994 audits summed by industry type. Data include the total acquisition
cost for all pools, adjusted cost, true tax value, as well as the breakout of acquisition cost by pool
number for the most recent full year. Also available is the calculation of 30% of the true tax value
and the maximum of calculated true tax value and the 30% minimum.
Property is distributed by expected life using the industry type breakdown, and information from
Ohio on the typical useful life of equipment in each industry. Property is distributed by age based
on the record of investment nationally over the past 25 years, and on tables showing the typical
pattern of property discards. The result is an estimate of the amount of depreciable personal
property assessments in Indiana by useful life and age.
The depreciable personal property model allows simulation of four policy changes which might be
considered movements in the direction of market value under a replacement cost less depreciation
method: eliminating the 30% floor, using reputedly more realistic Ohio remaining life rates,
disallowing modified accelerated cost recovery in setting equipment lives, and adjusting past
acquisitions for inflation. Multipliers are calculated from the model, which, when multiplied by
existing personal property assessments, give estimates of assessed value after policy changes.
Inventories are more straightforward. A policy adjustment that might be considered a move in the
direction of market value assessment is elimination of the 35% inventory valuation adjustment.
The tax board data show that this would increase inventory assessments almost exactly 50%.
Most utility personal property is assessed by the state, with values allocated to counties. In one
scenario, utility personal property is assumed to be assessed like other property, with the 30%
floor and the 35% inventory adjustment eliminated. The multiplier for utility property is less than
one in this case (that is, the assessed value after policy adjustments is less than currently), because
little utility personal property is inventories.
The second utility personal property scenario involves "unitary taxation." Many states assess
utilities by estimating the value of the entire company, then allocating a share of this value to the
state. The tax board obtained unitary values for some Indiana companies from other states, and,
when allocated to Indiana and compared to current assessments, this allowed calculation of
multipliers simulating the adoption of unitary taxation. In most counties the multiplier was
greater than two, meaning utility personal property assessments would more than double with
Calculation of Tax Burden Shifts. Gross assessed values by property type were summed from
property record card parcel information. This is done twice in each county, for tax districts in
incorporated cities or towns, and for tax districts in unincorporated districts. This is done because
property types are not distributed proportionately among incorporated and unincorporated county
areas. In particular, most farm land is in unincorporated areas. Since unincorporated areas have
generally lower tax rates, farm land owners pay a smaller share of the tax levy than their county-wide share of assessed value would imply. Deductions are divided into real and personal
residential and business categories, then subtracted from gross assessments. The net tax rate is
then multiplied by the net assessed values in each property category, and the district results are
summed, to estimate the part of the levy paid by owners of each property type.
Gross assessed values by property type are then multiplied by the appropriate multipliers to give
estimates of market value. Deductions are again subtracted. The dollar value of business
deductions is adjusted upward, since so many are calculated as a percentage of assessed value.
The dollar value of residential deductions is not adjusted, since most are denominated in dollar
amounts. The incorporated and unincorporated area levies are divided by the respective total net
assessed values to derive two district tax rates. These rates are multiplied by the net assessments
of each property type, and the district results summed, to give the part of the levy paid by each
property type under market value assessment.
The percentage change in the levies from the true tax value to market value systems by property type show the tax burden shifts.