When Indiana legislators passed last year's property tax reform bill, they made the most widespread changes in government finance that had been seen in the state since the 1970s.
According to Purdue economist Dr. Larry DeBoer, many of the implications of new legislation haven't even been felt yet.
"We're going to be working this out for many years to come," DeBoer told a crowd of about 50 gathered at the Kosciusko County Courthouse Thursday.
DeBoer spoke at the Kosciusko County Council meeting about how the new tax legislation and current recession will affect local government.
Statewide, DeBoer said, the new tax bill will reduce the amount of property taxes paid by homeowners, but it also will leave local governments with less property tax revenue.The general assembly passed the property tax reform bill called House Enrolled Act 1001, in March 2008. In 2008, the bill:
- Increased the state sales tax from 6 percent to 7 percent.
- Added homestead credits to reduce homeowner taxes by about one-third as tax bills went out.
- Transferred the duties of township assessors to counties and eliminated most township assessor offices.
- Required a referendum for capital projects.
DeBoer said bigger changes take effect in 2009 and 2010 when:
- The state will take over school general funds and county welfare funds, eliminating those property tax levies and adding $2.8 billion to the state budget.
- Most state property tax replacement and homestead credits will be eliminated.
- Homeowners will receive new 35 percent homestead deductions.
- Circuit breaker caps will be placed on property tax bills.
- The General Assembly will consider a second vote on amending the circuit breaker caps into the Indiana Constitution. If the resolution passes, it will go to a voter referendum in November 2010.
The circuit breaker credit is where many local municipalities will lose revenue. The circuit breaker credit limits a property owner's tax liability to a percentage of the gross assessed value of his or her property. In 2008, the cap was 2 percent for homeowners. In 2009 it is 1.5 percent for homesteads, 2.5 percent for other residential property and farm land and 3.5 percent for nonresidential real property and personal property.
From 2010 on, the caps are 1 percent for homesteads, 2 percent for other residential property or farmland and 3 percent for nonresidential real property and personal property.
DeBoer illustrated how the new homestead deductions and circuit breaker credit work.
In 2010, a homeowner whose property has a gross assessed value of $120,000 will receive the homestead standard deduction of $45,000, leaving $75,000 of taxable property value. Then, the new 35 percent supplemental homestead deduction will be applied, reducing the amount by another $26,250. After the mortgage deduction, for which DeBoer said most homeowners qualify, the homeowner will end up with $45,750 of taxable assessed value.
If the tax rate in that homeowner's county was 3 percent, he or she would owe $1,373 in property taxes. However, with the 1 percent circuit breaker in effect, the homeowner would only pay $1,200, receiving a credit of $173.
In Kosciusko County, the average property tax bill decreased by 27.8 percent from 2007 to 2008. However, DeBoer said bills will likely increase in 2009 because the old homestead credits will begin to be eliminated. Still, he said, most property tax bills will probably be lower than they were in 2007.
DeBoer said, in the past, the state paid local governments the revenue they lost from property tax deductions. The circuit breaker credit, he said, will not be funded by the state.
"This is the first time the state has given a tax credit without replacing revenue for local government," DeBoer said. "That means local government is going to take the hit."
Local municipalities where property tax rates exceed the caps will lose revenue. DeBoer said losses are divided among local jurisdictions according to each jurisdiction's share of the property tax rate, but, when one jurisdiction changes their tax rate, the amount of loss each other jurisdiction is allotted also goes up.
"So, no one can budget until everyone budgets," DeBoer said. "The question is, how are we going to do that?"
A section of HEA 1001 included a provision for county councils to review the budgets of municipalities within their counties and issue non-binding recommendations. DeBoer said this could develop into a coordinating role where circuit breaker credits are estimated at the proposed tax rates and calculations are made to see where shortfalls will occur. DeBoer said he expects that each county will come up with a system which works for them. "But, it's really a technical nightmare," he said.
DeBoer said Kosciusko County will likely not feel the affects of the new tax legislation as sharply as some other counties around the state. "Kosciusko County is not a place where tax rates are high," he said.
Circuit breaker credits in Kosciusko County in 2009 are estimated to account for less than one-tenth of a percent loss in the total county budget. By 2011, circuit breaker losses to the county are estimated to account for 0.2 percent of the total budget, or about $162,003.
The county estimated to take the hardest hit from the circuit breaker is Delaware County, where it is estimated the circuit breaker will account for a 13 percent loss by 2011.
To help mitigate some of the losses, the state is allowing counties to raise a local option income tax. Kosciusko County chose not to adopt a LOIT this year. Statewide, only 19 counties adopted a LOIT for 2008 and 2009.
DeBoer said the current economic recession will likely spell more bad news for local government tax units.
"The perception is that we're in for tight budgets and I think there's good reason to believe that," DeBoer said.
He said the recession will slow the growth of local government revenue. The amount local governments are allowed to increase their tax levies each year is limited by something called the Property Tax Maximum Levy Growth Quotient, which is based on the growth in personal income statewide. When the economy is ailing and people lose jobs, total personal income goes down and local governments' ability to raise more money will follow.
DeBoer also said this recession differs from past recessions in that it is causing a sharper decrease in home values. Indiana's property tax reform included annual trending of property values to determine tax rates.
"For the first time ever, property taxes are vulnerable to recession," DeBoer said.
Local income tax revenue is also vulnerable. The LOIT is based on the same data as state income taxes, but with a one-year lag.
"This year, they're going down partly because of loss of jobs and income and partly because of loss in capital gains," DeBoer said. "So, the state will suffer income tax loss this year and next year it will affect the LOIT."
