Property tax reform in Indiana

1
Property tax reform in Indiana

• V264 Class 29
• April 28, 2009

2
Overview

• Property tax reform legislation approved by
  legislature in 2008
• Elements of legislation
• Some issues raised, effects of property tax reform

3
Background

• Property tax crisis in Indiana
• Governor Daniels property tax proposal on
  October 23, 2007
• Introduced in legislature as House Bill 1001
• Bill passed (with some modifications) by
  legislature

4
Elements of proposal

• Increased homestead credit for 2008
• Cap on property taxes
• Other taxpayer relief
• State takeover of certain local costs
• Increase in sales tax
• Local referenda on new capital projects
• Assessment

5
Increased state homestead credit for 2008

• Temporary increase in state funds to reduce
  property taxes for homeowners in 2008, until
  other provisions take effect

6
Cap on property taxes (circuit breakers)

• Limits on property taxes as percent of assessed
  value
• 1 percent limit on owner-occupied homes
• 2 percent limit on rental properties
• 3 percent limit on other businesses
• Phased in for 2009, in place 2010
• Proposed amendment to include in state
  constitution

7
Other taxpayer relief

• Limits on property taxes for seniors with lower
  incomes
• Increased property tax deductions for seniors and
  disabled with lower incomes
• Increased renters deduction from 2,500 to
  3,000
• Increased Earned Income Tax Credit for low-income
  taxpayers from 6 to 9 percent of federal EITC

8
State takeover of certain local costs

• Remaining portion of local school operating
  expenses
• Child welfare levies
• Hospital care for the indigent
• Pre-1977 police and fire pensions
• State incarceration of juveniles
• A few small state property taxes

9
Increase in sales tax

• Increase in state sales tax from 6 percent to 7
  percent

10
Local referenda on new capital projects

• Provides for referenda on new capital projects
  with amounts over certain minimum thresholds
• Requires petition of voters for referendum

11
Assessment

• Eliminates township assessors in all but a small
  numbers of the largest townships (with greater
  than 15,000 parcels)
• More stringent standards on assessment practices

12
Issues raised by legislation

• Shifts in tax burden
• Effects on local government spending, services
• Federal income taxes
• Local government competition

13
Shifts in property tax burden

• Relatively higher property tax burdens for rental
  properties, other businesses
• Proportionately higher property tax burden for
  renters versus homeowners
• Higher property tax burden for businesses
• Except that shift from property tax overall to
  sales tax decreases burden, at least initially

14
Shifts in overall tax burden

• Shift from property tax to sales tax
• Sales tax considered a regressive tax,
  lower-income persons pay higher proportion of
  income in sales tax
• Some shift in tax burden to those with lower
  incomes?
• Some shift in tax burden from businesses to
  individuals?

15
Effects on local governments

• How much revenue will be lost by local
  governments?
• Will local governments be able to continue to
  provide current level of services?
• Will cutbacks in local services be required?
• Will this result in increased local user fees?
• Will counties increase Local Option Income Taxes
  to provide more revenues?

16
Increases in federal income taxes

• Property taxes deductible on federal income taxes
• Reduction in property taxes will result in
  lowered deductions
• Homeowners will pay higher federal income taxes

17
Increased competition for non-residential
development

• Higher tax rates on non-residential property will
  likely increase competition for non-residential
  development