|“After all”, said one Statehouse fiscal analyst, “It’s an Olympic year.”
The Indiana General Assembly faces its electoral Olympics in November, so legislators wanted to pass a property tax relief bill during this year’s short session. They did it on the last day, March 14. You can read House Bill 1001 on the General Assembly’s website - www.in.gov/legislative - click on Bills and Resolutions, then type 1001 in the Go to Bill box. Check out the fiscal impact statement for a summary.
We’re expecting bigger-than-usual property tax hikes for homeowners this year and next. Farmland assessments are dropping; inventory taxes are being eliminated; assessments are being trended to match sales price increases; taxes for schools and county welfare are increasing; and the state is capping property tax relief payments to help balance its budget. We expect these new laws and rules to raise the average homeowner’s tax bill by about 5 percent in 2006 and 17 percent in 2007. That’s why legislators wanted to act.
What to do? House Bill 1001 offers three solutions: one for 2006, another for 2007, and still another for 2008 and after.
In 2006 - taxes this year - the homestead credit will rise by 40 percent. The homestead credit is subtracted from homeowner tax bills after tax rates are calculated. The credit increase should reduce the average homeowner’s tax hike to near zero in 2006.
Homeowners will pay less, but local governments won’t lose revenue. That’s because the state reimburses local governments for the amount they would lose. But that’s the downside of this kind of tax relief. The state must pay more of its revenue to local governments. The added homestead credits will cost about $100 million in 2006. The state’s budget is still struggling to recover from the last recession. Balances are lower than we’d like. This will make them lower still.
In 2007, the homestead credit snaps back to its old level. But the homestead deduction will increase from $35,000 to $45,000. The deduction is subtracted from the assessed values of houses before tax rates are calculated. The larger homestead deduction should more than offset the drop in the homestead credit, so the average tax bill increase will be about 15 percent instead of 17 percent in 2007.
Higher deductions make assessed values lower, and this means tax rates must be higher to raise the same revenue for local governments. The higher tax rates mean higher tax bills for taxpayers who don’t get the deduction. This means about $100 million in taxes will shift from homeowners to businesses in 2007. Businesses get tax cuts from the other changes in 2007. Now these tax cuts will be smaller.
In 2008, the homestead deduction reverts to $35,000. After that, the bill offers a third kind of relief. Tax payments will be limited to 2 percent of assessed value for homeowners in 2008 and for all taxpayers by 2010. This means we’ll take the taxpayer’s payments after credits and deductions and divide by the property’s assessed value before deductions. The maximum a taxpayer would have to pay would be 2 percent. Lake County is offering this tax break already, and most of the taxpayers who would be affected are in Lake, Marion and St. Joseph counties. In a third of the counties, no property owners would be affected at all. This limit is called a credit, but unlike the homestead credit, the state will not reimburse local governments for their lost revenue. The locals will have to make do with less.
This is our tax triathlon. Over the next three years, we’ll try three kinds of tax relief. Each provides a different answer to the question: Who should take the hit? Should the state pay more tax relief from its budget? Should businesses be made to pay more, so homeowners can pay less? Should local governments be told to spend less? Or, should we forget tax relief, and let homeowners pay higher taxes?
We haven’t fixed the property tax problem. Homeowner tax increases will still be big in 2007. Legislators have promised to look at more comprehensive solutions during next year’s long session. That’s not an Olympic year, but tax reform may require Olympian efforts from our legislators.