Step One: For decades prior to 1998, Indiana had given homeowners a tax break by under-assessing houses relative to business property. The Town of St. John challenged this practice, and the Supreme Court required assessments based on market value.
Step Two: In 2002-03, reassessment was based on market value and tax bills on older homes jumped. The General Assembly provided about a billion dollars in property tax relief to ease the pain.
Step Three: The General Assembly found this level of property tax subsidy unsustainable for the State budget and decided to cap it. According to Prof. DeBoer, the cap accounts for about 4% of the recent 24% increase.
Step Four: Part of the 2002 tax reform with the huge property tax subsidy was elimination of the inventory tax. The last 51 counties eliminated their inventory taxes this year. (Other counties had done so in prior years.) The inventory tax shifted to other taxpayers and hit particularly hard in places, such as Indianapolis, with a lot of inventories. On average, the inventory tax reduction accounts for another 4%.
Step Five: Trending. Trending requires assessors to keep up with assessed value. In the past few years, assessed values were to be based on what a property was worth in 1999. This year, residential property values were to play catch up by going from 1999 levels to 2005 levels. Business property values were already subject to trending and, therefore, the changes in assessed value for business property values were not as dramatic. In Marion County and some others, however, business assessments were not trended. According to Prof. DeBoer, trending accounted for about 10% of the 24% statewide increase.
Step Six: Rising local tax collections account for about 6% statewide. Places with big government construction projects have higher increases and those without tend to have lower increases.
Homeowner tax bills are increasing mostly because of tax shifts, from businesses to homeowners, and from the state budget to local taxpayers. In most places, big homeowner tax hikes are not the result of large increases in tax collections. Big increases in government spending are not the main problem.
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Property assessment is the way we divide up the cost of local government among taxpayers. Market-value assessment says that homeowners should pay more than they did under our old system. Homeowners don’t think that’s fair.
Perhaps it’s time to step back from the year-to-year tax crises and ask ourselves, “What is a fair way to divide up tax payments?” Perhaps that’s one topic the governor’s new commission will take up. If so, the question will be, “Can we agree on what’s fair?”