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Property Tax System Returning to Normal After Years of Chaos


by Larry DeBoer
Purdue University

Published: Friday, July 14, 2017

The following is from Larry DeBoer, professor of agricultural economics at Purdue University.

Think of the changes in the Indiana property tax system between 1998 and 2010. The Indiana Supreme Court threw out the assessment system in December 1998. We started using market values for the reassessment in 2003. In 2002, we changed the formula for calculating the maximum property tax levy, and created a huge deduction for homesteads. In 2004, we amended the Indiana Constitution to allow those big homestead deductions. In 2008, we increased them even more.

We phased out the property tax on inventories from 2003 to 2007. We began annual adjustments of property assessments in 2007, which we call trending. We eliminated the property taxes for school general funds in 2009. We put property tax caps in the Constitution in November 2010. That's a partial list.

In the midst of all this policy chaos, we had the worst recession since the Great Depression, so bad that it reduced the value of property. Our new assessment system caught that decline in property values, so assessed value actually decreased for a couple of years.

Practically every year for 12 years, policy changes or economic disruptions rocked Indiana's property tax system. By the end of it all, we had no idea what "normal" looked like. In a normal year, how much would the assessed value of property grow? How much would the tax levy increase? How would tax rates and tax cap credits change? There was no way to know.

We've had fewer policy changes since 2010. Now, two economic measures that affect our tax system are back to normal.

In the 20 years between the recession of 1981-82 and the Great Recession, Indiana home prices increased about 4 percent per year, on average. They fell by a point a year during the recession, but in the past two years they're back to 4 percent increases. Trending captures the home price changes in assessments, and homesteads are a third of taxable assessed value.

The maximum levy restricts the amount that Indiana local governments can raise with the property tax. The assessed value growth quotient (AVGQ) allows the maximum to increase each year by the 6-year average percent change of Indiana non-farm personal income. From 2011 to 2016, the AVGQ included the income change for 2009, which was negative 3 percent. That was the Great Recession at its worst. It's the only negative number in the income series in the past 60 years.

That negative number dropped out of the AVGQ calculation for 2017, and the allowable growth rate jumped from 2.6 percent to 3.8 percent. We'll see a number near 4 percent for 2018 too.

With these two indicators back to normal, 2017 may give a clue about what normal looks like for Indiana property taxes. Statewide gross assessed value increased by 2.2 percent in 2017. After deductions, taxable assessed value increased by 2 percent. The total property tax levy before credits increased by 2.5 percent.

The property tax rate is the levy divided by taxable assessed value. Since the levy increased half a percent more than assessed value, the average tax rate increased from $2.44 to $2.46 per $100 assessed value.

Tax cap credits keep tax bills under the constitutional caps. They are taxes that local governments levy but taxpayers don't pay. When tax rates increase, more taxpayers become eligible for more tax cap credits. Credits rose from 10.5 percent of the levy in 2016 to 10.8 percent of the levy in 2017.

After the tax cap and local income tax credits, net tax bills increased by 2 percent, half a point less than the levy before credits. The implied net tax rate, calculated by dividing tax bills by net assessed value, stayed nearly constant at $2.07 per $100 assessed value.

So here's a guess about normal, based on just one year. Gross and net assessed value grow between 2 percent and 3 percent. The levy increases a little more than that, causing the average tax rate to rise slightly. That increases tax cap credits, which hold the tax bill increase closer to the rise in assessed value. The implied net tax rate is unchanged. Results for local governments will vary a lot around the statewide averages.

Maybe that's normal. Maybe it's not. If our economic expansion keeps going for a while, we can find out.

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