Every Option for Cutting Homeowner Property Taxes Has a Consequence
Published: Friday, November 1, 2024
The following is from Larry DeBoer, professor emeritus of agricultural economics at Purdue University.
Suppose we want to cut property taxes for homeowners. How could we do that?
Probably we should start with another question: Why would we want to cut property taxes for homeowners? One reason—property taxes on homesteads increased 17% across the state in 2023, and another 7% in 2024. The pandemic caused it. Housing supply was restricted by rising costs of building materials, and low mortgage rates boosted demand. Home prices spiked upward in 2021. County assessors incorporated these higher prices into assessed values in 2022, which were used to set tax bills in 2023.
So how could homeowner taxes be cut?
We could tell assessors not to raise assessments more than some maximum percentage. That would address the cause of the problem. But the Indiana Supreme Court says we can't do that. It's unconstitutional. The 1998 Town of St. Johns decision said that assessments must be based on "objective measures of property wealth," so assessments reflect market values, at the property's current use. Placing a legal limit on assessments would prevent the accurate measure of property values.
There's an alternative, though. We must assess the full value of a house, but we don't have to tax the full value. Deductions are subtracted from gross assessed value, so taxable assessed value is less.
We have homestead deductions that reduce their taxable assessed values by about half statewide. The General Assembly raised one of these, the supplemental deduction, for taxes in 2024 and 2025. Without that increase, homestead taxes probably would have increased 10% or more this year, instead of 7%.
Higher deductions mean lower taxes for homeowners, but they shift those taxes to landlords, farmers and businesses. That's because local governments recalculate tax rates every year. They figure out how much must be raised from the property tax to provide services, then divide that amount by the net assessed value within their borders. That becomes the tax rate. If higher homestead deductions make taxable assessed value smaller, the tax rate will be higher, and that raises tax bills for property owners who don't get the higher deduction.
We could tighten the maximum levy. That's a state-imposed limit on the amount that local governments can raise with property taxes. With the maximum, big increases in assessed values cause big decreases in tax rates. Tax rates did fall in 2023, just not as much as assessed value went up. The reason is that the maximum didn't apply to levies for debt service or those passed by referendum. They increased with the rise in assessed value.
The General Assembly cut the percentage that the maximum levy could increase in 2024, to 4%, and limited some referendum levy increases to 3%. Overall, 2024 levies increased by 6% statewide, down from 9% in 2023.
Population growth and inflation mean that governments may need more revenue for schools, roads, public safety and more. A tighter limit on levies means that local governments can't raise as much. Less revenue may mean fewer services.
We could replace the property tax with some other revenue source. Some counties use local income taxes to fund credits to reduce property taxes. These credits don't shift property taxes to other property owners. They shift taxes to income earners instead.
Three times in the past 50 years the state increased sales taxes to reduce property taxes. Most recently, in 2008 the sales tax rose to 7% to provide funds to eliminate property taxes for school classroom expenses. Property owners received tax cuts. People who buy taxable goods and services paid more.
Credits don't have to be funded. The constitutional circuit breaker caps provide credits to property owners without replacing the revenue with some other tax. Taxpayers get credits if their tax bills are higher than their caps. These credits cut property taxes by more than a billion dollars in 2024, about 10%. That's revenue local governments don't receive, which may mean fewer services.
We have lots of policy options for reducing homeowner property taxes. But every option affects other property owners, other taxpayers or local governments. That doesn't mean we shouldn't consider these policies, just that we should remember to consider the consequences.
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