Apartments and State Government and Property taxes and Government & Economic Development

Tax caps spread relief around

September 25, 2010

Property tax caps—promoted as a way to relieve homeowners from skyrocketing property tax bills—have provided much more relief to a different group of taxpayers.

Owners of rental properties and second homes got the lion’s share of assistance from the caps, according to Larry DeBoer, a Purdue University professor who studies taxation and tabulated the caps’ impact in all but Lake and LaPorte counties this year.

The caps were passed in 2008 but this year went into full effect at 1 percent of assessed value for homestead property, 2 percent for farm and other residential property, and 3 percent for business property.

According to DeBoer’s report released this month, properties under the 2-percent category—rentals and farmland—got about half the $335 million in breaks the caps provided. But farmers see little of that money because their land is in areas where tax rates are low.

Deboer DeBoer

Homeowners got about 28 percent of the relief and businesses got about 22 percent.

DeBoer’s findings call into question whether the caps are necessary for homeowner relief as taxpayers prepare to vote Nov. 2 on whether they should be inked into the state constitution.

They also validate the concerns of groups such as the Indiana Chamber of Commerce and the Indiana Farm Bureau, whose leaders oppose a policy that, by design, provides more help to particular groups.

“I think the General Assembly thought what they were doing was for homeowners, but the real beneficiary of [the caps] has been apartment owners,” said Bob Kraft, director of state government relations for the Indiana Farm Bureau, which opposes adding the caps to the constitution. “There may be some unintended consequences that no one is fully aware of. This is one of those.”

Deductions cloud picture

That doesn’t mean homeowners haven’t benefited from the total package of tax reforms state lawmakers passed in 2008. That included the caps and changes such as beefed-up deductions for homeowners.

According to DeBoer’s report, homeowners have seen a 27-percent drop in property tax payments since 2007, when huge increases in tax bills sparked outrage among taxpayers statewide.

But most homeowner relief was driven by other forces—including the increased homestead deductions that were part of the 2008 tax reform.

For homeowners, the caps work this way: A home’s assessed value, which is based loosely on the amount for which it would sell, is multiplied by 1 percent. A homeowner’s tax bill can’t exceed that amount—$1,000 for a home assessed at $100,000, for instance.

A homeowner’s bill is based on a different amount: the assessed value minus a $45,000 deduction. Another 35 percent of that amount also is subtracted.

Based on that formula, for a $100,000 house, the tax bill would be based on an assessed value of $35,750, multiplied by the tax rate.

So unless that house was in an area where tax rates were really high, it would be difficult for the bill to hit the $1,000 cap.

DeBoer’s study bears that out. Statewide, roughly 12 percent of homeowners—about one in eight—were eligible for the cap.

tax capMost of those eligible own higher-value homes or live in areas where tax rates are high, exceeding $3 per $100 of assessed value.

Owners of rental properties, by contrast, have a much easier time meeting the cap. While their cap is higher—2 percent of the assessed value—their bills also are higher because they don’t get the deductions that help make bills low for homeowners.

Businesses, meanwhile, see little relief from the 3-percent caps. About three-fourths of businesses that got the 22 percent share of relief this year are in six counties with high tax rates: Marion, Delaware, Vigo, Elkhart, Madison and St. Joseph.

Overall, both businesses and farmers paid about 15 percent more in property taxes this year than in 2007 before the tax relief was passed.

Apartment owners, however, have paid 17 percent less, and owners of rental properties or second homes have paid 25 percent less, according to DeBoer’s report.

Sound policy?

Some say the inequities highlight a downside of the caps. Because the caps differ, clear winners and losers emerge.

“When they’re not the same, you get situations like this—where different groups are impacted or relieved differently,” said Kevin Brinegar, president of the Indiana Chamber of Commerce.

But some—such as Sen. Luke Kenley, R-Noblesville—dispute that the unevenness of the caps makes them unfair.

Kenley, who was instrumental in creating the caps, said that, while businesses get less relief from the caps, they have benefited from previous breaks borne by other taxpayers—specifically a $600 million inventory tax elimination passed in 2002.

He also noted that the state sales tax hike, adopted to offset the property tax loss, has fallen mostly on homeowners’ shoulders. The increase boosted the rate from 6 percent to 7 percent.

But if deductions—rather than caps—are driving homeowners’ relief, why are the caps necessary?

Supporters and some opponents of the constitutional amendment agree that answer may be more evident in time. As tax bills rise in coming years, a majority of homeowners likely will benefit from the caps eventually.

“We think a cap in the constitution is the last line of protection for everybody,” Kenley said. “That’s what the real point of the cap is—the real top-end liability that we want homeowners to have or businesses to have.”

Lynne Sullivan, executive director of the Indiana Apartment Association, sees a more immediate benefit. She said rental properties largely have been passed over as past relief has benefited homeowners and businesses.

The help caps provide, she said, is much needed for owners of the 200,000 apartment units her group represents, given the mostly stagnant rents in a weak economy.

“It’s evening out the property tax relief,” Sullivan said. “We have to provide affordable housing for all Hoosiers, and rental housing is affordable housing.”

Others, though, see a big trade-off in making the caps part of the constitution. Rep. Peggy Welch, D-Bloomington, voted for putting the caps in law but worries putting them in the constitution limits flexibility for local government units that lose money under them.

“We just haven’t gotten to the point where we’ve felt the true impact to local government,” Welch said. “You can’t undo it easily when the public says, ‘Oops.’”•

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