How Indiana commercial property should be assessed is being debated as a result of the “big-box” decisions from the Indiana Board of Tax Review. Any angst should not be directed at the IBTR—it was simply doing its job and applying the law.
In Indiana’s system, value does not equate to fair market value (a known and recognized method applied by real estate appraisers). Instead, Indiana has established an ambiguous standard referred to as “market value-in-use.” It was devised to protect some properties, where highest and best use of the property (a principle of fair market value) would generate an assessed value much higher than its current use.
An example would be a property at the corner of a busy intersection that is best suited for commercial use, but is still used for agricultural or residential purposes. If this property were assessed based on what it would sell for, the farmer or homeowner might not be able to pay the tax. If the property is used for farming, it should be assessed as farmland. The current system provides protection against higher taxes by focusing on the value for the use, not on the value of the use to the current owner.
But should this protection against higher taxes for homeowners or farmers be used as the basis for higher taxes for commercial property owners? Some assessors and others maintain a commercial property should be assessed based on its intangible value to the current owner/occupant, rather than the transactional value for its current or similar use. The difference is subtle but very significant. To value property based on its use is one thing; to value it based on its user is quite another.
Our current system treats all taxpayers alike, with the tax based on an estimation of what the property would sell for, presuming a same or similar use. Some observers want to change the focus to what the property is worth to the current owner/user.
This “value-to-the-user” standard being promoted would cause more problems than it would solve. Physically identical properties would be assessed differently, depending on the individual circumstances (organizational structure, cash flow, labor contracts, etc.) of the owner. A property tax is supposed to tax real property, not the business operating on the property. And if the real properties are the same, they should be taxed at the same value, as they are under the current system.
Changing to a “value-to-the-user” system will produce higher assessments and taxes. It will also prevent a uniform and equitable assessment system. The recent IBTR cases demonstrate a need to improve how Indiana’s market value-in-use system is applied. But changing the basic tenets of the current system and replacing them with a subjective and discriminatory standard filled with new complications is not the way to go.
Vice president of taxation and public finance Indiana Chamber of Commerce