Analysis

by

VICKI URBANIK

Under Indiana’s new tax law, homeowners throughout the state will enjoy lower property tax bills this year. And many, though not all, will be further helped by the state’s new property tax caps that take full effect in 2010.

But well before taxpayers see any of that relief on their property tax bills, they’ll be hit with a tax hike.

Beginning April 1, the state’s sales tax will increase from 6 percent to 7 percent, a move that’s projected to raise $937 million in fiscal year 2009, money that the state will use to pay for other components of HEA 1001 that will help cut property taxes.

Statewide projections estimate that the average Hoosier homeowner will see their tax bills cut by up to 30 percent beginning this year, when the state pumps in more money for the homestead credit and adds a homestead deduction and then, in 2009, when it takes over local school and child welfare levies.

One of the most important state-funded credits that has helped lower tax bills will be gone after this year. Funding for the state’s other main credit for homeowners, the homestead credit, will decline as well in 2009 and '10. At the same time, though, new tax caps will kick in.

The new law, H.E.A. 1001, has numerous provisions that will mean different things for different people. People who don’t spend much money but who have homes with high assessed values will enjoy the biggest tax cuts. Renters will likely end up paying more in taxes overall. Owners of modest homes may come out ahead, unless they buy a lot of things subject to the sales tax. Property taxes could start creeping back up, regardless of local levies, once the two state credits end, unless the property owner qualifies for the tax caps.

Further, government units will lose revenue to varying degrees, and counties could be apt to take advantage of provisions in the new law allowing them to impose new local income taxes, which would further complicate things for people who just want to know how the new law will affect them.

At least two things are known for sure about HEA 1001:

The full impacts of the bill won’t be known for some time. And after this year’s elections are over, and Indiana legislators return to work for their 2009 session, they’ll take up can always tweak and adjust the decisions they made this session.

First: A Tax Hike

The very first change that Hoosiers will see from H.B. 1001 is a significant one. A tax hike.

The sales tax increase on April Fool’s Day will be the second time since 2002 that the sales tax was climbed as part of a major property tax measure.

The sales tax brought in about $5.5 billion in calendar year 2007. The 1 percent tax hike is projected to raise another $937 million in the fiscal year that begins in June, then $960 million in fiscal year 2010, according to the Legislative Services Agency.

On a strictly per capita basis, the 1 percent hike will result in every Hoosier, man, woman and child, paying $149 more per year. A different analysis, prepared by Purdue University professor Larry DeBoer, suggests an increase of $192 in sales taxes paid by homeowners at the state’s median income of $55,634 and an increase of $139 in sales taxes paid by renters at the median income of just under $25,000.

Is it possible for a homeowner to see their property taxes cut and end up paying more overall in taxes?

Various analyses project that the average savings for Indiana homeowners, due to the deductions, credits, tax shifts and tax caps, will be 30 percent.

A Chesterton resident with a home assessed at $200,000, and who qualified for only the standard homestead deduction, paid a net tax of $2,605 in 2007. Assuming that the 30 percent average cut is true for this homeowner, the savings would be a property tax reduction of $781. It’s difficult to imagine that homeowner spending more than that in increased sales taxes.

But if one looks at a much more modest home, the situation changes. A home in South Haven that was assessed at about $65,000 had a tax bill last year of $527. A 30 percent cut in that homeowner bill would result in a savings of $158. It’s entirely feasible for this homeowner to see that savings eaten up by the higher sales tax. And assuming this homeowner had one or two big ticket items to buy -- say, a few new appliances or a used car -- then, this homeowner has little reason to celebrate.

End of an Era

H.B. 1001 also contains a major policy change in Indiana.

After this year, the state will end its Property Tax Replacement Credit (PTRC) and Homestead Credit -- two credits that help lower the gross tax bills for years. While all property has enjoyed a tax cut through the PTRC, only homeowners qualify for the homestead credit.

The state annually pays about $2 billion for these two credits. That’s about the same amount that it will cost the state to take over the school general fund expenses now funded through property taxes.

Under HEA 1001, the state will provide additional homestead credits of $620 million this year, a big benefit for homeowners. But then next year, the PTRC will be gone, and the regular homestead credit will be replaced with a temporary one, funded at $140 million in ‘09 and then $80 million in 2010. Then that credit will disappear as well.

But by 2010, the 1 percent property tax cap kicks in full gear. So the loss of the remaining homestead credit will be offset by the tax cap, and many homeowners will be helped further by the tax cap. But that’s mainly true only for the higher assessed homes. More modest homes, such as those assessed at $100,000 or less, will probably pay less in property taxes in 2010 than they did in 2007, but if they don’t benefit by the tax cap, they will in all likelihood start seeing their property tax bills climb with the loss of these two credits.

History Repeats Itself?

In some ways, the 2002 tax bill passed by the Indiana Legislature was nearly as sweeping as this year’s, since it came on the heels of a court-ordered move to more of a fair market system of property assessments, a move that shifted more of the burden from business and industry to homeowners. For many homeowners, the tax bills in 2002 or ‘03 more than doubled.

Taxpayer fury at that time didn’t seem to reach the same level as it did in 2007. But lawmakers nonetheless reacted to the higher tax bills. The legislation that year hiked the standard homestead deduction (from $6,000 to $35,000) and doubled the statewide homestead credit from 10 percent to 20 percent statewide. At the same time, the bill significantly altered the state’s role in funding the PTRC, by capping the amount dedicated to tax relief at $1 billion and tying the increases to the increased sales tax.

Some have observed that the main reasons why property taxes have been spiraling upwards have less to do with the high cost of local government, and much more to do with other factors, such as the state’s cap on the PTRC, coupled with last year’s significant drop in the homestead credit following the one-time boost in 2006.

The impact of capping the PTRC was evident on last year’s tax bills. The rate that the state set for this credit fell in many taxing districts, which, in conjunction with other tax bill changes, resulted in reduced savings for taxpayers.

A real-life example: A Chesterton home assessed at $200,000 in both 2006 and 2007 enjoyed a savings of $1,043 from the PTRC in 2006 but a savings of $923 last year.

Several years ago, lawmakers enacted a 2 percent tax cap. But last year, in response to widespread concerns about how the cap would hurt local government, the state watered down the “circuit breaker” legislation significantly, by removing school operating costs from the cap.

Then, this year, the lawmakers not only restored the original cap, but made it even more beneficial for all property owners. At the same time, lawmakers set into motion amending the state’s constitution to make the caps permanent.

But that process will take another year. Will lawmakers be apt to return to work next session and tweak this year’s law? Time will tell, as indicated by a statement issued by House Speaker Pat Bauer following the bill’s passage: “Although the plan undoubtedly provides help in 2008, it may not be the final answer. The 600-page House Bill 1001 is a major shift to state funding that carries an enormous price tag, and there is great risk due to the state of our nation’s economy and its impact on the state’s treasury.”

Posted 3/21/2008