Purdue Cooperative Extension Service On Local Government Indiana Property Tax Reform, 2008: Budgets, LOITs and Circuit Breaker Credits Larry DeBoer Purdue University June 26, 2008

Circuit Breakers Tax Bill Limits by 2009 Homesteads: 1.5% of Gross Assessed Value Other Residential, Farm Land: 2.5% of Gross Assessed Value Other Real and Personal Property: 3.5% of Gross Assessed Value If your house has an assessed value of $120,000 before deductions, you cannot pay a tax bill of more than $1,800

Circuit Breakers Tax Bill Limits by 2010 Homesteads: 1% of Gross Assessed Value Other Residential, Farm Land: 2% of Gross Assessed Value Other Real and Personal Property: 3% of Gross Assessed Value If your house has an assessed value of $120,000 before deductions, you cannot pay a tax bill of more than $1,200

Estimated Impact of Indiana's New Tax Reform (HEA 1001) on Property Tax Payments, 2010 Home- steads Non- Home- stead Res- idential Com- mercial Apart- ments Other Real Property Per- sonal Prop- ertyTotal Change from Taxes Under Current Law due to: Levy Takeovers, 35% Hmstd. Deduction-31.7%6.1%7.3%6.5%0.0%-10.4% Circuit Breaker Limits-4.6%-18.7%-21.3%-4.3%-4.4%-7.2% Total-36.3%-12.6%-14.0%2.2%-4.4%-17.6% Source: Legislative Services Agency, "Estimated Impact on Net Property Tax, HB1001 (2008) CC08 Update", March 13, 2008.

Circuit Breaker Revenue Losses Circuit Breaker credits for taxpayers are revenue losses for local governments Estimated Losses: 2008$4 million, a small fraction of budgets 2009 $229 million, 2% of budgets 2010$524 million, 5% of budgets

A Homeowner’s Tax Bill: Assessed Value and Deductions by 2010 Gross Assessed Value120,000 Homestead Standard Deduction45,000 Remainder 75,000 35% Homestead Supplemental Deduction 26,250 Mortgage Deduction 3,000 Taxable Assessed Value 45,750

A Homeowner’s Tax Bill: Tax Rate, Circuit Breaker and Tax Bill Tax Rate3.00 Gross Tax Bill (rate times taxable AV)1,373 Circuit Breaker Limits (1% of gross AV) 1,200 Circuit Breaker Credit 173 Net Tax Bill 1,200 If tax rate is 2.00, not 3.00, net tax bill before circuit breaker credit is $915. That’s less than the circuit breaker limit, so credit is zero.

A Homeowner’s Tax Bill: Collections and Losses for Local Governments Rate Tax Levied Circuit Breaker Loss Tax Col- lected County City School Corporation Other Units Total3.00 1, ,200 Homestead with Gross AV of $120,000, Net AV of $45,750, with no state or local credits.

A Homeowner’s Tax Bill: Tax Rate, Circuit Breaker and Tax Bill Tax Rate3.25 Gross Tax Bill (rate times taxable AV)1,487 Circuit Breaker Limits (1% of gross AV) 1,200 Circuit Breaker Credit 287 Net Tax Bill 1,200 Suppose School Rate rises to 1.00

A Homeowner’s Tax Bill: Collections and Losses for Local Governments Rate Tax Levied Circuit Breaker Loss Tax Col- lected County City School Corporation Other Units Total3.00 1, ,200 With School rate at 0.75

A Homeowner’s Tax Bill: Collections and Losses for Local Governments Rate Tax Levied Circuit Breaker Loss Tax Col- lected County City School Corporation Other Units Total3.25 1, ,200 With School rate at 1.00

A Homeowner’s Tax Bill: Effect on Local Government Tax Collections Change in Tax Levied Change in Tax Col- lected Change in Circuit Breaker Loss County City School Corporation Other Units Total+1140

Some Consequences of Circuit Breakers for Local Government Policy 1.Interdependent budgets 2.Annexation 3.Bond issues 4.Changes in Assessed Values 5.Assessment Practice

HEA 1001, Section 148: County Council Review of Civil Government Budgets Each civil taxing unit shall file with the county council its proposed tax rate, tax levy and proposed budget at least fifteen (15) days before budgets are adopted. Council shall review the proposed rates, levies and budgets, comparing them to each other and to county and Indiana income. Council shall make a nonbinding recommendation about these tax and budget proposals.

HEA 1001, Section 148: County Council Review of Civil Government Budgets Potential role in budget process: Estimate circuit breaker credits at the proposed tax rates.

Circuit Breaker Estimation: A 12-Step Program 1.Acquire gross assessed value and deduction data. 2.Subtract deductions from gross assessed value. 3.Calculate tax district and unit net assessed values. 4.Acquire the proposed tax levies by unit and fund.

Circuit Breaker Estimation: A 12-Step Program 5.Calculate unit-fund tax rates 6.Calculate tax district tax rates. 7.Calculate parcel gross tax bills (before state and local credits, if any). 8.Calculate parcel credits and net tax bills, before circuit breaker credits. 9.Calculate the circuit breaker tax bill limits.

Circuit Breaker Estimation: A 12-Step Program 10. Estimate the circuit breaker credits by parcel. 11. Estimate the circuit breaker credits by tax district. 12. Estimate the circuit breaker credits by unit and fund.

Clues to Circuit Breaker Credits from Tax Rates Net Tax Rate: the rate, multiplied by net assessed value, that yields the tax bill that the taxpayer actually pays, after credits. Calculate prior to circuit breaker credit Gross Rate x (1 – State Homestead Credit rate) x (1 – the sum of Local Credit rates)

A Homeowner’s Tax Bill: Net Tax Rate before Circuit Breaker Credits Gross Assessed Value120,000 Taxable Assessed Value 45,750 With no credits, the net rate = the gross rate, $3.00 per $100 AV Tax Rate3.00 Gross Tax Bill (rate times taxable AV)1,373 Circuit Breaker Limits (1% of gross AV) 1,200 Circuit Breaker Credit 173 Net Tax Bill 1,200

A Homeowner’s Tax Bill: Net Tax Rate before Circuit Breaker Credits Gross Assessed Value120,000 Taxable Assessed Value 45,750 At what rate will circuit breaker credits drop to zero? At the 1% limit, for this homeowner, at $2.62 / $100 AV Tax Rate2.62 Gross Tax Bill (rate times taxable AV)1,200 Circuit Breaker Limits (1% of gross AV) 1,200 Circuit Breaker Credit 0 Net Tax Bill 1,200

Test with Fayette County Data Only tax districts with the highest rates had significant circuit breaker losses In 2009 – For 1.5% CB category, rates above $2.59 – For 2.5% CB category, rates above $2.84 – For 3.5% CB category, rates above $4.30 In 2010 – For 1% CB category, rates above $2.82 – For 2% CB category, rates above $2.35 – For 3% CB category, rates above $3.48

Local Option Income Taxes Created in Counties adopted Three types: – Levy freeze for civil government operating funds – Property tax relief – Public safety

Local Option Income Taxes HEA 1001 made some minor changes – Have until December 31, 2008 to adopt for 2009 – Must adopt only one property tax relief LOIT to adopt public safety LOIT (not both) – Must hold hearings, defend decision to distribute LOIT to taxpayers other than homeowners

Local Option Income Taxes For property tax relief Up to 1% Tax relief distributed to – Homeowners only – Homeowners and rental housing owners – All property owners – Any combination of these three

Local Option Income Taxes What you might consider – Will the income tax provide the same revenue as the property tax? – Will income tax revenues be less stable or predictable than property tax revenues? – Which taxpayers pay more, which pay less if income taxes rise and property taxes fall?

Local Option Income Taxes What you might consider – Will circuit breaker revenue losses be reduced? – Will taxpayers see a large property tax increase in 2009?

A Homeowner’s Tax Bill: Assessed Value and Deductions by 2010 Gross Assessed Value120,000 Homestead Standard Deduction45,000 Remainder 75,000 35% Homestead Supplemental Deduction 26,250 Mortgage Deduction 3,000 Taxable Assessed Value 45,750

A Homeowner’s Tax Bill: Effect of LOIT on Circuit Breaker Credit No LOITLOIT Tax Rate3.00 Gross Tax Bill (rate times taxable AV)1,373 LOIT Credit (50%; homeowners only)687 Tax Bill after LOIT686 Circuit Breaker Limits (1% of gross AV) 1,200 Circuit Breaker Credit Net Tax Bill 1, Net tax reduction for homeowner: $514 LOIT revenue gain for local units: $687 Net revenue gain for local units: $173

The “Tax Echo”: Big Increases in Homeowner Taxes in 2009, in Some Counties Because tax relief is delivered through tax credits in 2008, tax deductions and levy takeovers in 2009 Counties that are treated more generously in 2008, less generously in 2009, will see homeowner tax hikes in 2009 Homeowner taxes will still be lower than they were in 2007 Adopting a local income tax for 2009 could offset this tax echo

Local Government Website For more information