COMMENTARY: Capital Comments: The 2023 Indiana General Assembly delivers some property tax relief

Larry DeBoer, Purdue University agricultural economist whose column appears in Indiana newspapers

Indiana homeowner tax bills increased 17 percent on average this year, the largest increase in years.  Other property owners saw big increases too.  The pandemic caused property values to rise in 2021, which increased property assessments in 2022.  Tax bills in 2023 were based on those assessments. 

The General Assembly responded with some property tax relief in House Bill 1499.  The bill passed with big majorities and was signed by the Governor as Public Law 239.  The intrepid Legislative Services Agency’s fiscal note cuts through the bill’s legalese, and gives an analysis of what it will do.  You can find it on the General Assembly’s website at iga.in.gov.  Click on Legislation, then Bills, then scroll down to House bill 1499.

Property tax rates are set anew by local governments each year.  They set target property tax revenues, called levies, as part of their budget process.  Much of the levy is restricted by a state-imposed maximum, which increases by formula each year. Meanwhile, the county assessor determines the assessed value of property within the borders of each jurisdiction.  The County Auditor subtracts deductions. The levy divided by this net assessed value determines the property tax rate.

HB 1499 offers tax relief for 2024 and 2025—but not this year.  That’s because County Treasurers had already mailed property tax bills by the time the legislation was passed.  The General Assembly realized that recalculating those bills would cause chaos.  Still, it looks like assessments will increase more than usual again next year, so taxpayers will welcome any relief.

The tax relief will be delivered in three primary ways.  The homestead supplemental deduction will be increased.  There are two main deductions for homeowners which reduce the taxable assessed value of their homes.  The standard deduction will be a fixed $48,000 in 2024.  The supplemental deduction usually subtracts 35 percent of the remaining assessed value for most homeowners.  Under HB 1499, that percentage will increase to 40 percent in 2024 and 37.5 percent in 2025.

Homestead taxable assessed value will be lower than it would have been.  That means homeowners will pay lower taxes than they would have paid.  But with lower assessed value, tax rates will be higher than they would have been, which will increase non-homestead tax bills.  This part of HB 1499 shifts some tax payments from homeowners to other property owners.

Levies are limited by the maximum levy, which increases each year by the “maximum levy growth quotient.”  The MLGQ was 5 percent for 2023, and was expected to be near that again in 2024.  HB 1499 will cap the MLGQ at 4 percent in 2024 and 2025.  Tax bills will be lower than they would have been for all property owners.  Local government revenue will increase less.

The maximum levy applies to most operating revenues, but not to debt service or referendum levies.  Referendum levies are passed with fixed maximum tax rates.  When assessed value grows a lot, and the tax rate is fixed, revenues grow a lot.  Operating referendum levies increased 15 percent this year.  HB 1499 restricts growth to 3 percent in 2024.  That will reduce tax bills below what they would have been for all property owners in school districts that have passed referendums.

Lower tax bills mean less revenue for local governments.  LSA expects revenues to be $28 million lower than they would have been in 2024 and $65 million less in 2025.  At that point, all three provisions expire, yet the revenue loss continues, at $85 million in 2026.  That’s because the lower MLGQ in 2024 and 2025 makes the maximum levy lower than it would have been in later years. 

LSA estimates that homestead taxes will be $109 million less than they would have been in 2024.  Other property owners will pay slightly more in 2024, because the higher homeowner supplemental deduction shifts taxes to them.  Homeowner taxes will be $68 million lower than they would have been in 2025. 

That’s a funny phrase, “lower than they would have been.”  Property taxes rose $800 million in 2023, a lot more than the estimated tax relief in the legislation.  Tax bills will still increase in 2024, just a little less than they would have without HB 1499.