By Bryan Corbin, Evansville Courier & Press
INDIANAPOLIS - In announcing his complicated property tax relief plan last week, Gov. Mitch Daniels is proposing sweeping changes to a tax system unpopular with homeowners, yet has proved resistant to reform in the past.
To set the stage for the 2008 session of the Legislature, here are the basics of Indiana property taxes, drawn from interviews with sources and public records:
1. What do property taxes pay for?
In Indiana, 99 percent of property taxes pay for the costs of local government services, such as police and fire protection, snow removal, salaries of elected and appointed local officials, courts, jails, libraries, protection of abused and neglected children, school construction and about 15 percent of school operating costs.
2. Who pays property taxes?
Owners of land and buildings. Property taxes are assessed on commercial, industrial and agricultural land and improvements, but most of the discussion has focused on residential property taxes paid by homeowners. Renters don't pay property taxes directly, but such costs would be passed along to them by landlords through rent increases. Certain nonprofit organizations, such as churches, hospitals and universities, usually are exempt from paying property taxes.
3. Who decides how much I pay in property taxes?
First, a property is assessed for taxing purposes. Assessors review a parcel, both the land and the house or building, and compare it to sales data of surrounding similar properties to determine its assessed valuation.
Once the total assessed value of all properties within the jurisdiction is added up, then local elected boards determine how much they need to collect in property taxes to fund their budgets. Knowing the levy - the maximum they can collect by law - and the total assessed value, local boards can then set the proposed tax rate for that jurisdiction. Budgets and tax rates have to be approved by the state.
To estimate an individual homeowner's tax payment, divide the net assessed value by 100 and multiply it by the total tax rate.
Acting independently of each other, multiple overlapping units of government each have their own tax levies and their own tax rates, which are added together to determine the total tax rate for a particular locale.
Property tax replacement credit and homestead credit currently are subtracted to produce the net tax bill for the half-year.
4. How much money is raised through property taxes in Indiana?
About $6 billion a year.
5. Which local boards set property tax rates?
Boards that adopt budgets paid through property taxes are typically the school board, county council, city council, town council and library board. Budgets and tax rates require approval by the Indiana Department of Local Government Finance.
6. How much of school costs are paid through property taxes?
About 15 percent of school general-fund operating costs are paid through local property taxes with 85 percent are paid through state tax dollars. School capital improvement costs, such as bond issues for new buildings and gymnasiums, are paid through property taxes, according to Dennis Costerison, executive director of the Indiana Association of School Business Officials.
7. How much of local property taxes are spent on state government?
Less than 1 percent. On average, the breakdown for spending property taxes currently is: 54 percent for schools, 16 percent for cities and towns, 19 percent for counties, 3 percent for townships, 3 percent for libraries and the rest for other units or purposes, according to the Department of Local Government Finance.
8. When must property taxes be paid?
Normally, property tax bills are due twice a year, on May 10 and Nov. 10. Homeowners who have their property taxes figured into an escrow pay their taxes monthly when they make mortgage payments. Property taxes in Indiana are paid in arrears, meaning taxes paid in the current year reflect taxes owed for the previous year.
9. What happens if a property owner doesn't pay his taxes?
Properties in which taxes are delinquent could be ordered seized by a court and auctioned off at a sheriff's sale.
10. Do homeowners get a deduction?
Yes. Owners of owner-occupied homes are entitled to a $45,000 standard homestead deduction, which they must apply for whenever moving into a different house. If they have a mortgage, they also are eligible for a mortgage deduction. Other types of deductions are available for the disabled, blind and those 65 and older.
11. Who actually assesses my house?
Elected township-level assessors are in charge of collecting data to determine assessed values of homes, with county-level elected assessors sending the data to the state. In counties with small rural townships, however, the job often falls to the county-level assessor. Many counties hire private appraisal firms to assist assessors in that process.
12. How did the "property tax crisis" begin?
Projections last spring showed property taxes increasing statewide by 24 percent, on average - with some bills much higher. That was based on several factors:
Counties had problems adapting to a new "trending" process that requires assessments to be adjusted every year depending on the sales prices of similar properties within the same area. Trending had been delayed for several years, meaning when it was implemented, new assessments had to catch up with six years' worth of changes in value, causing "sticker shock" for homeowners.
In some counties, significant disparities were found in the reassessments: Valuations of residential property went up while valuations of commercial and industrial property didn't. That shifted more of the tax burden to homeowners.
The state's property tax on inventory was phased out in 2006. As a result, the part of the tax burden once paid through inventory tax is made up by the remaining taxpayers.
School and local government spending increased in some jurisdictions, according to the House Ways and Means Committee.
13. What did the Legislature and governor do about the property tax crisis?
To cushion the impact of big increases, the state provided $550 million in short-term property tax relief that will by funded by allowing slot machines at Indiana's two horse racing tracks. It provides $300 million in homestead credits that will be sent as rebate checks, mailed out in early 2008. Once the rebate checks arrive, the net property tax increase for taxpayers would be an average of about 8 percent, instead of the predicted 24 percent. The rest of the relief will come as credits on tax bills in 2008.
14. What else have the Legislature and governor done about property tax relief in 2007?
Lawmakers in 2007 passed a law giving counties the flexibility to adopt a new local-option income tax to reduce their property taxes accordingly. To date, 12 counties have decided to take that step.
Daniels directed the Department of Local Government Finance to investigate disparities between residential and commercial or industrial assessments. Department commissioner Cheryl Musgrave has triggered the process for new reassessments in 21 counties.
15. Property taxes are so complicated. Why not just repeal them?
The underlying problem with abolishing property taxes entirely is finding other ways of replacing the $6 billion in revenue that schools and local government need to operate. Some proposals have focused on partially replacing property taxes with a combination of increases in sales tax and income tax. That approach creates its own obstacles, since raising the sales tax too high would harm Indiana's economy because consumers would flock to neighboring states where sales taxes would be lower to make large purchases. The other issue is that property tax revenue tends to be reliable and predictable over time, while sales tax revenue fluctuates with the economy and is unpredictable.
17. What is Daniels' proposal?
The governor says property tax bills can be reduced on average by one third by 2009 by capping a home's property taxes at 1 percent of assessed value and by raising the sales tax by 1 cent, to 7 percent. Also, the state would assume child-welfare costs and school operating costs; and local spending would be limited through requiring budgets to be approved by new county tax boards. Spending above those limits would have to be approved by local voters in a referendum. Essentially, about $3.1 billion of the current $6 billion property tax burden would come from sources other than property taxes, under Daniels' plan.
17. What happens now?
The governor's proposal and those of individual lawmakers will by considered by the Legislature in its 2008 short session. Republican lawmakers have said they want to start hearings on the bills Nov. 20 and work through December, so that they can vote once the Legislature's session officially begins Jan. 8. With multiple complicated proposals for lawmakers to take apart, examine and rewrite, it appears likely that any final package that wins approval in the Legislature would have to be a hybrid, compromise plan.
SOURCES: Courier & Press research, The Associated Press, The Indiana Department of Local Government Finance, the Interim Commission on State Tax and Fiscal Policy, the Legislative Services Agency, the state Office of Management and Budget, the Indiana Association of School Business Officials, the Association of Indiana Counties and published reports