Indiana’s Constitution Article 10, The General Assembly shall provide, by law, for a uniform and equal rate of property assessment and taxation and shall prescribe regulations to secure a just valuation for taxation of all property, both real and personal.
Prior to court ordered changes, Indiana’s assessment system was subjective, lacked uniformity and did not reflect market value. In the late 1990’s, the courts ruled that Indiana’s assessment system was unconstitutional due to its lack of “objective reality” and required the General Assembly to create a new system that “must provide for a uniform and equal rate of property assessment and taxation based on property wealth.”
Indiana’s property tax system is twenty years into its “new” assessment and property tax system. After property tax caps were enacted and enshrined in the Indiana Constitution, the assessment system and property tax system has been stable and without dramatic changes, except for a few special assessing methodologies for unique properties.
Enter the Covid-19 pandemic economy. Not only did the pandemic disrupt our everyday norms, but it also disrupted the economy. After a brief downturn in the spring of 2020, it was reignited through federal spending and low interest rates enacted by the Federal Reserve. People were working from home and quickly realized they could purchase larger homes or upgrade their homes.
Economic consequences
Thanks to lower mortgage rates, their house payments would not increase significantly. The result — a blistering real estate market in late 2020 through the second quarter of 2022. Bidding wars for houses that ended up on the market for just a few hours became common. Construction cost drove up the purchase price of new homes. The assessors, charged with assessing properties at their market value, were required to implement the market trend. Home values increased at a historic rate.
That historic trend is testing the assessment system designed to reflect property wealth. A property owner’s assessment (asset) increased by doing nothing except watching the homes in their neighborhood sell above asking price. Normally, home values increase by less than 5% per year. From 2021 to 2022, home values increased by 16%, over three times the norm. The average home went from $181,000 to $211,000.
With increased property wealth comes increased property tax liability. The General Assembly’s long enacted property tax controls designed to prevent large increases are helping homeowners. The 1% tax cap ensures homesteads will not pay more than 1% of the gross assessed value in property taxes. The exception, voter-approved school referendums that are outside the 1% cap. The supplemental deduction helps remove more value from taxation as it is a percentage of assessed value. However, the standard deduction ($45,000 in 2022 pay 2023) does not reflect changes in inflation.
What’s next
On average, we expect tax bills across all classes of property to increase 7.4% this spring This coincides with the expected increases in property tax collections across all units of government, 7.0%. These numbers are reflective of inflation. Local government expenses are not immune from inflation.
Residential liability will be well above the average tax bill increase. Adding to the increased liability in taxes for residential property is the tax shift. In 2022, as a class of property, residential property taxes increased in value (wealth) more than any other class of property so residential property taxes will be paying more of the total property tax liability in 2023.
In 2022, residential property paid 47% of all property taxes, in 2023 that is expected to increase to 50% of all property taxes. This is a function of a system that assesses and taxes property wealth. Personal property taxes, which as a class of property tends to be more stagnant in value, are expected to have their property taxes decrease as a class of property.
Will legislators continue to support a market-based assessment system that uses “objective reality” and a property taxation system “based on property wealth”?
A well-designed system is self-correcting. Residential property values have appeared to peak, most likely due to higher interest rates. Every system can use improvements, but the property assessment and taxation system is performing as it was designed.