Understanding Indiana State and Local Taxes

Larry DeBoerDepartment of Agricultural Economics

Purdue University

October 15, 2015

Purdue Cooperative Extension Service

Indiana’s Economy

Indiana and U.S. Unemployment Rates

Indiana

U.S.

Indiana

U.S.

Personal Income, Indiana and U.S.

Indiana Home Building Permits

Indiana Home Price Index (percent change from previous year)

Indiana Construction Employment

State and Local Bond Interest Rate

Janet YellenChair, Federal Reserve Board

When the Committee decides to begin to remove

policy accommodation, it will take a balanced approach

consistent with its longer-run goals of maximum

employment and inflation of 2 percent.

The Committee currently anticipates that, even after employment and inflation

are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate

below levels the Committee views as normal in the

longer run.   FOMC, September 17, 2015

Janet YellenChair, Federal Reserve Board

U.S. Inflation, All Items and Core

All Items

Core (lessfood & energy)

Exchange Rates: European Euros and Chinese Yuan per Dollar

Yuan/Dollar

Euros/Dollar

Indiana’s State Budget, FY2015-17

Indiana State Budget, FY 2015-17(millions of dollars)

Avg Chng

2015-17

Revenues 14,849 15,240 15,698 2.8%

Sales Tax 7,226 7,505 7,840 4.2%

Ind. Income Tax 5,049 5,122 5,283 2.3%

Corp. Income Tax 974 985 994 1.1%

Gaming 458 441 439 -2.1%

All Other 1,143 1,188 1,142 0.0%

Budget 2015

Budget 2016

Budget 2017

2014 2015 2016 2017 2018

Inheritance Tax Repealed for deaths in 2013 and after

Sales Tax 1% of revenue to road constructionCorporate Income Tax* 7.50% 7.00% 6.50% 6.25% 6.00%

(fiscal years) -6.7% -7.1% -3.8% -4.0%

Individual Income Tax 3.40% 3.30% 3.30% 3.23% 3.23%

(calendar years) -2.9% -2.1%

Recent and Scheduled Tax Rate and Allocation Changes

*Corporate Tax reductions continue through 2022, to rate 4.9%

Indiana State Budget, FY 2015-17(millions of dollars)

Avg Chng

2015-17Appropriations 15,447 15,393 15,828 1.2%

K-12 Education 7,754 7,940 8,117 2.3%

Higher Education 1,805 1,885 1,902 2.6%

Medicaid 2,162 2,027 2,242 1.8%

Mental Health 254 260 270 3.2%

Other Health/Social 993 998 997 0.2%

Public Safety 933 981 983 2.6%

All Other 1,546 1,302 1,318 -7.7%

Budget 2015

Budget 2016

Budget 2017

0%

5%

10%

15%

20%

25%

30%

1976 1980 1984 1988 1992 1996 2000 2004 2008 2012

Indiana State Fund Balances as Share of Operating Revenues, FY 1976-2014, Estimated 2015

Prudent Range

Rule-of-Thumb Minimum

End of FY '14

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

17,000

18,000

2000 2002 2004 2006 2008 2010 2012 2014 2016

Indiana State Budget Revenues and Appropriations, Actual 2000-14 and 2015-17 from April '15 Forecast

and As-Passed 2016-17 Budget(fiscal years, millions of dollars)

AppropriationsAppropriations less ReversionsRevenues, Indiana Own SourceRevenues plus ARRA

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

17,000

18,000

2000 2002 2004 2006 2008 2010 2012 2014 2016

Indiana State Budget Revenues and Appropriations, April '15 Forecast and As Passed Budget 2016-17Appropriations to Maintain 2009 Real Per Capita

(fiscal years, millions of dollars)

Appropriations

Revenues, Indiana Own Source

Appropriations, 2009 Real Per Capita

4.0%

4.2%

4.4%

4.6%

4.8%

5.0%

5.2%

5.4%

5.6%

5.8%

6.0%

6.2%

6.4%

6.6%

6.8%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Indiana State Appropriations and Reversions as Percent of Indiana Total Personal Income (estimated 2015-17)

ReversionsAppropriations Less Reversions

Local Government

-32.6%

18.7%

47.1%

7.9%

-5.8%

-37.0%

36.4%

60.2%

7.7%

-7.1%

-0.1%

36.2%

60.9%

-7.5%

6.4%

-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70%

Homesteads

Other Residential

Ag Business/Land

Business Real/Personal

Total

Indiana Total Property Taxes, 2007-2014

Gross Assessed ValueNet Assessed ValueNet Tax After Credits

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Calculation of Property Tax Maximum Levy Growth Quotient (AVGQ) 2003-2016 and Estimates 2017-19

Annual Growth Rates, Indiana Non-Farm Personal Income (Statewide)

2009 growth rate dropped fromAVGQ 6-year rolling average

Income growthestimates fromrevenue forecast through 2017

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

Total Credits $2 or Less $2 to $3 More than $3 City/Town NotCity/Town

Cred

its,

Per

cent

of L

evy

Tax Cap Credits as Percent of Levy, 2014

Business Real/Personal (3%)

Residential/Farmland (2%)

Homestead (1%)

District Tax Rates

10.6%

0.1%

5.9%

20.7%

13.7%

3.1%

Tax Cap Credits as a Percent of Property Tax Levies, 2014

Brown

Jasper

Morgan

Ohio

Pulaski

Ripley

Warren

Switzerland

Clay

Wells

Harrison

Spencer

Parke

Orange

Wabash

Franklin

Fulton

Monroe

Steuben

Putnam

Lagrange

Owen

Warrick

Whitley

Martin

White

Kosciusko

Fountain

Newton

Decatur

Posey

Pike

Noble

Dearborn

Jackson

Benton

Marshall

Dubois

Jay

De Kalb

Tipton

Starke

Washington

Sullivan

Carroll

Jennings

Shelby

Bartholomew

Adams

Jefferson

Floyd

Tippecanoe

Gibson

Vermillion

Clinton

Montgomery

Porter

Union

Scott

Greene

Boone Hamilton

La Porte

Lawrence

Grant

Johnson

Vanderburgh

Miami

Hancock

Daviess

Rush

Allen

Hendricks

Crawford

Perry

Huntington

Clark

Lake

Wayne

Randolph

Knox

Blackford

Marion

Howard

Cass

Henry

Elkhart

Vigo

St Joseph

Fayette

MadisonDelaware

Tax Cap Credit %0%

More than 0% to 5%

5% to 15%

15% or More

Local Government Funding Issues

Should “big box” retailer property be valued using the sales comparison approach, or the construction less depreciation approach?

Such stores usually sell only when they’re abandoned (“dark store”). They often have unique features valuable only to the original owner, so they’re worth less to a buyer. There may be deed restrictions too, limiting the possible buyers.

Sales comparison assessments are usually much lower than cost less depreciation assessments.

“Dark Store” Retail Assessments

Indiana Board of Tax Review decisions have reduced assessments on some large retail stores, based on comparative sales assessment method

Association of Indiana Counties analysis found that effect could have been $50 million shift to other taxpayers and $43 million in lost local revenues, plus $25 million TIF loss

SEA 436 (2014) requires that big box retail buildings be assessed based on cost less depreciation method, not comparative sales method

“Dark Store” Retail Assessments

Assessed Value of Farmland Equals the base rate per acre of farmland

Base rate calculated each year by the Department of Local Government Finance based on rents, yields, commodity prices, costs and interest rates

Times the acre’s soil productivity factor Accounts for variations in quality of farmland

Less its influence factor, if any Reduce assessments for characteristics like frequent

flooding or forest cover

Farmland Property Taxes

0

500

1000

1500

2000

2500

3000

350019

8019

8219

8419

8619

8819

9019

9219

9419

9619

9820

0020

0220

0420

0620

0820

1020

1220

1420

1620

18

Dol

lars

per

Acr

e

Year Taxes Paid (Pay Year)

Base Rate per Acre of Farmland for Property Taxation,Actual 1980-2016; and Estimated 2017-2018

Negotiated Rate, 1980-2002

Annual Trending withCapitalization Formula, 2008-15

New Capitalization Formula Drops Highest Value, 2011-15

Capitalization Formula, 2003

Trending and Rate Freeze, 2006-07

Freeze and AVGQLimit, 2016 -

0

500

1000

1500

2000

2500

3000

350020

07

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Dol

lars

per

Acr

e

Year Taxes Paid (Pay Year)

Base Rate per Acre of Farmland for Property Taxation,Capitalization Formula and AVGQ Formula, Projected 2016-2025

Freeze and AVGQ Formula

Capitalization Formula

HEA 1485 (2015) will change the LOITs effective January 1, 2017.

Understanding Indiana State and Local Taxes

Larry DeBoerDepartment of Agricultural Economics

Purdue University

October 15, 2015

Purdue Cooperative Extension Service

Twitter: @INTaxRockStars