Purdue Cooperative Extension Service

On Local Government

Indiana Property Tax Reform, 2008:Budgets, LOITs and Circuit Breaker

Credits

Larry DeBoerPurdue University

June 26, 2008

Circuit Breakers

Tax Bill Limits by 2009Homesteads: 1.5% of Gross Assessed ValueOther Residential, Farm Land: 2.5% of Gross

Assessed ValueOther Real and Personal Property: 3.5% of Gross

Assessed ValueIf 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 2010Homesteads: 1% of Gross Assessed ValueOther Residential, Farm Land: 2% of Gross

Assessed ValueOther Real and Personal Property: 3% of Gross

Assessed ValueIf 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-

erty Total

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 budgets2009 $229 million, 2% of budgets2010 $524 million, 5% of budgets

A Homeowner’s Tax Bill:Assessed Value and Deductions by 2010

 Gross Assessed Value 120,000 Homestead Standard Deduction 45,000 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 Rate 3.00 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

RateTax

Levied

Circuit Breaker

Loss

Tax Col-

lectedCounty 0.75 343 43 300City 1.00 458 58 400School Corporation 0.75 343 43 300Other Units 0.50 229 29 200

Total 3.00 1,373 173 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 Rate 3.25 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

RateTax

Levied

Circuit Breaker

Loss

Tax Col-

lectedCounty 0.75 343 43 300City 1.00 458 58 400School Corporation 0.75 343 43 300Other Units 0.50 229 29 200

Total 3.00 1,373 173 1,200

With School rate at 0.75

A Homeowner’s Tax Bill: Collections and Losses for Local Governments

RateTax

Levied

Circuit Breaker

Loss

Tax Col-

lectedCounty 0.75 343 66 277 City 1.00 458 88 369 School Corporation 1.00 458 88 369 Other Units 0.50 229 44 185

Total 3.25 1,487 287 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 0 -23 +23City 0 -31 +31School Corporation +114 +69 +45Other Units 0 -15 +15

Total +114 0 +114

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.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1% 2% 3%

Circ

uit B

reak

er C

redi

ts a

s Per

cent

of G

ross

Tax

Levy

Assumed Annual Gross Assessed Value Growth Rate, 2008, 2009 & 2010

Effect of AV Growth Assumptions on Estimated Circuit Breaker Credits, Fayette County, 2009 & 2010

2009

2010

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 Value 120,000

Taxable Assessed Value 45,750

With no credits, the net rate = the gross rate, $3.00 per $100 AV

 Tax Rate 3.00 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 Value 120,000

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 Rate 2.62 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

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

14.00

0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000

Net

Tax

Rat

e

Gross Assessed Value

Gross Assessed Value and Net Tax Rate Required for Eligibility for Homestead Circuit Breaker Credit

Homestead Circuit Breaker Credit at 1.5% of Gross A.V.

Homestead Circuit Breaker Credit at 1% of Gross A.V.

Assumes that homesteads receive the$45,000 standard deduction upto 60% of assessed value, the supplementalhomestead deduction of 35% of the remainder, and the $3,000 mortgagededuction. No other deductions areassumed.

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 2007• 14 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 Value 120,000 Homestead Standard Deduction 45,000 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 LOIT LOIT Tax Rate 3.00 3.00 Gross Tax Bill (rate times taxable AV) 1,373 1,373 LOIT Credit (50%; homeowners only) 687Tax Bill after LOIT 686Circuit Breaker Limits (1% of gross AV) 1,200 1,200 Circuit Breaker Credit 173 0

Net Tax Bill 1,200 686

Net tax reduction for homeowner: $514LOIT revenue gain for local units: $687Net 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

www.agecon.purdue.edu/crd/LocalGov

For more information