Transcript Property Taxes and State/Local Finance

Purdue Cooperative Extension Service
On Local Government
Indiana Property Tax Reform, 2008:
Budgets, LOITs and Circuit Breaker
Credits
Larry DeBoer
Purdue University
June 26, 2008
Circuit Breakers
Tax Bill Limits by 2009
Homesteads: 1.5% of Gross Assessed Value
Other Residential, Farm Land: 2.5% of Gross
Assessed Value
Other Real and Personal Property: 3.5% of
Gross Assessed Value
If 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 2010
Homesteads: 1% of Gross Assessed Value
Other Residential, Farm Land: 2% of Gross
Assessed Value
Other Real and Personal Property: 3% of Gross
Assessed Value
If 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
Homesteads
NonHome- Comstead mercial Other
Res- ApartReal
idential ments Property
Personal
Property
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 budgets
2009 $229 million, 2% of budgets
2010 $524 million, 5% of budgets
A Homeowner’s Tax Bill:
Assessed Value and Deductions by 2010
Gross Assessed Value
Homestead Standard Deduction
Remainder
35% Homestead Supplemental Deduction
Mortgage Deduction
Taxable Assessed Value
120,000
45,000
75,000
26,250
3,000
45,750
A Homeowner’s Tax Bill:
Tax Rate, Circuit Breaker and Tax Bill
Tax Rate
Gross Tax Bill (rate times taxable AV)
Circuit Breaker Limits (1% of gross AV)
Circuit Breaker Credit
3.00
1,373
1,200
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
County
City
School Corporation
Other Units
Rate
0.75
1.00
0.75
0.50
Circuit
Tax
Tax Breaker ColLevied Loss lected
343
43
300
458
58
400
343
43
300
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
Gross Tax Bill (rate times taxable AV)
Circuit Breaker Limits (1% of gross AV)
Circuit Breaker Credit
3.25
1,487
1,200
287
Net Tax Bill
1,200
Suppose School Rate rises to 1.00
A Homeowner’s Tax Bill:
Collections and Losses for Local Governments
County
City
School Corporation
Other Units
Rate
0.75
1.00
0.75
0.50
Circuit
Tax
Tax Breaker ColLevied Loss lected
343
43
300
458
58
400
343
43
300
229
29
200
Total
3.00
1,373
173
With School rate at 0.75
1,200
A Homeowner’s Tax Bill:
Collections and Losses for Local Governments
County
City
School Corporation
Other Units
Rate
0.75
1.00
1.00
0.50
Circuit
Tax
Tax Breaker ColLevied Loss lected
343
66
277
458
88
369
458
88
369
229
44
185
Total
3.25
1,487
287
With School rate at 1.00
1,200
A Homeowner’s Tax Bill:
Effect on Local Government Tax Collections
County
City
School Corporation
Other Units
Total
Change Change in
Change in Tax
Circuit
in Tax
ColBreaker
Levied lected
Loss
0
-23
+23
0
-31
+31
+114
+69
+45
0
-15
+15
+114
0
+114
Some Consequences of Circuit
Breakers for Local Government Policy
1.
2.
3.
4.
5.
Interdependent budgets
Annexation
Bond issues
Changes in Assessed Values
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.
Circuit Breaker Credits as Percent of Gross Tax Levy
Effect of AV Growth Assumptions on
Estimated Circuit Breaker Credits, Fayette County, 2009 & 2010
18%
2010
16%
14%
12%
10%
8%
2009
6%
4%
2%
0%
1%
2%
3%
Assumed Annual Gross Assessed Value Growth Rate, 2008, 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
Taxable Assessed Value
120,000
45,750
Tax Rate
Gross Tax Bill (rate times taxable AV)
Circuit Breaker Limits (1% of gross AV)
Circuit Breaker Credit
3.00
1,373
1,200
173
Net Tax Bill
1,200
With no credits, the net rate = the gross rate, $3.00
per $100 AV
A Homeowner’s Tax Bill:
Net Tax Rate before Circuit Breaker Credits
Gross Assessed Value
Taxable Assessed Value
120,000
45,750
Tax Rate
Gross Tax Bill (rate times taxable AV)
Circuit Breaker Limits (1% of gross AV)
Circuit Breaker Credit
2.62
1,200
1,200
0
Net Tax Bill
1,200
At what rate will circuit breaker credits drop to zero?
At the 1% limit, for this homeowner, at $2.62 / $100 AV
Gross Assessed Value and Net Tax Rate Required for
Eligibility for Homestead Circuit Breaker Credit
14.00
13.00
Assumes that homesteads receive the
$45,000 standard deduction up
to 60% of assessed value, the supplemental
homestead deduction of 35% of the
remainder, and the $3,000 mortgage
deduction. No other deductions are
assumed.
12.00
11.00
10.00
Net Tax Rate
9.00
8.00
7.00
6.00
Homestead Circuit Breaker Credit at 1.5% of Gross A.V.
5.00
4.00
3.00
2.00
1.00
Homestead Circuit Breaker Credit at 1% of Gross A.V.
0.00
0
50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000
Gross Assessed Value
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
Homestead Standard Deduction
Remainder
35% Homestead Supplemental Deduction
Mortgage Deduction
Taxable Assessed Value
120,000
45,000
75,000
26,250
3,000
45,750
A Homeowner’s Tax Bill:
Effect of LOIT on Circuit Breaker Credit
Tax Rate
Gross Tax Bill (rate times taxable AV)
LOIT Credit (50%; homeowners only)
Tax Bill after LOIT
Circuit Breaker Limits (1% of gross AV)
Circuit Breaker Credit
Net Tax Bill
No LOIT
3.00
1,373
1,200
173
LOIT
3.00
1,373
687
686
1,200
0
1,200
686
Net tax reduction for homeowner: $514
LOIT revenue gain for local units: $687
Net 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
For more information
www.agecon.purdue.edu/crd/LocalGov