Popcorn & Property Taxes

Beth Henkel

Schuckit & Associates

October 10, 2007

Local Government Structure

• Proliferation of local officials performing overlapping functions.

Constitutional Offices

• Clerk • Auditor • Treasurer• Recorder• Prosecuting Attorney • Sheriff• Coroner• Surveyor

Legislative Entities

• Board of Commissioners – 3 with executive power

• County Council – 7 – as legislative– Unique to Indiana – Instituted in late 1800s as watchdog over

excesses & corruption– Fiscal powers

• 92 county assessors • 1008 local assessors

Local Government Home Rule

•  In many other states, local government units have restricted powers.

• In Indiana, under the Indiana Home Rule Act, units have: – all powers granted it by statute; and– all other powers necessary or desirable in the

conduct of its affairs, even though not granted by statute.

Home Rule

• Indiana’s Home Rule statute limited, however. – No fiscal home rule. – No municipal charters – Incorporation laws provide strict structures.

• Constitution’s elected officials limit reform movement.

Indiana’s Property Tax System

• Early 20th Century, market value system in place

• 1960s = departure – to a cost based system.

• True tax value did not equal market value.

Evolution of New Rules of Assessment

• It was whatever the State Tax Board determined.

• Land was always valued, allegedly, at market.

• Improvements assessed differently: – Reproduction cost of property less

depreciation. – Actual sales price of property irrelevant.

Systemic Change

• 1998-2002 --Tax Court and Supreme Court ruled that the old system was unconstitutional because it assessed property on reproduction costs less depreciation rather than “real world values.”

• In 2002, Indiana joined 48 other states and adopted market-based assessment system.

Supreme Court Guidance

(1) The assessment system must measure taxpayers’ property wealth.

(2) Based on objectively verifiable data to enable a review of the assessment system to ensure uniformity and equality . . . .”

(3) One acceptable deviation from strict market value is “value in use.”

Dragging the Feet

• Legislature postponed reassessment. • Governor postponed.• Why? The effect on homeowners –

predictions that tax burden would rise by more than 30%.

• 2000– Judge Fisher orders new rule in place by June 2001 and reassessment under constitutional rules as of March 1, 2002.

Market Value in Use

• The new rules focus on the ultimate value and whether it accurately measures the value in use of a particular parcel of property.

• Most often value in use = sale value

• Focus is on the bottom line: Sales price.

The Bottom Line

• Question you should ask yourself when you get your assessments: Would I sell my house/business for that?

• More an art than a science

• Opinion-based -- still subjective

• Actual sales of comparable property provide the benchmark.

Why Older Homes Were Hit

• Old system valued Victorian home based on its cost to reproduce – but depreciated the value substantially.

• In defending the old system, the State pointed out the costs associated with rehabbing such homes and maintaining their value.

• Tax Court rejected the defense.

Rehabilitation Deduction

• Form 322 (IC 6-1.1-12-18 to 21)• This deduction is for 100% of the increase

in assessed value due to rehabilitation, up to a maximum of $ 18,720 per dwelling unit. The deduction runs for five (5) years from the increase in assessment.

• Useful for rentals.• Low assessed value limit = $37,440 for

single family.

Older Home Rehabilitation Deduction

• Form 322A

• Deduction for up to 50% of the increase due to rehabilitation.

• Up to max of $124,800 for single family dwelling.

• Building must be at least 50 years old before the date of application.

• Minimum price for rehab = $10,000.

Annual Adjustments

• Sounded like a good idea

• Avoiding real property “sticker shock” in 2009.

• Moving up valuation dates.

• Reassessment a continual process.

• Professionalize the assessment process.

Effect of No Annual Adjustments

• Reassessments could be as long as 10 years apart.

• In between, real property values stayed the same while personal property updated annually.

• Effect = – shift of tax burden to business– “sticker shock” in year of reassessment.

Straightforward Components

• Bring benchmark date to 1/1/05.

• General rules: – Verify 2004 and 2005 sales. – Perform statistical analysis and ratio studies

for each township and property class.

• Update real property values based on sales of comparable property.

Legislative Changes that Fueled Perfect Storm

• Inventory off the tax rolls – 51 counties this year

• Balanced state budget in part by freezing state support of property tax– Reduced PTRC – Reduced homestead credits.

• Legislature relied upon incomplete and inaccurate data.

Perfect Storm: Homestead Credit

• Reduction in homestead credit from 28% to 20%• Not offset by increase from $35,000 to $45,000

in homestead deduction. • 28% decline in homestead credit • Hit homeowners with assessed values under

$70,000. • Homestead deduction increase only benefited

those whose houses were assessed at > $70,000.

Perfect Storm: Trending

• Trending real estate values from 1999 to 2005– General trend statewide to increase

residential property. – Counties’ did not trend as State predicted. – Industrial decline– Insufficient sales for commercial property.

Perfect Storm: Unequal Impact

• Rates vary within the county

• But even within taxing districts, these tax policies result in disparities.

Unequal Impact

• Chart depicts tax changes from 2006 to 2007 in Franklin taxing unit. – $100,000 home, 20% increase in assessed

value, sees 27% increase in taxes.– $150,000 home, 20% increase in AV, has

37% increase in taxes. – $70,000 home, 20% increase in AV, has 54%

increase in taxes.

Local Spending Issues

• Property tax is perceived as local tax funding local services

• More than 50% of taxes go to fund schools.

• County and local government saddled with unfunded mandates: – Welfare– Unfunded pension liabilities

Local Spending Issues

• State controls levies, not rates

• Debt, capital projects, welfare, and some funds outside the levy controls

• State support – PTRC and homestead – does not apply to excluded levies.

• No oversight entity that places effective controls over impact on taxpayers.

Reform Measures

• Tension between state and local control– Municipalities are not all the same– Property tax changes have had disparate

impact– One size changes do not fix the problems

• Declining and shifting tax base– Elimination of inventory– Change from manufacturing to services

oriented economy

Real Reform Based on Facts

• Eliminate property tax? Be careful what you wish for: – Property tax has been stable form of funding

local services– All 50 states have property tax– Often, the only tax that businesses pay– One of the three legs of taxation stool

Real Reform

• Intergovernmental partnerships unraveling

• Needs are changing

• Unregulated, unsustainable growth

• Need for users of services to pay fair share

• Changing economy from manufacturing to services and knowledge-based industries

• Need for regional tax base vs. turfdom