Two years ago, nearly three-quarters of Hoosiers supported putting property tax caps in the state constitution.
Since then, those caps have saved land owners millions of dollars across Allen County and the state, but they haven’t helped everyone.
In fact, those caps have only helped owners of at least moderate homes and have disproportionately aided those with exceptionally expensive dwellings.
Allen County homeowners will save more than $16 million on their property tax bills this year because of the caps, but more than a third of that benefit will go to people living in homes worth $250,000 or more, according to analyses by The Journal Gazette and the county auditor. Those typically larger structures represent 7.2 percent of all homes in the county.
Homes in Allen County generally must have a tax value – which is supposed to represent market value – of about $100,000 to get any benefit at all. The actual tax cap benchmark varies wildly depending on where the property is located in the county (See chart, Page 6A).
In total, 31.5 percent of Allen County homeowners will receive some benefit from the caps this year – that number rises to 40 percent in Fort Wayne.
Rep. Win Moses, D-Fort Wayne, said the effect of the caps should not be a surprise to anyone, and was something he and other opponents tried to explain before the constitutional referendum. He said they were unsuccessful in explaining the issue or getting people to believe them.
“The intent of the legislation has been to shift the tax burden from the higher income to the middle and lower incomes,” he said. “This was not a tax reduction.”
What the caps mean in practice is that should property values remain consistent, any future property tax increases would only be felt by those living in less-expensive homes.
Sen. David Long, R-Fort Wayne, said it would be unfair to isolate the effect of property tax caps without looking at how other tax reforms have assisted Hoosiers, although he admitted the caps seem to get most of the attention.
“Everybody benefits from property tax reform significantly,” Long said.
He said the caps came at a time of property tax crisis, especially in Marion County, when homeowners were facing double-digit percentage increases on their tax bills. That is why the state took several steps to limit the growth, which included limiting government revenue growth and limiting the increase senior citizens can get on their tax bill.
He said the property tax caps were vital, however, because they ensure long-lasting relief for taxpayers.
“Without some permanent controls in there, you’d likely see the same erosion of our reforms over time,” Long said.
Reason for disparity
While the 1 percent cap is consistent for all homes, regardless of value, it affects homes differently because of other property tax relief measures taken by the state. The most basic is the standard homestead deduction, which reduces the taxable value of a home by 60 percent or $45,000 – whichever is less.
That means a $180,000 home has its taxed value reduced by a quarter, while a $90,000 home’s tax value is cut in half.
Because more of its value is cut, the less expensive home also has a larger portion of its tax bill reduced. This leaves larger homes with proportionally larger tax bills and thus more likely to hit the 1 percent tax cap.
“You are more likely to be eligible to be at the tax caps if you live in a more expensive home,” said Larry DeBoer, a professor at Purdue University and one of the pre-eminent experts on Indiana property taxes.
This means people in lower-priced homes are paying proportionally smaller bills, in comparison with their home’s value, than owners of higher-priced homes even with the caps.
But Moses said that argument omits a key part of the state’s property tax overhaul, which required raising sales tax from 6 percent to 7 percent.
“A sales tax is very regressive,” he said, noting lower and moderate income families have to spend a higher percentage of their incomes on necessities that include sales tax.
Moses also said it would be difficult to argue lower- and middle-class families weren’t paying their fair share, especially during a national recession.
The other property tax deductions also mean that the more expensive a home is, the more benefit it will receive from the tax caps.
For example, take two neighboring homes in Washington Township in Fort Wayne. One has a tax value of $442,900 and the neighboring home has a tax value of $250,900. Both homes save money under the property tax caps, but the more expensive home sees a 34.6 percent cut in its tax bill because of the caps while the smaller house receives a 28.5 percent tax break.
Cap cutoffs
In Fort Wayne, that value is about $100,000, although the city has its own variances. Residents living in northwest Perry Township have the lowest threshold in the county at $84,090, and because the median home value in the area is an estimated $170,200 nearly 95 percent of all homes there reached the tax caps.
This is the highest percentage in the county, followed by 85 percent of homeowners benefiting from the cap that live in the portion of Aboite Township that was annexed into the city.
Conversely, only 12.1 percent of homes receive property tax relief in Wayne Township in Fort Wayne. This is despite having a minimum value to hit the cap – $95,965 – that is similar to the minimum in Aboite – $99,040.
The difference is the median property value in Wayne Township is $75,000 compared to $173,600 in Aboite.
The swings are even wilder outside Fort Wayne, where tax rates vary dramatically. A resident in rural Jackson Township – and it is all rural – would need to have a home valued at more than $1 million to see any property tax cap relief. No homeowner met that threshold.
In unincorporated Aboite Township, a home must be worth nearly $800,000 to get a benefit from the caps, and 26 homes will receive some relief this year.
In the aggregate, property owners in Allen County receive $35.3 million in relief from the property tax caps this year. Of that total, about $16 million went toward homes, including nearly $500,000 in special relief for senior citizens.
There are 6,967 homes in the county valued at more than $250,000, and 4,415 of those homes receive some tax cap benefit. In aggregate those 4.5 percent of all county households received $6.4 million in cuts to their tax bills from the state caps.
Some of this benefit might fall under other tax caps for homes with huge chunks of land or large swimming pools, but the vast majority would be under the 1 percent cap for homes, according to Nicholas Jordan, Allen County deputy auditor. Jordan said it would be safe to assume that less than $1 million of the benefit received by larger home owners were as a result of those other caps.
This means between 33 percent and 40 percent of homeowners’ property tax relief went to people living in quarter-million-dollar homes.
Unfunded benefit
“Nobody that did get a (tax decrease) will argue that it is inappropriate,” he said.
That means local governments must assume that the caps, which are in the constitution, are here to stay.
But unlike other property tax relief, the tax caps come with no alternative financing source. State homestead deductions could be countered with higher tax rates, and local relief is financed with income taxes. The caps, however, mean local governments such as cities, libraries and schools don’t collect as much revenue as they could.
Sen. Long said that was exactly the point.
“It is forcing local government to become more efficient,” he said, noting that he was hopeful this limiting of revenues would force governments to examine some of the government reform recommendations made in previous years.
The caps, along with a few election-year decisions to freeze tax growth, have caused Fort Wayne’s net property tax revenues to drop annually since a peak of $99.4 million in 2007, the first year annexed residents in Aboite Township paid city property taxes.
Part of the problem facing local governments is the fact the caps hit at the same time the national economy collapsed. This not only hurt income taxes because fewer people were working, but it also led to a precipitous drop in property values in the area.
Since 2008, Fort Wayne properties – including homes, rentals and businesses – have seen a combined loss of more than $2 billion in value, according to the county’s assessor.
That plunge in property values means tax rates are pushed higher to collect the same amount of revenue, meaning more homes hit the circuit breaker and more revenues are lost. The hope is property values will eventually rebound and new construction will add more to the tax base, which DeBoer said will likely happen.
The slow erosion of its property tax stream prompted Mayor Tom Henry to convene a panel of tax experts, including DeBoer, to help the city create a sustainable fiscal policy in a world with property tax caps.
Fort Wayne Controller Pat Roller said the group met for the first time last week and will have a lot to discuss.
One of the concerns the tax caps create is that, should the city decide to increase property taxes, the only homeowners to feel that hit are the ones in lower-valued homes, she said, as long as property values remain flat.
Because more expensive homes are at their cap, any increase in tax rates has no effect on the homeowner’s bill. Homeowners not at the caps – those in less expensive homes – would continue to see their bills rise until they also hit the 1 percent cap.
While the caps have directly helped those living in larger homes, Moses said their effect will likely hurt people who receive no tax cap benefit at all.
“What it did is we are probably going to have a substantial reduction of service at some point and that is probably going to affect those that need them the most,” he said.
http://www.journalgazette.net/article/20120401/LOCAL/304019946
