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By LARRY DeBOER
Every six to 10 years Indiana has a statewide reassessment to update property values for property tax bills. We remeasure the characteristics of real property – square footage, building materials, home improvements and so forth.
We apply new data on prices and costs to these characteristics. Since we waited so long between reassessments, we would update for six to 10 years of inflation all at once. Assessed values would jump.
Property taxes in 2013 will be based on new values from a statewide reassessment. What can we expect?
Let’s first look at some past reassessments. In the reassessment for 1980 taxes, total assessed value grew 41 percent from the values used in 1979. In the 1990 reassessment the increase was 32 percent. Property price and cost inflation had been higher in the 1970s than in the 1980s. In 1996 assessed value rose 13 percent, a smaller increase because of lower inflation and the shorter time between reassessments. In 2003 assessed value jumped 52 percent, mostly due to the new market-value assessment rules.
But in the reassessment for 2013, assessed value may decrease.
The difference is trending. Every year since 2007 we’ve updated the prices and costs applied to the characteristics of real property, which is land and buildings. In effect, we’ve sliced up the big reassessment jump into small pieces that we apply each year. The new price data applied in 2013 will represent a change from trended 2012 prices, not from 2003 prices.
If values hadn’t been trended upward enough, there still would have been uncounted inflation to make assessments jump. Trending has to be done right to eliminate the big increase. The early statewide results show real-property assessments falling by about 1 percent. Trending seems to have measured between-reassessment price changes pretty well.
Past reassessments always caused big increases in tax bills for homeowners and decreases for businesses. This happened even though assessments increased for all land and buildings. The reason was personal property, which is mostly business equipment (and inventories before 2007).
Personal property is not subject to statewide reassessment because taxable values for equipment are updated every year. So, in reassessment years the assessments of real property would grow a lot more than personal property. The share of property taxes paid by real-property owners would increase. Since nearly all homeowner property is real while nearly all personal property is business-owned, the homeowner share of the property tax would rise and the business share would fall.
The personal-property tax shift won’t happen this time, because with trending, both real and personal values have been updated every year.
But in some counties a tax shift to homeowners may happen anyway. The reassessment appears to have decreased commercial and industrial property assessments, while home assessments have increased slightly. The business share of property taxes will drop, and the homeowner share will rise. The effect looks to be small statewide, but in some counties business assessments have dropped considerably. Homeowner tax bills could rise noticeably in those counties.
In the past, reassessment had a big effect on taxpayers, but only a small effect on local governments. Assessments would jump but revenue would not, because most property-tax revenue is subject to state controls. Tax rates are set by dividing revenue by assessed value, so tax rates would fall. Revenue would increase in reassessment years just like it did in other years.
But this is the first reassessment under the tax caps, which were created by the 2008 tax reforms and voted into the Indiana Constitution in 2010. The fall in assessed values will cause a rise in tax rates, if local governments try to collect their controlled revenues. Higher tax rates make more taxpayers eligible for tax-cap credits, and that’s revenue that local governments do not receive.
So a drop in assessed value will cause a drop in tax revenue for local governments, where tax rates are already high. Revenues are proportional to the size of the assessment pie in such places, and reassessment will take a bite out of that pie. Local governments that depend on business property taxes will be affected the most.
The 2013 reassessment could reduce assessed values and tax revenues. It’s a brand new world for the Indiana property tax.
DeBoer is an agricultural economist at Purdue University.