Education, From The Capitol To The Classroom

Seven Essential Questions About Indiana’s Property Tax Caps, Answered

Cars were moving at speeds well below the school zone limit near Franklin Township Middle School East back in August 2011, after steep busing fees impelled many parents to drive their kids to school. School officials began charging the fee after property tax caps cut off revenue from the district's transportation fund.

Kyle Stokes/StateImpact Indiana

Cars were moving at speeds well below the school zone limit near Franklin Township Middle School East in August 2011, after steep busing fees impelled many parents to drive their kids to school. School officials began charging the fee after property tax caps cut off revenue from the district's transportation fund.

A bad riddle for you: what do the costs of owning a home have in common with school buses, technology upgradessmall-town schools, school closures, referendums and special elections?

The answer we’re looking for: property tax caps.

Though voters enshrined the limits on property tax collections in the state’s constitution in 2010, we at StateImpact hear a lot about them — they kept $245 million in revenues out of schools’ budgets and in property owners’ pockets last year.

With property taxes back in the spotlight and their impact on district budgets growing, we thought we’d put together a few more excerpts of our interview with Purdue agricultural economist Larry DeBoer that will — we hope — help you make sense of the issue. (Check out his explanation of the state’s business personal property tax.)

Alright, let’s start at the beginning. What is a ‘property tax cap’?

It’s a limit on the amount of taxes local governments can collect on a piece of property.

Sounds simple enough. How does it work?

That depends on what kind of property we’re talking about. Do you own a home? A business? Rental property? Farmland?

For instance, let’s say the assessor says your home is worth $200,000. The state’s constitution prevents you from paying more than $2,000 in property taxes on that home in a year. That’s no random limit. Under property tax caps, governments cannot collect more than one percent of the “gross assessed value” of a piece of homestead property.

Owners of farmland or rental property won’t pay any more than two percent of the property’s value in taxes. For any other type of property — notably, commercial property — gets capped at three percent.

Timeout — I thought governments loved property tax revenue, especially local governments. Why limit this revenue source with a cap?

The caps “emerged from ten years of property tax chaos,” says DeBoer, “that began at the end of 1998 when our Indiana Supreme Court determined that the way we were assessing property was unconstitutional.”

Long story short, DeBoer says property owners started seeing wild swings in their property tax bills. Some years, a property owner’s tax bill would be low. Some years, they’d be very high. By 2007, DeBoer says, the General Assembly was spending more than $2 billion of the state budget on helping ease the burden of property taxes. The worst part, says DeBoer was that homeowners couldn’t plan ahead for the swings.

“Everybody realizes that the Indiana homeowner property taxes are not very high compared to most other places — Illinois’ are much higher,” says DeBoer. “But it was the uncertainty of the thing.

“You’d buy a house. You’d say, ‘Well, I can afford this house. I can afford the payment. I can afford the property tax payments.’ And then a year or two down the road, property tax payments doubled. You’d feel like, ‘Well, maybe I can’t afford this house.’”

So this is where the property tax caps come into the picture, right?

Yup — and state lawmakers paired the caps with an increase in sales taxes.

“You may remember we raised the sales tax in [2008] to replace some of the lost property tax revenue and then imposed these caps as well to say, ‘Yes, your property taxes may vary, they may grow, but there is a cap,’” DeBoer says.

Okay, so the caps are in place to keep my property tax bill from going through the roof — as a homeowner, I like that. But you said $245 million in revenues diverted from schools? What would districts have used that money for?

In general, for a few key things: maintaining buildings, building new buildings, paying off the debt from (mostly) buildings. So, buildings. But also for replacing buses and keeping them on the roads. Some districts use property tax dollars to pay for new technology.

(As part of lawmakers’ 2008 overhaul of Indiana’s tax policy, though, state government assumed responsibility for the General Fund — which, on average, accounts for two-thirds of the dollars on a school district’s ledger. Instead of local property tax dollars, state sales tax dollars now replenish that fund. Districts use this money to pay operating costs, like salaries and benefits for teachers and staff.)

Anyway, yes, the tax caps have diverted $245 million from the funds schools use to pay for buses, buildings and debt. Only Indiana’s city governments have seen as big of a collective hit to their budgets — about $244 million — from the tax caps.

Which districts have been the biggest losers from the caps?

Most districts haven’t lost that much. More than two-thirds of the state’s districts lost less than five percent of their property tax revenues last year.

On the other end of the spectrum are the 61 districts that lost more than 10 percent of their revenues. On the extreme ends are districts like Muncie Community Schools and Gary Community Schools, which both lost more than three-quarters of their property tax revenues to the caps.

If there’s a common thread among these hardest-hit districts, it’s this: most of them are in areas with incorporated cities or towns. Basically, property taxpayers in these communities are paying for another layer of government services. Since property tax caps shrink the overall pie of available revenues, DeBoer says school districts are left with a smaller share.

“If your school corporation is in a city or town, you’re more likely to have taxpayers at their caps,” he explains. “You’re more likely to be losing revenue. If the identical school corporation was out in an unincorporated area, out in a rural area, their taxpayers would not be paying that city and town rate and fewer of the taxpayers would be at their caps, and the school corporation would not lose revenue.”

Can school districts do anything about these losses besides cut?

This might be a good time to point out that part of the point of property tax caps was to check school districts’ ability to set tax rates at levels that were good for them. Before state lawmakers implemented tax caps in 2008, school boards could essentially name their tax rate, DeBoer says, so long as they met some state guidelines.

The key question, DeBoer says, was “will your taxpayers accept [the tax rate]? Will they vote the school board out of office? Will they force the firing of the superintendent if the property tax goes up? And if not, you can fill in those holes and keep your school corporation going. With the caps, that option is limited.”

That said, districts do have options to avoid deep cuts. Chief among them: ask voters to raise their own property taxes. Property taxes collected from taxpayer-approved referenda are not subject to the tax caps. In the state’s brief history with school referenda, schools have had mixed success at the ballot box, but there is some evidence that districts are getting better at asking for money.

“Since 2008, there have been six really small school corporations that have done referenda — school corporations with less than 1,000 students,” DeBoer says. “Five of them have passed, mostly by landslide margins, which tells me that small communities that think their school system might cease to exist if they don’t get the money are sometimes willing to pony up; willing to say, ‘Okay, we’re going to pay, we’re going to pay higher property taxes. We volunteer to pay higher property taxes in order to maintain our school corporation.’”



  • jjmarbles

    Love this article – way past time for it! Now, please go back and indicate how districts HAVE LOST more money by the state taking over the general fund. This is the sales tax portion that the increase in that was supposed to cover. This sales tax portion was promptly CUT by Daniels when he took an axe to the education budget during his term. Also, how the state then allowed districts to move money from other funds – funds still covered by property tax – to cover the shortfalls that those cuts caused. We also had districts having to borrow funds during those chaotic years when they were trying to get the whole property tax assessment figured out. Is the problem really solved though? The court ruling indicated that it was how the property was assessed that was the problem – with a tax cap, your property rate can still go up or down based on what your property’s value is assessed at and that is completely up to the assessor… Funding our schools is much more complex then people are led to believe.

  • Lloyd Piper

    Not all residential property is capped at 1% of assessed value. Last year, I purchased the vacant lot adjacent to my home. Adding this piece of property, I now own 1.09 acres. Only the first acre is capped at 1%, according to the Howard County Auditor’s Office. The remaining 0.09 acres is considered “other property” (not residential, not farmland) and is capped at the state maximum 3% of assessed value. At least they didn’t pick that 0.09 acres under my home, and selected part of the vacant lot instead. Go figure.

  • Allenedwardwood

    Everybody realizes that the Indiana homeowner property taxes are not very high compared to most other places. luxury apartments london

  • Brent B

    What this article fails to explain is that property assessments are required by state law to be bade on “fair market value.” And just who determines fair market value? Not the county assessor. Rather, buyers and sellers determine that. Experts typically define fair market value as “what a knowledgeable, willing, and unpressured buyers would probably pay to a knowledgeable, willing, and unpressured seller in the market.” So with that understanding, and as required by state law, a property that sold for $250,000 last year should be assessed by the county at $250,000 – because that is precisely what the market fairly determined its value to be. A house that sold for $500,000 should be assessed at $500,000. But what about assessing the values of other nearby properties? The county should take the sales data of properties that were on the market and, comparing similar properties, apply that data to existing homes that were not bought/sold in the market. If the sales data indicates prices rose for the sale of similarly-sized 3 bedroom, 2.5 bath homes on quarter acre lots, then assessments for all similar homes nearby would be assessed values similar to the the sold homes experience in the actual market. Likewise, if prices dipped, so too would assessments. In other words, assessments should be driven by actual market data. However, in Marion County at least it does not appear the county assessor follows this objective approach. I once tracked a number of actual sales and, a year later, looked up the property assessments for each. Rarely did the property assessment reflect the actual sales price. In most instances the assessments where at least 5-7 percent lower than the sales prices (though, to be fair, in some instances for inexplicable reasons the assessments were far higher). When property owners get the higher tax assessment they at least have the ability to challenge it; property owners who are under-assessed could also challenge it, but why should they? It is up to the assessor in each county to use the available sales data and make objective assessments. If in fact assessors are under-valuing properties, that means cities and towns are being cheated out of the legitimate revenues necessary to maintain and improve the places where we live, work, and play.

  • Lew Wadsworth

    This article is very misleading. I live in one of the referenda districts that was led to believe the sky was falling, and voted to raise property taxes beyond the caps set by state law. It is one of the wealthiest districts in our county. The funds were needed because an out of control school board didn’t know how to control spending or properly assess needs over wants. Now people who had lived in their homes for decades can no longer afford to stay in their homes. Raising properly taxes is really just wealth redistribution under the guise of helping our children. It’s socialists taking over another sector of our lives. If they truly wanted what was best for the children, They would support school vouchers, not higher taxes.

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