Circuit breakers really more of a tax cap
Larry DeBoer, Guest Writer
I had the opportunity to speak to a meeting of the International Association of Assessing Officers in Indianapolis last fall. That’s a group that does education and research about property tax assessment, and they’re a big help to assessing officials around the world. Mostly, I talked about farm land assessment in Indiana, but I mentioned some of our other property tax policies, too.
When question time came, a very severe-looking man approached the floor mic and declared, ‘You know those circuit breakers of yours really aren’t circuit breakers!’
I know, I know. That’s why I call them tax caps.
We amended our Constitution in November 2010 to add limits on property tax bills. Our circuit breakers are maximum percentages of gross assessed value, which is the value the assessor places on property before deductions are subtracted. With a few exceptions, homeowners don’t pay more than 1 percent of the assessed value of their homes, rental housing and farm land owners don’t pay more than 2 percent and business owners don’t pay more than 3 percent. When taxpayers get overloaded by their property tax bills, the Constitutional limits are triggered to hold taxes down. That’s why we call them circuit breakers.
To the rest of the assessing world, though, circuit breakers are something else. They limit property tax bills as a share of income, not as a share of assessed value. Taxpayers compare their property tax bills to their incomes, and, if the bill is more than a certain percentage of that income, they get a rebate. Twenty states have income-based circuit breakers for various taxpayers. Michigan rebates property taxes above 3.5 percent of income for many homeowners. Illinois has one for retired people, except they haven’t had the money to fund the rebates since 2012.
Indiana’s circuit breaker doesn’t measure property tax bills against incomes, and that’s what offended my severe questioner. It’s probably better to call them ‘tax caps’ when talking to folks from out of state.
Turns out, though, that Indiana does have a mechanism for comparing property taxes to incomes. It’s called the ‘maximum levy growth quotient,’ and it limits the amount that our local governments can increase their property tax levies each year. It’s calculated based on a six-year average of Indiana non-farm personal income growth. For taxes in 2016, the growth quotient was 2.6 percent. That meant that local government maximum levies were limited to a 2.6-percent increase from 2015 to 2016.
Since the quotient is based on income growth, the maximum levy can’t increase by more than income does. Over six years, the levy can only rise as fast as taxpayers’ ability to pay, as measured by their incomes. If incomes grow slowly, so will the maximum levy.
It’s kind of like the rest of the world’s circuit breaker, just applied to the whole state all at once.
Actually, there’s a naming problem with the growth quotient, too. It’s also called the AVGQ, which stands for assessed value growth quotient. Assessed value hasn’t been used in the calculation since 2002.
The income data in the calculation are always two years behind the tax year. That’s because our Dept. of Local Government Finance has to notify local governments of the quotient before they set their budgets. They usually release the new quotient by the end of June (any day now). The most recent income data are from 2015, so income growth from 2010 to 2015 will be used to set the quotient for 2017 levies. We know all those numbers, so it’s a good guess that the growth quotient for 2017 will be about 3.8 percent.
That’s a pretty substantial increase from 2.6 percent in 2016. And that’s because the 2009 income growth number has finally dropped out. Indiana income fell 3.3 percent in 2009, the worst year of the recession. Without that big negative number, the quotient will increase.
Because of the two-year lag, the maximum levy increased much more than income did in 2009. Starting in 2011, the 2009 negative growth rate was included in the quotient calculation, which reduced maximum levy growth below 3 percent each year through 2016.
It was a kind of long, slow-acting circuit breaker. We held levy growth down while incomes caught up. As of 2017, they have.
Larry DeBoer is a professor of agricultural economics at Purdue University.