How tax bills are calculated, where money goes
Larry DeBoer, Purdue University
The second installment for Indiana property tax bills was due a few weeks ago. If you own a house with a mortgage, you probably didn’t notice. Let’s hope the bank remembered to pay! But, the rest of Indiana property owners had to send a check to the county treasurer for the second half of the tax owed on their property. They paid the first installment in May. With the property tax on our minds, it’s a good time to look at how tax bills are calculated and where the money goes.
Your property is located within the boundaries of several local governments. It’s in a county and a school district, probably in a township and a library district, maybe in other special districts, and maybe in a city or town. You pay taxes to them all, with that one tax payment.
Each government sets a property tax levy as part of its budget process. The levy is the revenue they intend to collect to pay for the services they provide. The state imposes a limit called the maximum levy, and most local governments tax right at that maximum.
Meanwhile, the county assessor measures the assessed value of each parcel of property. That’s called the gross assessed value. The county auditor then determines which parcels are eligible for deductions. Deductions are subtracted, and the result is the net assessed value. Parcel net assessed values are added up for each local government to get the total net assessed value that it can tax.
Each government’s tax rate is set by dividing its levy by its total net assessed value. That tax rate is multiplied by the net assessed value of each parcel, and the sum for all parcels adds up to the total levy that each government needs for its budget.
Except it doesn’t.
In 2010, we voted property tax caps into the Indiana Constitution. Sometimes they’re called “circuit breaker caps.” The total tax bill paid by each taxpayer is limited to a percentage of the gross assessed value of their property. The homeowner limit is 1%, the limit for rental housing and farmland is 2% and the limit for business land, buildings and equipment is 3%. If your total tax bill from all those overlapping local governments is more than your cap amount, you’ll get a tax cap credit. That’s a part of the tax bill you don’t pay, and a part of the levy that local governments don’t receive.
Let’s do an example.
Suppose I own a home with a gross assessed value of $120,000. Homeowners are eligible for lots of deductions, so typically the net assessed value on my home would be $45,750. Suppose the county government’s tax rate is 50 cents per $100 assessed value (that is, 0.5%), the township and library rates are both 10 cents, the school’s rate is one dollar and there are special district rates that add up to 30 cents. That’s a $2, or 2%, rate. My tax bill would be 2% of $45,750, which is $915.
Now comes the check against the tax caps. The tax cap for a home is 1% of gross assessed value, which would be $1,200 for this home. The tax bill is less than that, so I’d pay the full $915.
But, wait. Maybe my home is in a town with a tax rate of $1 per $100 assessed value. Then, the total tax rate is $3. My tax bill would be 3% of $45,750, which is $1,373. That’s $173 more than my $1,200 cap. So, I’d get a $173 tax cap credit, and I’d pay a tax bill of $1,200. It’s a tax break for me but a revenue loss for the local governments. The loss is divided up among the overlapping governments based on their shares of my tax bill.
Those are the basics, though there can be more complications. But, unlike the income tax, the taxpayer doesn’t have to do these calculations. Each county sends out a page of information showing how the calculations are done and where the money goes.
It couldn’t hurt to take a look. Well, it couldn’t hurt too much.
Editor’s note: Larry DeBoer is a professor of agricultural economics at Purdue University.