Purdue Economist Larry DeBoer has provided the following wrap-up of the recent Indiana Legislative session.
HEA1001 is the biggest, most important reform in Indiana local government finance since 1973, at least.
Here are the essentials.
The state will take over the remaining school general fund, the county welfare funds, and a few smaller funds. State spending will rise by these amounts, and the tax levies and rates for these funds will disappear. The state will pay for the added spending with an increase in the state sales tax from 6% to 7% (as of April 1), and by redirecting existing property tax relief spending. That means the property tax replacement credits and state homestead credits will disappear, too.
Added property tax relief will be channeled to homeowners with a supplemental homestead standard deduction, equal to 35% of a home’s value after the existing $45,000 deduction is subtracted. This reduces the tax base, and so makes property tax rates higher than they would have been. Post-reform tax rates will be near the current rates less credits. That means most taxpayers other than homeowners won’t receive much property tax relief. This is very much a bill to deliver property tax relief to homeowners.
The income tax deduction for renters will rise from a $2,500 maximum to a $3,000 maximum, and the Indiana earned income credit will increase from 6% to 9% of the Federal credit. This will help offset some of the sales tax increase for renters, who do not receive direct relief from the property tax reductions. Lower income homeowners will receive additional relief through an increase in the maximum share of assessed value that can be taken with the standard deduction. It was $45,000 up to 50% of assessed value, now it will be $45,000 up to 60% of assessed value.
Lower income homeowners age 65 and over will be allowed to freeze their property tax payments.
These measures will phase in over the next two years. This year there will be a substantial increase in homestead credits, financed by the April 1 sales tax increase.
The circuit breaker credits will limit homeowner taxes to 1% of gross assessed value (that’s market value before deductions are subtracted). Rental housing and farm land taxes will be limited to 2% of assessed value, and other taxes will be limited to 3% of assessed value. This is in law, and will fully phase in by 2010. A constitutional amendment resolution was also passed, to put these limits into the constitution. That starts the amendment process. Lost revenue from circuit breaker credits will not be replaced, and estimates show total losses to local governments to be in the $500 to $600 million range. Owners of rental housing will be the chief beneficiaries of circuit breaker tax relief. Governments in Lake and St. Joseph Counties will exempt debt service taxes from the circuit breaker limits.
Township trustee assessment duties will be moved to the county assessor, but the township trustees will keep their positions. Elected township assessors will be eliminated, except in townships with more than 15,000 real property parcels. Township voters will decide whether to eliminate these assessors in November.
Bigger school and other capital projects will be subject to referenda. Smaller projects will still be subject to petition-remonstrance.
Some things that were considered did not pass:
- New local spending controls based on county personal income growth will not be imposed.
- The three local income taxes authorized in 2007 continue to exist. This includes the public safety income tax.
- Few of the Local Government Commission reforms were considered (that’s the Kernan-Shepard commission). Most township assessors were eliminated, and the county council was given some added oversight over capital projects. That debate is still to come, if it happens at all.
