Popcorn & Property Taxes

1. Popcorn & Property Taxes Beth Henkel Schuckit & Associates October 10, 2007

2. Local Government Structure • Proliferation of local officials performing overlapping functions.

3. Constitutional Offices • Clerk • Auditor • Treasurer • Recorder • Prosecuting Attorney • Sheriff • Coroner • Surveyor

4. Legislative Entities • Board of Commissioners – 3 with executive power • County Council – 7 – as legislative • Unique to Indiana • Instituted in late 1800s as watchdog over excesses & corruption • Fiscal powers • 92 county assessors • 1008 local assessors

5. Local Government Home Rule •  In many other states, local government units have restricted powers. • In Indiana, under the Indiana Home Rule Act, units have: • all powers granted it by statute; and • all other powers necessary or desirable in the conduct of its affairs, even though not granted by statute.

6. Home Rule • Indiana’s Home Rule statute limited, however. • No fiscal home rule. • No municipal charters • Incorporation laws provide strict structures. • Constitution’s elected officials limit reform movement.

7. Indiana’s Property Tax System • Early 20th Century, market value system in place • 1960s = departure – to a cost based system. • True tax value did not equal market value.

8. Evolution of New Rules of Assessment • It was whatever the State Tax Board determined. • Land was always valued, allegedly, at market. • Improvements assessed differently: • Reproduction cost of property less depreciation. • Actual sales price of property irrelevant.

9. Systemic Change • 1998-2002 --Tax Court and Supreme Court ruled that the old system was unconstitutional because it assessed property on reproduction costs less depreciation rather than “real world values.” • In 2002, Indiana joined 48 other states and adopted market-based assessment system.

10. Supreme Court Guidance • The assessment system must measure taxpayers’ property wealth. • Based on objectively verifiable data to enable a review of the assessment system to ensure uniformity and equality . . . .” • One acceptable deviation from strict market value is “value in use.”

11. Dragging the Feet • Legislature postponed reassessment. • Governor postponed. • Why? The effect on homeowners – predictions that tax burden would rise by more than 30%. • 2000– Judge Fisher orders new rule in place by June 2001 and reassessment under constitutional rules as of March 1, 2002.

12. Market Value in Use • The new rules focus on the ultimate value and whether it accurately measures the value in use of a particular parcel of property. • Most often value in use = sale value • Focus is on the bottom line: Sales price.

13. The Bottom Line • Question you should ask yourself when you get your assessments: Would I sell my house/business for that? • More an art than a science • Opinion-based -- still subjective • Actual sales of comparable property provide the benchmark.

14. Why Older Homes Were Hit • Old system valued Victorian home based on its cost to reproduce – but depreciated the value substantially. • In defending the old system, the State pointed out the costs associated with rehabbing such homes and maintaining their value. • Tax Court rejected the defense.

15. Rehabilitation Deduction • Form 322 (IC 6-1.1-12-18 to 21) • This deduction is for 100% of the increase in assessed value due to rehabilitation, up to a maximum of $ 18,720 per dwelling unit. The deduction runs for five (5) years from the increase in assessment. • Useful for rentals. • Low assessed value limit = $37,440 for single family.

16. Older Home Rehabilitation Deduction • Form 322A • Deduction for up to 50% of the increase due to rehabilitation. • Up to max of $124,800 for single family dwelling. • Building must be at least 50 years old before the date of application. • Minimum price for rehab = $10,000.

17. Annual Adjustments • Sounded like a good idea • Avoiding real property “sticker shock” in 2009. • Moving up valuation dates. • Reassessment a continual process. • Professionalize the assessment process.

18. Effect of No Annual Adjustments • Reassessments could be as long as 10 years apart. • In between, real property values stayed the same while personal property updated annually. • Effect = • shift of tax burden to business • “sticker shock” in year of reassessment.

19. Straightforward Components • Bring benchmark date to 1/1/05. • General rules: • Verify 2004 and 2005 sales. • Perform statistical analysis and ratio studies for each township and property class. • Update real property values based on sales of comparable property.

20. Legislative Changes that Fueled Perfect Storm • Inventory off the tax rolls – 51 counties this year • Balanced state budget in part by freezing state support of property tax • Reduced PTRC • Reduced homestead credits. • Legislature relied upon incomplete and inaccurate data.

21. Perfect Storm: Homestead Credit • Reduction in homestead credit from 28% to 20% • Not offset by increase from $35,000 to $45,000 in homestead deduction. • 28% decline in homestead credit • Hit homeowners with assessed values under $70,000. • Homestead deduction increase only benefited those whose houses were assessed at > $70,000.

22. Perfect Storm: Trending • Trending real estate values from 1999 to 2005 • General trend statewide to increase residential property. • Counties’ did not trend as State predicted. • Industrial decline • Insufficient sales for commercial property.

23. Perfect Storm: Unequal Impact • Rates vary within the county • But even within taxing districts, these tax policies result in disparities.

24. Unequal Impact • Chart depicts tax changes from 2006 to 2007 in Franklin taxing unit. • $100,000 home, 20% increase in assessed value, sees 27% increase in taxes. • $150,000 home, 20% increase in AV, has 37% increase in taxes. • $70,000 home, 20% increase in AV, has 54% increase in taxes.

25. Local Spending Issues • Property tax is perceived as local tax funding local services • More than 50% of taxes go to fund schools. • County and local government saddled with unfunded mandates: • Welfare • Unfunded pension liabilities

26. Local Spending Issues • State controls levies, not rates • Debt, capital projects, welfare, and some funds outside the levy controls • State support – PTRC and homestead – does not apply to excluded levies. • No oversight entity that places effective controls over impact on taxpayers.

27. Reform Measures • Tension between state and local control • Municipalities are not all the same • Property tax changes have had disparate impact • One size changes do not fix the problems • Declining and shifting tax base • Elimination of inventory • Change from manufacturing to services oriented economy

28. Real Reform Based on Facts • Eliminate property tax? Be careful what you wish for: • Property tax has been stable form of funding local services • All 50 states have property tax • Often, the only tax that businesses pay • One of the three legs of taxation stool

29. Real Reform • Intergovernmental partnerships unraveling • Needs are changing • Unregulated, unsustainable growth • Need for users of services to pay fair share • Changing economy from manufacturing to services and knowledge-based industries • Need for regional tax base vs. turfdom