By Larry DeBoer | Purdue University
What will be the effect of the COVID recession on the property taxes that fund Indiana local governments? I’ve been thinking and writing about the possibilities for a year and a half. Now we have enough data to answer that question. No spoilers, though. Let’s consider what could happen — and what did happen after the Great Recession in 2007-09.
The Great Recession depressed new construction and reduced the demand for property. Property prices fell, especially for homes. Statewide, assessed values fell in 2011 and again in 2013. Assessments declined in 54 of 92 counties in 2013 alone.
The COVID recession was in 2020. Changes in property values were assessed in 2021, for tax bills in 2022. The recession of 2020 would hit local government budgets in 2022.
Property tax revenue is limited by the state-imposed maximum levy. It increases each year based on the six-year average of statewide non-farm income growth. That percentage increase is called the maximum levy growth quotient (MLGQ). In 2009 income dropped, and this negative number depressed levy growth starting in 2011 — there’s that two-year lag again — and continued to depress the MLGQ through 2016.
The change in income in the COVID recession would enter the maximum levy calculation in 2022, and remain through 2027. Again, the recession first affects budgets in 2022.
Tax rates are determined each year by dividing the levy by the assessed value in each jurisdiction. If levies rise, even slowly, while assessed values fall, tax rates go up. Higher tax rates make more property owners eligible for credits under the constitutional tax caps. Tax cap credits are revenue losses for local governments. Credits did increase after the Great Recession.
So local officials been wondering and worrying: Would assessments fall for 2022 tax bills? Would falling incomes restrict growth in the maximum levy? Would rising tax rates increase tax cap credit losses? There was no way to know.
Until now.
We know what will happen to the maximum levy growth quotient. During the recession unemployment increased and wages fell, but all that federal pandemic aid caused non-farm personal income to rise by 5.7% in 2020, the biggest increase since 2011. Adding that number to the six-year average increased the MLGQ from 4.2% for 2021 budgets, to 4.3% for 2022.
But if assessed values fall, tax rates would have to rise to generate those higher levies. Tax cap credits could rise enough to erase much of the revenue increase.
Now the numbers we need are posted on Indiana Gateway, the source for data on Indiana local government, at gateway.ifionline.org. Click Report Search, then Assessed Value, to find the first numbers I’ve seen about assessed value for 2022.
I compared them to the numbers for 2021. The result: Assessed values are up! Net assessed value, after deductions, rose 5.6% statewide for pay-2022. The average over the past four years was 3.4%.
The big concern about property values was commercial property, such as restaurants, strip malls, or office buildings. Business was down because people didn’t want to risk COVID People worked from home and didn’t need the office space. Occupancy rates were down, and so were rents. That could have depressed assessments.
But home prices are growing fast, and manufacturing businesses have done well. Apparently that was enough to offset any commercial property declines in assessed values.
Since assessments grew faster than the MLGQ limit on levy growth, it’s likely that tax rates will fall in many jurisdictions. There should be no big increase in tax cap credits.
That’s good news for local governments, but maybe not for property taxpayers, especially homeowners. Tax rates may fall, but many home assessments will rise more. Tax bills could increase. The constitutional tax caps won’t limit these increases, because the caps are based on percentages of assessed value. When assessments rise, so do the caps.
Owners of farmland may see tax reductions. Farmland assessments are not scheduled to rise very much, so falling tax rates would cut farmland tax bills.
Local governments can lay to rest the threat of recession. Most won’t suffer property tax revenue losses as a result of the 2020 COVID downturn.
What will we worry about now? How about inflation?
Larry DeBoer is a professor and extension specialist in agricultural economics at Purdue University.