By Larry DeBoer | Purdue University
Here’s one way to think about property taxes: The local government sets its budget, subtracts all other tax revenue, and raises the remainder with the property tax levy. The assessor measures the value of all the parcels of taxable property inside the boundaries of the government. Then the government measures the share of each parcel in total assessed value. That is the share of the levy that the owners must pay.
In other words, your property’s share in the total value of property is your share of the property tax levy. We use property value shares to divvy up responsibility for funding local government.
Real life is more complicated, with deductions, credits, several ways to estimate value, and state limits on the levy and on tax bills. Still, knowing what’s happening to the values of property, compared to the total, tells us a lot about who pays property taxes.
We’re particularly interested in the share of property taxes that residential property owners pay. That’s owner-occupied primary residences, known as homesteads, and rental housing. Why a special interest in residential property? For one, lots of people pay these taxes. Homeowners with a mortgage pay directly through their lenders; those who rent pay through their landlord. For another, all these people are voters, which interests the General Assembly. And that’s why the share of property taxes paid by residential property owners will be getting some attention. The residential share is going up.
Start in 1998, just before the Indiana Supreme Court threw out the old assessment system. That year residential property owners paid about 36% of the property tax levy.
The old assessment system undervalued older homes. The new market-value-in-use system did not. With the reassessment for taxes in 2003, the residential share jumped to 45%. By 2007 the share was up to 47.8%, mostly because business inventories had been eliminated from property taxation.
Then came the big reform in 2008. Homeowner deductions were increased, school general fund property taxes were replaced by state aid, and a constitutional amendment was proposed to limit tax bills. The amendment was approved in 2010, creating the circuit breaker tax caps. Most of the tax cap credits went to homeowners and rental housing owners. Local governments acted too, adopting more local income taxes for property tax relief.
By 2011, residential taxes were down to 42% of the total, a tax bill reduction of about $500 million. Many owners of other types of property saw their tax bills increase.
The residential share remained within a couple of tenths of 42% for five years, through taxes in 2016. Then the share began to rise. It was 42.7% in 2017, 43.8% in 2019, and last year the residential share was 45.7%.
What’s going on? Partly it was the decline in farmland values. Corn and soybean prices fell, and eventually this caused farmland assessments to drop. Those taxes shifted to other taxpayers.
It was also the more rapid increase in home prices. Home price increases hit 3.8% in 2015, the highest rate in 14 years. Prices rose more than 5% in 2018 and after. Those were the biggest increases since the 1970s.
Home prices in 2015 were measured by assessors in 2016, and those assessments were used for taxes in 2017. That’s when the residential share of property taxes began to rise.
The economy was expanding and mortgage rates were low, yet home construction lagged. As late as 2019 Indiana home building permits were less than two-thirds of what they averaged between 1996 and 2006. Demand for houses was increasing faster than houses were being built. Prices increased.
That was before the pandemic. In 2021, Indiana home prices increased 13.5%. Those home prices will affect tax bills in 2023. The residential share will keep rising. Policy Analytics, a consulting firm, projects the residential share at 48.2% in 2023.
The property tax is a tax on the value of property. If your property’s value rises faster than your neighbors’, your share of the property tax levy will increase. That’s what’s been happening to owners of residential property. I’m guessing that legislators are paying attention.
Larry DeBoer is a professor and extension specialist in agricultural economics at Purdue University.