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 Professor Gives Overview of Tax Reform

December 3, 2008 - A Purdue University economist gave an overview of property tax reform passed by state lawmakers earlier this year during a Nov. 20 special meeting of the Knightstown Town Council.

At the outset of his hour-long presentation, Professor Larry DeBoer of Purdue’s Department of Agricultural Economics said the reform legislation, House Enrolled Act 1001-2008, had been 800 pages long. Fortunately for the council and others in attendance, though, DeBoer was able to summarize the law’s major provisions on less than two pages of the 20-page handout he passed out.

DeBoer described HEA 1001 as the most significant property tax reform in Indiana since at least 1973. Judging from the effects of HEA 1001, he said lawmakers seemed more concerned with giving property tax relief to homeowners, as opposed to all property owners who are taxed.

Under “circuit breaker” credits that will be fully phased in by 2010, DeBoer explained that property taxes will be limited to one percent of a property’s assessed value (AV) before deductions for homeowners. This cap will be two percent of AV before deductions for rental housing and farm land, and three percent for other nonresidential real property and personal property.

According to data compiled by the Legislative Services Agency and included in DeBoer’s handout, circuit breaker credits could result in the town of Knightstown losing as much as $15,000 in revenue in 2009 and $50,000 in 2010. The city of New Castle could lose up to $465,000 and $1 million in revenue in 2009 and 2010, respectively, while the county government could stand to lose $227,000 and nearly $596,000 those two years.

DeBoer said that the circuit breaker caps will create an interdependence among local taxing units. When these caps kick in and limit the amount of property taxes that can be collected, he said all local taxing units end up sharing the losses, which he said creates “a huge complication in budgeting.”

There’s no way to know for sure what impact the circuit breaker caps are going to have, DeBoer said, unless the total tax rates for individual taxing units are known. He said some local governments are hiring consultants to run simulated tax bills, which he called “a major piece of number crunching,” to come up with estimates of what the net effect will be.

Henry County Treasurer Debbie Walker asked DeBoer if he recommended the hiring of consultants to do this task. He replied that he thought it would be great if county auditors and treasurers could acquire software that would allow them to do the simulated tax bills themselves.

Town council member Terry Guerin, who had recently seen DeBoer give his presentation to another group and arranged for him to attend last week’s meeting, noted that assessed values seem to go up every year. DeBoer said he agreed with Guerin that these increases in AV would minimize the effect of the circuit breaker caps, but also said that there’s a two-year lag for AVs, with, for example, 2008 taxes being based on AVs noted calculated in 2006.

DeBoer also briefly discussed last week the use of local option income taxes (LOIT) by counties to help with funding shortfalls. He said the state legislature created three new LOITs in 2007, bring the total available to seven. Guerin told DeBoer that Henry County has scheduled a public hearing on adoption of one or more LOITs for Dec. 8.

When considering whether to adopt a LOIT, or which type is preferable, DeBoer said it’s important to keep in mind the amount of revenue the tax(es) need to generate, the stability of the revenue and who will pay more and who will pay less if income taxes rise while property taxes fall. With respect to the latter point, he said those who are “property rich, income poor,” like farmers, corporations and retired homeowners, will tend to pay less, while those who are “income rich, property poor,” like renters and most employed homeowners, will tend to pay more.

Copies of DeBoer’s handout that was distributed during last week’s presentation can be obtained at Knightstown Town Hall, 26 S. Washington St., during regular business hours. Interested persons can also obtain more information at DeBoer’s website, www.agecon.purdue.edu/crd/Localgov.

 

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