Property Tax Caps Property Owner Classes Impact

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Some opponents contend that the Constitutional Amendment should not be supported because the property tax caps primarily benefit the wealthy. This assertion can be analyzed from two vantage points.

(1) How do the property tax caps operate for homeowners whose primary residences have different assessed values?

(2) How do the property tax caps operate for different classes of property owners?

The first question can be answered by analyzing some cap examples for two homeowners whose primary residences have different assessed values. One homeowner lives in a residence that has a Gross Assessed Value of $100,000 while the other homeowner's residence is valued at $1,000,000. Both homeowners are under the age of 65 and own their residence outright without a mortgage. The two homeowners live in the same geographical area and have the same Property Tax Rate. There are NO voter-approved projects and charges that are exempt from the property tax caps.

Listed next are four cap examples comparing the property tax burden of the $1 million homeowner to the $100,000 homeowner under different property tax rate scenarios.

Example 1A ($1.3986 Property Tax Rate)
$100,000 Gross Assessed Value
- 45,000 Standard Deduction
    55,000
- 19,250 (35% of $55,000)
    35,750 Net Assessed Value
X 1.3986 (per $100 of Net AV)
         500 Gross Property Tax
      1,000 (1% of Gross Assessed Value)
         500 BELOW 1% Cap
$500 Annual Property Tax is 0.5% of Gross AV

Example 1B ($1.3986 Property Tax Rate)
$1,000,000 Gross Assessed Value
     - 45,000 Standard Deduction
     955,000
   - 210,000 (35% of $600,000)
     745,000 Net Assessed Value
    - 88,750 (25% of $355,000)
     656,250 Net Assessed Value
   X 1.3986 (per $100 of Net AV)
         9,178 Gross Property Tax
       10,000 (1% of Gross Assessed Value)
            822 BELOW 1% Cap
$9,178 Annual Property Tax is 0.9178% of Gross AV

Example 1A compared to Example 1B
(a) The $1 million homeowner has a Gross Assessed Value that is 10.00 times more than the Gross Assessed Value of the $100,000 homeowner.
(b) The $1 million homeowner pays 18.36 times more Annual Property Tax than the $100,000 homeowner ($9,178 vs $500).
(c) The $1 million homeowner has an Annual Property Tax burden that is 1.84 times more as a percentage of Gross Assessed Value than the $100,000 homeowner (0.9178% vs 0.5%).

Example 2A ($1.5238 Property Tax Rate)
$100,000 Gross Assessed Value
- 45,000 Standard Deduction
    55,000
- 19,250 (35% of $55,000)
    35,750 Net Assessed Value
X 1.5238 (per $100 of Net AV)
         545 Gross Property Tax
      1,000 (1% of Gross Assessed Value)
         455 BELOW 1% Cap
$545 Annual Property Tax is 0.545% of Gross AV

Example 2B ($1.5238 Property Tax Rate)
$1,000,000 Gross Assessed Value
     - 45,000 Standard Deduction
     955,000
   - 210,000 (35% of $600,000)
     745,000 Net Assessed Value
    - 88,750 (25% of $355,000)
     656,250 Net Assessed Value
   X 1.5238 (per $100 of Net AV)
      10,000 Gross Property Tax
      10,000 (1% of Gross Assessed Value)
               0 SAVINGS from 1% Cap
$10,000 Annual Property Tax is 1% of Gross AV

Example 2A compared to Example 2B
(a) The $1 million homeowner has a Gross Assessed Value that is 10.00 times more than the Gross Assessed Value of the $100,000 homeowner.
(b) The $1 million homeowner pays 18.35 times more Annual Property Tax than the $100,000 homeowner ($10,000 vs $545).
(c) The $1 million homeowner has an Annual Property Tax burden that is 1.83 times more as a percentage of Gross Assessed Value than the $100,000 homeowner (1% vs 0.545%).

Example 3A ($2.1605 Property Tax Rate)
$100,000 Gross Assessed Value
- 45,000 Standard Deduction
    55,000
- 19,250 (35% of $55,000)
    35,750 Net Assessed Value
X 2.1605 (per $100 of Net AV)
         772 Gross Property Tax
      1,000 (1% of Gross Assessed Value)
         228 BELOW 1% Cap
$772 Annual Property Tax is 0.772% of Gross AV

Example 3B ($2.1605 Property Tax Rate)
$1,000,000 Gross Assessed Value
    - 45,000 Standard Deduction
     955,000
- 210,000 (35% of $600,000)
     745,000 Net Assessed Value
    - 88,750 (25% of $355,000)
     656,250 Net Assessed Value
   X 2.1605 (per $100 of Net AV)
       14,178 Gross Property Tax
       10,000 (1% of Gross Assessed Value)
         4,178 SAVINGS from 1% Cap
$10,000 Annual Property Tax is 1% of Gross AV

Example 3A compared to Example 3B
(a) The $1 million homeowner has a Gross Assessed Value that is 10.00 times more than the Gross Assessed Value of the $100,000 homeowner.
(b) The $1 million homeowner pays 12.95 times more Annual Property Tax than the $100,000 homeowner ($10,000 vs $772).
(c) The $1 million homeowner has an Annual Property Tax burden that is 1.30 times more as a percentage of Gross Assessed Value than the $100,000 homeowner (1% vs 0.772%).

Example 4A ($2.7972 Property Tax Rate)
$100,000 Gross Assessed Value
- 45,000 Standard Deduction
    55,000
- 19,250 (35% of $55,000)
    35,750 Net Assessed Value
X 2.7972 (per $100 of Net AV)
      1,000 Gross Property Tax
      1,000 (1% of Gross Assessed Value)
             0 SAVINGS from 1% Cap
$1,000 Annual Property Tax is 1% of Gross AV

Example 4B ($2.7972 Property Tax Rate)
$1,000,000 Gross Assessed Value
    - 45,000 Standard Deduction
     955,000
- 210,000 (35% of $600,000)
     745,000 Net Assessed Value
    - 88,750 (25% of $355,000)
     656,250 Net Assessed Value
   X 2.7972 (per $100 of Net AV)
       18,357 Gross Property Tax
       10,000 (1% of Gross Assessed Value)
         8,357 SAVINGS from 1% Cap
$10,000 Annual Property Tax is 1% of Gross AV

Example 4A compared to Example 4B
(a) The $1 million homeowner has a Gross Assessed Value that is 10.00 times more than the Gross Assessed Value of the $100,000 homeowner.
(b) The $1 million homeowner pays 10.00 times more Annual Property Tax than the $100,000 homeowner ($10,000 vs $1,000).
(c) The $1 million homeowner has an Annual Property Tax burden that is the same as a percentage of Gross Assessed Value as the $100,000 homeowner (1% vs 1%).

The conclusions listed next result from an analysis of the foregoing four cap examples.

(A) The $1 million homeowner DOES INDEED reach the 1% homeowner property tax cap BEFORE the $100,000 homeowner.

(B) The $1 million homeowner has a Gross Assessed Value that is 10 times more than the Gross Assessed Value of the $100,000 homeowner.

(C) Until the $1 million homeowner reaches the 1% homeowner property tax cap, the $1 million homeowner pays 18 times more Annual Property Tax than the $100,000 homeowner.

(D) Until the $1 million homeowner reaches the 1% homeowner property tax cap, the $1 million homeowner has an Annual Property Tax burden that is 1.8 times more as a percentage of Gross Assessed Value than the $100,000 homeowner.

(E) Until the $100,000 homeowner reaches the 1% homeowner property tax cap, the $1 million homeowner pays 10 to 18 times more Annual Property Tax than the $100,000 homeowner.

(F) Until the $100,000 homeowner reaches the 1% homeowner property tax cap, the $1 million homeowner has an Annual Property Tax burden that is 1.0 to 1.8 times more as a percentage of Gross Assessed Value than the $100,000 homeowner.

(G) The $1 million homeowner pays 10 times more Annual Property Tax than the $100,000 homeowner after both homeowners reach the 1% homeowner property tax cap.

(H) The $1 million homeowner has an Annual Property Tax burden that is the same as a percentage of Gross Assessed Value as the $100,000 homeowner after both homeowners reach the 1% homeowner property tax cap.

(I) The $1 million homeowner reaches the 1% homeowner property tax cap before the $100,000 homeowner, BUT the $1 million homeowner has an Annual Property Tax burden that is proportionally greater than the Annual Property Tax Burden of the $100,000 homeowner.

The bottom line is that higher-value homeowners realize more in property tax cap savings than do lower-value homeowners, but higher-value homeowners in most localities still pay proportionally more in property taxes than do lower-value homeowners. This bottom line is reached because of the homestead deductions that homeowners have purchased with their sales tax increases. The standard homestead deduction is the lesser of $45,000 or 60% of a home's gross assessed value. The supplemental homestead deduction (after subtracting the standard deduction) is 35% of the first $600,000 of net assessed value plus 25% of any net assessed value that exceeds $600,000. These homestead deductions are SO important that the following question will be included in the Watchdog Indiana Candidate Questionnaire for this November's General Assembly election: QUESTION: Do you pledge to maintain both the Homestead Standard Deduction and the Homestead Supplemental Deduction without ANY change?

The 1% homeowner property tax cap is just as important to lower-value homeowners as to higher-value homeowners. Even though the property tax burden of many lower-value homeowners is less than the 1% homeowner property tax cap because of the homestead deductions, the cap serves as an important "insurance policy" that provides a generally affordable and predictable maximum property tax burden. A lower-value homeowner can use the 1% cap together with the sales tax exceptions to plan their property and sales tax burdens so they do not have to make terrible choices between nutritious foods, life-enhancing medications, and losing their home.

ANOTHER WAY to analyze the assertion that property tax caps primarily benefit the wealthy is to compare the Net Property Tax paid to the Property Tax Cap Circuit Breaker Credits received for different classes of property owners. The following property owner classes will be compared: Homesteads (includes low income elderly), Other Residential (1 to 3 units), Commercial Apartments (4 or more units), Ag-Business Real (includes farmland), Other Real (includes commercial, industrial, mobile home land, long term care facilities), Personal Property. Homesteads have a cap that is 1% of gross assessed value. Apartments, Other Residential, Ag Land, Mobile Home Land and Long Term Care Facilities have a 2% cap, while all Other Real and Personal Property have a 3% cap.

Listed next are the statewide Tax Paid vs. Credits Received comparisons for 2010 and 2011. The data for these comparisons was obtained from the December 1, 2009, Estimated Impact on Net Property Tax Report completed by the Legislative Services Agency at http://www.in.gov/legislative/pdf/PropertyTax_Estimates_By_PropertyClass_20091201.pdf.

2010 Statewide Net Property Tax
$1,750,351,749 Homesteads (30% of TOTAL)
     780,836,330 Other Residential (14% of TOTAL)
     236,740,386 Commercial Apartments (4% of TOTAL)
     361,333,882 Ag-Business Real (6% of TOTAL)
1,793,827,904 Other Real (31% of TOTAL)
     894,729,253 Personal Property (15% of TOTAL)
$5,817,819,504 TOTAL

2010 Statewide Property Tax Cap Circuit Breaker Credits
$110,914,051 Homesteads (24% of TOTAL)
153,498,274 Other Residential (33% of TOTAL)
    58,132,388 Commercial Apartments (12% of TOTAL)
      3,850,658 Ag-Business Real (1% of TOTAL)
    86,029,481 Other Real (19% of TOTAL)
    52,448,694 Personal Property (11% of TOTAL)
$464,873,546 TOTAL

2011 Statewide Net Property Tax
$1,805,851,350 Homesteads (31% of TOTAL)
     782,488,673 Other Residential (13% of TOTAL)
     235,952,268 Commercial Apartments (4% of TOTAL)
     383,699,539 Ag-Business Real (7% of TOTAL)
1,787,334,388 Other Real (30% of TOTAL)
     899,104,098 Personal Property (15% of TOTAL)
$5,894,430,316 TOTAL

2011 Statewide Property Tax Cap Circuit Breaker Credits
$138,706,458 Homesteads (28% of TOTAL)
152,622,714 Other Residential (31% of TOTAL)
    57,611,977 Commercial Apartments (12% of TOTAL)
      3,605,671 Ag-Business Real (1% of TOTAL)
    84,478,615 Other Real (17% of TOTAL)
    51,671,799 Personal Property (11% of TOTAL)
$488,697,234 TOTAL

The conclusions listed next result from the foregoing property owner classes comparisons.

(1) The percentage of total Property Tax Cap Circuit Breaker Credits received by Homesteads statewide is a little less than the percentage of total Net Property Tax they pay. The primary reason for this Circuit Breaker Credits "shortfall" is that the Homestead standard and supplemental deductions keep the Homestead Net Property Tax below the 1% Homestead property tax cap for many homeowners.

(2) The percentage of total Property Tax Cap Circuit Breaker Credits received by Other Residential and Commercial Apartments statewide is somewhat more than the percentage of total Net Property Tax they pay. This outcome is driven by the fact that most rental and apartment residences are in urban areas with higher tax rates.

(3) The percentage of total Property Tax Cap Circuit Breaker Credits received by Ag-Business Real statewide is somewhat less than the percentage of total Net Property Tax they pay. The reason for this Circuit Breaker Credits "shortfall" is that most farm land is in rural areas with lower property tax rates.

(4) The percentage of total Property Tax Cap Circuit Breaker Credits received by Other Real and Personal Property statewide is less than the percentage of total Net Property Tax they pay. The primary reason for this outcome is the higher 3% cap for commercial and industrial businesses.

UNLESS Other Residential and Commercial Apartments property is deemed to have "wealthy" owners, the bottom line is that the operation of property tax caps for different classes of property owners does NOT benefit the wealthy. Wealthy property owners do NOT receive more in Property Tax Cap Circuit Breaker Credits compared to the Net Property Tax they pay.

This page was last updated on 05/14/10 .