Property Tax Caps: How They Operate

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Some Hoosiers, particularly small business owners and farmers, do not fully understand how the 1%-2%-3% property tax caps operate. They think the property tax revenue shortfalls that the caps will generate in some localities will cause their property tax burden to increase. The truth of the matter is that any property tax revenue shortfalls generated by the caps cannot be shifted to other taxpayer classes that have not reached their cap limit. The property tax increase of a taxpayer who has not reached its cap threshold is limited by the 6-year rolling average growth in non-farm income.

A local taxing unit's property tax rate is computed by dividing the unit's property tax levy by the unit's total net assessed value of real and personal property (and multiplying by 100). Every property taxpayer in the taxing unit multiplies this computed property tax rate times its assessed value (divided by 100) to determine how much property tax the taxpayer must pay. It should be noted that a taxing unit's net assessed value is the gross assessed value less deductions, primarily including the standard and supplemental deductions for homesteads.

Beginning in 2010, the property tax caps will limit the maximum property tax burden of a taxpayer to a percentage of the taxpayer's gross assessed value - 1% for homestead property - 2% for residential rentals (1 to 3 units), commercial apartments (4 units or more), mobile home land, long term care facilities, and agricultural land - 3% on business and personal property.

When the caps are reached by one or more classes of property taxpayers in a local taxing unit, the taxing unit experiences a property tax levy shortfall. This shortfall CANNOT be simply shifted to a taxpayer class that has not reached its property tax cap limit. Every taxing unit has three options to deal with the shortfall: (1) reduce spending, (2) appeal to the state's Distressed Unit Appeals Board for permission to exceed the property tax caps (if the caps reduce the taxing unit's property tax revenue at least 5%), (3) use their share of property tax cap replacement revenue if the county imposes a county-wide local option income tax for this purpose. A school corporation can initiate a referendum to impose a 7-year referendum property tax levy to replace a property tax caps revenue shortfall. Also, property taxes imposed after being approved by voters in a capital projects referendum are not subject to the property tax caps. Finally, debt service property taxes imposed before July 1, 2008, in Lake and St. Joseph are not subject to the property tax caps until 2020.

The property tax levy of a taxing unit cannot increase from one year to the next more than what is allowed by the 6-year rolling average growth quotient included in current law. Using pay 2010 property taxes as an example, the state's average 2003-2008 non-farm income is compared to the state's average 2002-2007 non-farm income to determine how much a taxing unit's tax levy can change. Even though debt service is excluded from the growth quotient and some localities have relatively minor exceptions, the growth quotient limits how much a taxpayer's property tax levy will increase from one year to the next if the taxpayer has not reached its property tax cap limit. Again, any property tax revenue shortfalls within a taxing unit generated by property tax caps CANNOT be simply shifted to other taxpayer classes that have not reached their cap threshold.

Passage of the Constitutional Amendment is crucial to make certain the property tax relief provided by the legislative caps does not disappear. The Constitutional Amendment makes cap-exceeding decisions by the Distressed Unit Appeals Board unconstitutional. Also, the Constitutional Amendment is needed to protect against legal action that will wipe out the legislative caps and homestead credits.

The importance of the constitutional amendment to business owners and farmers is emphasized by an early City of Gary appeal to the state's Distressed Unit Appeals Board. Gary proposed that the Board offset its upcoming property tax caps revenue shortfall by keeping its homeowner property tax cap at 1% and raising the cap on its business properties to 5.4 percent in 2009, 4.68 percent in 2010, and 4.149 percent in 2011. In 2012, the caps would return to the 3 percent enshrined in statute. Constitutional property tax caps will protect business owners and farmers from this type of extreme tax-shifting shenanigan by both the Distressed Unit Appeals Board and future General Assemblies.

IN SUMMARY, any property tax revenue shortfalls generated by property tax caps cannot be shifted to other taxpayer classes that have not reached their cap limit. The state's growth quotient limits how much a taxpayer's property tax levy will increase from one year to the next if the taxpayer has not reached its property tax cap limit.

This page was last updated on 03/31/13 .