Jeff Thompson Property Tax Replacement Plan

Watchdog Indiana Home Page General Assembly Property Tax Legislation Homestead Deductions Threat Property Tax Caps Top Twenty Reasons to support Constitutional Property Tax Caps Property Tax Caps: How They Operate Property Tax Caps K-12 Schools Impact Property Tax Caps Municipal Impact Property Tax Caps: Referendum Implications 2008 House Bill 1001 Property Tax Assessment Issues Property Tax Betrayal & Incompetence Accurate Property Tax Math Property Tax Replacement Impact  Homeowner Property Tax Effects Property Tax "Stories" 2008 Property Tax Legislation Testimonies Property Tax Deferral Program  

(January 16, 2009)

NOTE: Accurate Property Tax Math and Jeff Thompson Property Tax Replacement Plan Impact accompany this Plan description.

The constitutional property tax caps in Senate Joint Resolution 1 represent a giant step down the road to homestead property tax elimination. Another giant step is the Jeff Thompson Property Tax Replacement Plan.

The Thompson Plan has been presented as House Bill 1149 during the 2010 General Assembly session.

The Thompson Plan provides all local taxing units with two new Local Option Income Taxes – the Property Tax Replacement LOIT and the Property Tax Cap LOIT. Both LOITs are a variable tax on the adjusted gross income of individuals that may be imposed or removed by any of the more than 2,400 local taxing units.

The Property Tax Replacement LOIT provides an alternate source of tax revenue to a local taxing unit that replaces the property tax revenue from all real property wholly owned by individuals within the local taxing area. Partners, stockholders in subchapter S-corporations, trusts, estates, and nonresidents with income from sources in Indiana are all considered individuals for income tax purposes. What this means is that property taxes on real property will be replaced by the Property Tax Replacement LOIT for all homeowners, many small businesses, and most farms within a local taxing area. C-corporations and public utilities will continue to pay real property taxes, and personal property taxes will continue unchanged.

The Property Tax Replacement LOIT will not actually eliminate any property tax. Real property will continue to be assessed for property tax purposes and property tax levies will continue to be established under existing law. The Property Tax Replacement LOIT will replace the property tax levy on real property owned by individuals within a local taxing unit. However, it is expected that use of the Property Tax Replacement LOIT over a period of time will eventually lead to legislation that eliminates the real property tax paid by individual income tax payers.

The Thompson Plan also allows every local taxing unit to impose a Property Tax Cap LOIT. The Property Tax Cap LOIT provides an alternate source of tax revenue to replace the property tax revenue lost from property tax caps.

The Property Tax Cap LOIT is important because it addresses a weakness of the county-wide LOITS that are allowed under existing law. A county-wide LOIT for property tax levy replacement would punish low-tax county areas and benefit high-tax county areas. The Property Tax Cap LOIT is not imposed county-wide, but is imposed within local taxing areas. County taxpayers in low-tax areas would not be adversely affected if a high-tax local taxing unit imposes a Property Tax Cap LOIT.

In conclusion, the new Jeff Thompson Property Tax Replacement Plan is another giant step down the road to homestead property tax elimination. The Thompson Plan also gives local taxing units an alternate source of tax revenue that equitably replaces the revenue lost to property tax caps.

Property Tax Replacement Plan
Questions & Answers for House Bill 1149
(annotated to the pages and lines of http://www.in.gov/legislative/bills/2010/PDF/IN/IN1149.1.pdf)

1. What does the Replacement Plan accomplish?

The Replacement Plan provides all local taxing units with two new Local Option Income Taxes – the Property Tax Cap LOIT and the Property Tax Replacement LOIT. Both LOITs are a variable individual income tax. [Page 5 Lines 25-42 and Page 6 Lines 1-10]

The Property Tax Cap LOIT provides an alternate source of tax revenue to replace the property tax revenue lost from property tax circuit breaker credits (popularly known as property tax caps). [Page 5 Lines 28-30]

The Property Tax Replacement LOIT provides an alternate source of tax revenue to replace the property tax revenue from all real property wholly owned by those individuals, partners, stockholders in subchapter S-corporations, trusts, estates, and nonresidents with income from sources in Indiana residing in the taxing units where the LOIT is imposed. Property taxes on real property will be replaced by the Property Tax Replacement LOIT for all homeowners, many small businesses, and most farms in the units where the LOIT is imposed. C-corporations and public utilities will continue to pay real property taxes, and personal property taxes will continue unchanged. [Page 5 Lines 31-42 and Page 6 Lines 1-10]

The two new LOITs may be imposed by the fiscal body of every political subdivision that has the power to impose an ad valorem property tax. The Replacement Plan does not change the existing legal provisions that provide for the review of civil unit budgets and the approval of some budgets prepared by unelected governing bodies. [Page 5 Line 24]

Every local taxing unit can decide at any time to impose one, both, or neither of the new LOITs. Also, local taxing units can at any time reverse their decision to impose one or both of the new LOITs. [Page 11 Lines 28-38]

6. When do the two new LOITs become effective once imposed?

Local taxing units may decide to impose the two new LOITs at any time beginning July 1, 2009. A new LOIT is effective the second budget year after the final vote is taken by the taxing unit to impose the LOIT. Likewise, a LOIT is removed effective the second budget year after the date the final vote is taken by the taxing unit to remove the LOIT. [Page 12 Lines 6-16]

Both new LOITs are imposed on the adjusted gross income of individuals in the local taxing unit’s tax area. [Page 7 Lines 28-42 and Page 8 Lines 1-10]

The two new LOITs are a flat tax – LOIT tax rates must be uniform throughout the local taxing area. For example: if the Property Tax Replacement LOIT for a local school district is 1.1843%, then every individual in the school district’s tax area will pay 1.1843% of his or her adjusted gross income to the school district. These individuals will not have to pay a school district property tax on real property wholly owned by the individuals (and their partnerships, S-corporations, trusts, and estates) within the school district. [Page 15 Lines 38-42 and Page 16 Lines 1-10]

The Department of Local Government Finance computes the appropriate LOIT tax rate for each local tax area. The total property tax levy (or the property tax revenue lost from property tax caps) for the next calendar year within the local tax area is divided by the total adjusted gross income for the prior calendar year within the tax area. The computation must be rounded to the nearest ten-thousandth of one percent. For example, a local school district with a 2011 total property tax levy of $8,897,929 and a 2009 total adjusted gross income of $751,313,629 would generate a Property Tax Replacement LOIT rate of 1.1843%. [ Page 16 Lines 4-22]

No. The Property Tax Replacement LOIT replaces the property tax revenue from all real property within a local tax area wholly owned by individuals, partners, stockholders in subchapter S-corporations, trusts, estates, and nonresidents with income from sources in Indiana. Real property will continue to be assessed for property tax purposes and property tax levies will continue to be established under existing law. It is expected that use of the Property Tax Replacement LOIT over a period of time will eventually lead to legislation that eliminates the real property tax paid by individual income tax payers.

The replacement of property taxes for homeowners only would be too difficult to administer because it is not feasible to separate just homeowners from all the other classes of individual income tax payers.

Yes, as long as the individual files an Indiana Individual Income Tax Return.

Corporate and public utility property taxes are needed to help make tax increment financing payments. They can also be used to make bond and lease debt payments. [Page 5 Lines 31-42 and Page 6 Lines 1-10]

Counties may continue to impose the CAGIT, COIT, CEDIT, and LOITs already allowed by existing law. [Page 6 Lines 15-16]

The existing LOITs are imposed county-wide to provide property tax levy replacement including budget increases (up to 1%), dollar-for-dollar property tax relief (up to 1%), and public safety (up to 0.25%, or 0.5% in Marion County). The two new LOITs are not imposed county-wide, but are imposed within local taxing areas. A county-wide LOIT for property tax levy replacement would punish low-tax county areas and benefit high-tax county areas. For example, assume that there are three school systems in a county. One high-tax school system has exceeded the property tax caps in its tax area. The other two low-tax county school systems have not exceeded the property tax caps in their areas. A county-wide LOIT for property tax replacement would provide revenue to meet the cap shortfalls of the high-tax school system. However, the county-wide LOIT would almost certainly provide "windfall" revenue to the two low-tax school systems because they would be reluctant to trim their existing budgets by the full amount of the additional LOIT revenue they receive. The end result for the taxpayers in the two low-tax school systems would be a tax increase to provide unnecessary school system revenue increases. The taxpayers in the two low-tax school systems would not be adversely affected if the high-tax school system imposed a Property Tax Cap LOIT within its tax area.

16. Can the two new LOITs be easily administered?

The Indiana Department of Local Government Finance (DLGF) can work with the Indiana Department of Revenue (DOR) to compute a variable local income tax rate for every one of the more than 2,400 local taxing units. Every property location in Indiana has a unique parcel number assigned for property tax assessment purposes. The DOR can match the address on every state individual income tax return with its unique parcel number. The unique parcel number can also be linked to the applicable county, school district, city, town, township, and library taxing units. Therefore, the total annual adjusted gross income within every Indiana taxing unit can be tabulated. The DLGF, using the income tax data tabulated by the DOR and the tax levy data provided by county auditors, can then calculate a variable local income tax rate for each local taxing unit. The DOR, using the tax rates calculated by the DLGF, can develop the website capability where an employer can type in the address of an employee and obtain the data needed to identify the variable local income tax rate for each taxing unit where the employee has a tax liability. This data can be used to deduct from each paycheck that employee’s share of the levy obligation for every taxing unit where the employee resides.

The assignments are determined by principal place of residence in Indiana on January 1 each year. [Page 8 Lines 11-17]

That resident is entitled to a credit equal to the amount of income tax paid to the outside taxing unit. [Page 9 Lines 34-42 and Page 10 Lines 1-10]

The two new LOITs may not be imposed on the part of a Perry County resident’s adjusted gross income that is subject to an income tax imposed by a local government entity in an adjacent Kentucky county. [Page 8 Lines 21-29]

The assignments are determined by the principal place of business or employment in Indiana on January 1 each year. [Page 8 Lines 11-17]

The tax is imposed only on the part of the nonresident’s adjusted gross income that is derived from the nonresident’s principal place of business or employment in the tax area. [Page 8 Lines 18-20]

An Indiana taxing unit may enter into a reciprocity agreement with a taxing unit in another state to exempt the income of residents in each taxing unit from income taxation by the other taxing unit. [Page 8 Lines 30-42 and Page 9 Lines 1-10]

An average tax rate is computed. [Page 9 Lines 11-23]

The tax liability is prorated over part of the year. [Page 9 Lines 24-33]

Yes. [Page 10 Lines 11-42 and Page 11 Lines 1-6]

Individual income tax payers who are homeowners will continue to receive the homestead property tax credit when a Property Tax Replacement LOIT is imposed. Property taxes will continue to be computed according to current law, and the Property Tax Replacement LOIT will provide a 100% credit. [Page 14, Lines 22-29 and Page 18 Lines 8-40]

Each employer, including an employer making payments by electronic funds transfer, must report for each reporting period the amount of tax withholdings attributable to each tax area. [Page 11 Lines 10-18]

Yes. [Page 11 Lines 19-26]

The procedures for the two new LOITs mirror the existing procedures for property taxes. [Page 12 Line 20 through Page 16 Line 42]

30. How will revenue from the two new LOITs accumulated in the state general fund be accurately distributed?

The auditor of state makes monthly distributions to county auditors of the net amount of LOIT revenue collected in the immediately preceding month. [Page 17 Lines 1-42]

Revenues from the two new LOITs are treated as property taxes so that COIT and excise tax revenues continue to be allocated proportionally to taxing units. [Page 17 Line 42 and Page 18 Lines 1-7]

Yes. [Page 19 Lines 33-42 and Page 20 Lines 1-15]

Yes. Most taxing units will have enough business property tax revenue to continue making payments on their existing bond issues. Some new and existing bonds may have to be issued or reissued using revenue from the two new LOITs for repayment. Income tax bond issues may cost a little more than property tax bond issues, but it will be a small price to pay in return for homeowner, small business, and farm property tax replacement. [Page 20 Lines 16-29]

Income taxes are not as stable a revenue source as property taxes. Therefore, each taxing unit needs to have a rainy day fund to deal with unanticipated revenue shortfalls. The rainy day fund must be 5% of the taxing unit’s revenue from the two new LOITs for the immediately preceding budget year. The balance of a rainy day fund does not revert at the end of a budget year to any other fund. Any excess revenue deposited in a rainy day fund must be used in the following budget year to maintain a lower LOIT rate. [Page 30 Lines 30-42 and Page 31 Lines 1-9]

No.

Watchdog Indiana Home Page General Assembly Property Tax Legislation Homestead Deductions Threat Property Tax Caps Top Twenty Reasons to support Constitutional Property Tax Caps Property Tax Caps: How They Operate Property Tax Caps K-12 Schools Impact Property Tax Caps Municipal Impact Property Tax Caps: Referendum Implications 2008 House Bill 1001 Property Tax Assessment Issues Property Tax Betrayal & Incompetence Accurate Property Tax Math Property Tax Replacement Impact  Homeowner Property Tax Effects Property Tax "Stories" 2008 Property Tax Legislation Testimonies Property Tax Deferral Program  

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