While much of the nation was focusing on Republicans’ takeover of the House of Representatives during last week’s mid-term Congressional elections, Indiana voters overwhelmingly made it nearly impossible for the state to increase property tax rates.
By almost a 3-to-1 margin, voters approved a constitutional amendment that incorporates property tax caps into the Indiana Constitution.
The Hoosier State’s property tax rates are now permanently set at 1% of assessed value on owner-occupied homes, 2% on rental property and farmland, and 3% on business and industrial property.
The Indiana vote is a snapshot of a problem facing states across the country. As the recession dramatically reduced income and sales-tax revenues, states in turn have cut funds for local governments. To make up this critical revenue source, some cities, towns and school districts have been forced to raise property taxes, even as property values have fallen.
Most states like politicians who like tax caps
Voters are responding with outrage and politicians are listening. In New York, both victorious Democratic gubernatorial candidate Andrew Cuomo and his primary challenger, Republican Carl Paladino, campaigned on promises to cap property taxes, according to The Wall Street Journal. In New Jersey, Republican Gov. Chris Christie negotiated with the legislature earlier this year to reduce the state’s annual property-tax increase cap from 4% to 2%. And the best-known tax cap, Proposition 13, has limited California's property-tax increases to 2% a year for the past three decades.
But not all states are approving the tax cap craze. Colorado voters Tuesday killed a series of controversial tax-cutting initiatives that would have lowered taxes by limiting government spending or tax increases in certain categories, including telecommunications, income, property and government borrowing, according to The Denver Daily News.
After a 2007 spike in Indiana's property-tax bills led to a huge home owner protest, the ousting of the mayor of Indianapolis and a 2008 law limiting property taxes, Republican Gov. Mitch Daniels and the real estate and business coalitions championed the more permanent approach. Daniels said his goal was to make the state's property tax rates – already among the lowest in the nation – so well-known that they would attract new investment, according to the Northwest Times of Indiana.
The caps – which couldn’t be added to the Constitution until a second legislative vote and Nov. 2’s ballot measure – saved taxpayers $478 million this year. They are projected to save another $577 million next year, according to an October report from the nonpartisan Legislative Services Agency.
Opponents: Indiana’s Property Taxes Already Low Enough
Opponents of the measure argued that Indiana homeowners already benefit from a variety of generous property tax breaks. These existing provisions already lower the taxes of many Indiana home owners so much that only about 11% of home owners will qualify for the new caps in 2010, according to the Legislative Services Agency. These existing tax breaks include:
• A homestead exemption on the first $45,000 of a home’s assessed value
• An additional 35% deduction on remaining home value up to $645,000
• An extra 25% deduction on the remaining value of homes worth more than $645,000
These deductions dramatically reduce property taxes paid by the owners of the state’s most expensive homes, according to an Institute for Working Families briefing. “For example, after factoring in the benefit of the homestead deductions and applying a fairly typical 2% tax rate, a home valued at $125,200 would receive no benefit from the caps, while a home worth $1 million would receive over $3,000 in benefits!” according to the briefing.
And even with the caps in codified in the state constitution, property tax bills can increase for property owners whose bills fall below the caps and for those with increasing assessed values on their property. And because the cost of some of the changes was offset by a 1% increase in the state sales tax, “renters and lower-income homeowners can expect to pay more in taxes overall,” according to another briefing by Citizens for Tax Justice.
But supporters say the caps give homeowners added peace of mind and prevent shocking increases like those seen in 2007. After angry homeowners demanded relief, the caps were approved in 2008, and the process of amending the constitution began the same year.
The state’s Chamber of Commerce and Farm Bureau argued that the caps were unfair because they treat commercial and residential property differently. But neither group actively opposed them because of the inevitability of their passage. “We've moved on,” Indiana Chamber President Kevin Brinegar told Bloomberg Business Week.