August 31, 2006

Beware: Fake Circuit Breakers!

Like many states Indiana is struggling to provide property tax relief in a meaningful way. In the past several years Indiana has struggled with how to utilize property tax relief mechanisms already in place to offset the nearly guaranteed property tax increases Hoosiers faced because the state changed property tax assessment practices.

During the last legislative session property tax relief was again foremost in the mind of legislators and a brand new circuit breaker passed into law.

Circuit Breakers are one of the best tax policy mechanisms around that ensures people who most need property tax relief actually get it. Here’s an ITEP brief on the subject. In a nutshell a circuit breaker protects low-income residents from a property tax "overload" just like an electric circuit breaker: when a property tax bill exceeds a certain percentage of a taxpayer’s income, the circuit breaker reduces property taxes in excess of this "overload" level.

One of the reasons why people so dislike property taxes is because they aren’t based on people’s ability to pay. For example, if you lose your job your property tax bill won’t change even though your income has dramatically decreased. The circuit breaker acts to link the property tax with a taxpayer’s income level.

Given that circuit breakers make a state’s tax structure more fair, I was really pleased to see Indiana lawmakers decide to implement a circuit breaker. Wanting to learn more about this circuit breaker, I read this report from Indiana’s Department of Local Government Finance. To my dismay I learned that what the legislature passed really isn’t a true CB at all!

In fact, the Indiana circuit breaker doesn’t have anything to do with income levels, it’s a type of property tax cap. When the circuit breaker becomes law property taxes won’t be able to exceed two percent of a property’s assessed value. That’s it. Nothing that helps make the overall tax structure more fair and nothing that specifically helps low income people.

Local governments are fuming too. Check out this article from the Fort Wayne paper to see why many local governments aren’t endorsing this policy prescription either.

The moral here seems to be - just because it says it’s a duck, doesn’t really mean it’s a duck. Indiana lawmakers would do better to create a real circuit breaker that offers real benefits to working Hoosiers and their families.


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