January 29, 2007

Indiana: Making the Property Tax More Like An Income Tax?

Even as Indiana lawmakers continue to scratch their heads over how best to reduce their reliance on local property taxes to fund services, the Indiana Fiscal Policy Institute (FPI) has been beating the drum for the all-important goal of more accurate assessment of property. It was FPI that blew the whistle on the inaccuracies of the property tax system earlier this year with an exhaustive report documenting these inaccuracies, locality by locality. FPI found that some local assessors routinely assess properties at less than their actual worth; others assess higher than actual worth. And in some taxing districts, neighboring homes that should be taxed the same way simply aren't. It's an administrative mess that calls into question the basic fairness of the property tax.

FPI's latest budget brief drives this point home again with an apt comparison to the income tax:
While there are many who wish to provide more relief for property taxpayers, the tax base upon which tax levies are calculated needs to be correct and consistent across the state. The current status of the system is comparable to one in which a taxpayers’ W-2 form (the form on which an individual's salary or wages for income tax purposes is stated) may or may not reflect the actual earnings by that taxpayer in a year. Imagine if your W-2 understated your wages by 30% or more, or, even worse, that W-2 overstated your salary or wages by 30%. That, in fact, is the case, as many properties’ assessed values are up to 30% or more above or below their market value—the value upon which the property tax is supposed to be based.
If such a condition existed in the income tax, the first thing taxpayers would demand is that the W-2s "get fixed." The basic equity and credibility of the income tax system requires that the income upon which we pay taxes is correctly calculated. Why should we, as Hoosiers, expect less from the property tax system?
The comparison is apt. Whatever measure of "ability to pay" a tax is based on, it stands to reason that this measure should be accurate, and if the income tax was as poorly administered as the property tax, people would flip.

And FPI is correct in asserting that the goal should be to make the property tax base as well-administered as the income tax base.

But it's worth dwelling on FPI's property tax-income tax comparison. Sure, cleaning up assessment practices is an important first step toward property tax fairness. But even when the property tax base is measured accurately, it will remain a less fair basis for taxation than is income.

The value of your home represents wealth, to be sure, but for most families increased property tax wealth simply doesn't have the same impact as increased income. When your income goes up from $100,000 to $150,000 from one year to the next (a fanciful example, but one that facilitates comparison to the property tax), you are definitely getting richer by the day. But when your home's assessed value shoots up from $100,000 to $150,000, you're "richer," but in a way that has no meaning for most families. This added value will only be meaningful to you if you plan on selling your house immediately. Otherwise, the main implication of this added value is that your property taxes will go up as a result-- which won't make you feel "richer" at all.

All of which is to say that if Indiana lawmakers could snap their fingers and make the property tax assessment process 100% accurate tomorrow, the property tax would still remain unfair in a way that desperately needs to be fixed. Adding a true "ability to pay" measure to the property tax by creating a real "circuit breaker" tax credit based on your income would be a great first step. (And Indiana lawmakers have NOT done this, whatever they may think.)

Read the rest of the FPI brief here.


At 4:56 PM, Blogger Andrew Oh-Willeke said...

An assessor who generally assessed properties on the high end, or generally assesses properties on the low end, doesn't necessarily have any financial impact at all, so long as the assessments are consistent.

Governments seek to impose property taxes to meet their budgets. The nominal mill levy rate will be higher if properties are undervalued generally, or lower if they are overvalued generally. But, this really doesn't matter much to the taxpayer who pays the same share of the total governmental expense paid for with property taxes.

It doesn't matter that one county has high assessments and another has low ones, unless the same government is imposing taxes at the same mill levy rate in multiple counties that differ greatly.

Few governmental entities collect material amounts of property taxes in more than one assessor's jurisdiction, and most of the time, even when it does happen, the differences aren't huge.

The problem is an assessor who favors particular neighborhoods, parcels, or classes of property over others.


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