Professor of Agricultural Economics, Purdue University
There's potential for chaos in Indiana local government in 2013. Indiana taxpayers can prevent this chaos. All we have to do is send in a form.
Here's the story.
Homeowners receive some terrific breaks under Indiana's property tax system. First, the $45,000 standard deduction is subtracted from the taxable assessed value of homesteads. Then what remains is reduced another 35 percent by the supplemental homestead deduction. Some counties have homestead credits, which are percentage reductions in homestead tax bills. Local governments replace this lost property tax revenue with local income tax revenue. Finally, homesteads are subject to a tax cap at 1 percent of the original assessed value. When all the tax breaks are applied, the tax bill on a mid-valued house can be cut in half, and then some.
A homestead is defined as an owner-occupied primary residence. Homeowners can only have one primary residence, so they can qualify for only one set of homestead tax breaks. Second homes or vacation homes are classified as non-homestead residential property, and they don't get the tax breaks.
The state suspects that some people are getting homestead deductions and credits they aren't supposed to get. People who own more than one home, sometimes in more than one county, may be getting homestead tax breaks on more than one house.
To catch these errors, the state has authorized counties to send homestead verification forms to homeowners. These are pink forms that were included with tax bills. The form asks homeowners to show that their house is eligible for homestead tax breaks. The counties will use this information to look for people who are claiming more than one homestead. The state's Department of Local Government Finance has a lot of information about these forms on their website, at http://www.in.gov/dlgf/8455.htm.
The forms first went out a couple of years ago. For taxes in 2013, county auditors can use this information to cancel the homestead status for homes that don't qualify. People who have not submitted their forms can lose their homestead tax breaks, too.
A lot of people don't bother with forms, but ignoring this form could cost them their homestead deductions and credits.
Tax rates could be affected if a lot of homeowners don't submit their forms. Without those big homestead deductions, a county's total assessed value would be higher. Tax rates would then be set lower to raise the necessary revenue. Qualified homestead owners would pay less in taxes at those lower rates. So would owners of rental housing, farmland and businesses. Counties with homestead credits funded by local income taxes would provide more tax relief to fewer homesteads. Credit rates would be set higher. Qualified homestead owners would see even lower tax bills.
Now here's the chaos for local governments.
Homeowners who lose their homestead tax breaks will notice that their 2013 tax bills are really high. The law allows homeowners to appeal to their county auditor to have their deductions reinstated for 2013. You can read the law at http://www.in.gov/legislative/ic/code. The code citation is IC 6-1.1-12-17.8.
Failure to submit the form need not have tax consequences for homeowners. But there would be budget consequences for local governments. When the deductions are reinstated, 2013 tax bills will have been mailed. Tax rates and homestead credit rates will have been set. They cannot be changed.
Reinstated deductions would be subtracted from total assessed value. With less assessed value, those fixed low tax rates would deliver less revenue than local governments budgeted. Counties, cities, schools and other local governments would find themselves short of funds. More homeowners would be eligible for homestead credits at those fixed high rates. There wouldn't be enough local income tax revenue to replace those credits, so local governments would again receive less revenue than budgeted.
The law requires counties to send notice to homeowners before deductions are cancelled. It's a really good idea for those notices to be sent well before tax rates are set.
What's the chaos in store for 2013? Some very unhappy homeowners appealing their tax bills. Tax rates set too low, and homestead credits set too high. Local governments struggling to handle revenue shortfalls.
It doesn't have to be, though. All we have to do is send in a form.