Circuit Breaker (Tax Cap) Impacts for 2014, Part 1

Although this doesn’t exactly rate as breaking news, the Indiana Department of Local Government Finance recently released the 2014 reports on the impacts of the circuit breakers for all units of local government in Indiana, including Monroe County. Today’s post is part one of a two-part series on the circuit breakers in Monroe County. Today I will discuss what the circuit breakers are, and how much they are costing Monroe County (or conversely, saving Monroe County taxpayers) in 2014.  Tomorrow’s post will break the numbers down a little further and discuss the impact on individual taxing units within Monroe County, as well as consider what the trends mean for the future.

What Are Circuit Breakers?

The circuit breakers — also referred to as “tax caps” — refer to various statutory (and constitutional) limitations on the property tax responsibility of individual property taxpayers in Indiana. There are actually two types of circuit breakers: the 1%-2%-3% circuit breakers and the Over 65 circuit breakers. Note that circuit breakers are limitations on an individual’s property tax bill, and represent a loss of revenue to the local units of government; local units cannot shift this loss to other taxpayers.

1%-2%-3% Circuit Breakers

1%-2%-3% Circuit Breakers are caps in the amount of property tax owed by taxpayers as a percentage of the gross assessed value of their property. These circuit breakers apply to the following property types:

• 1% of homestead properties
• 2% of other residential properties, long-term care facilities, and agricultural land
• 3% of all other properties (i.e., business and personal property)

For example, the property taxes of an owner-occupied (homestead) house that is assessed at $150,000 are capped at 1% of that assessed value, or $1500. If the house is not a homestead (i.e., is a rental property or vacation home), the limit would be 2%, or $3000. Only property taxes that are passed by referendum are exempt from the circuit breaker calculations. For example, voters in 2010 passed an operating levy via referendum for the Monroe County Community School Corporation (MCCSC). These taxes do not count towards the amount used to determine the circuit breaker.

These circuit breakers were placed into the Indiana Constitution by referendum in 2008 (wisely, Monroe County voted against!). The following is the section of the Indiana Constitution that refers to the circuit breakers:

Indiana Constitution, Article 10: Finance

This subsection applies to property taxes first due and payable in 2012 and thereafter. The following definitions apply to subsection (f):         (1) “Other residential property” means tangible property (other than tangible property described in subsection (c)(4)) that is used for residential purposes.         (2) “Agricultural land” means land devoted to agricultural use.         (3) “Other real property” means real property that is not tangible property described in subsection (c)(4), is not other residential property, and is not agricultural land.     (f) This subsection applies to property taxes first due and payable in 2012 and thereafter. The General Assembly shall, by law, limit a taxpayer’s property tax liability as follows:         (1) A taxpayer’s property tax liability on tangible property described in subsection (c)(4) may not exceed one percent (1%) of the gross assessed value of the property that is the basis for the determination of property taxes.         (2) A taxpayer’s property tax liability on other residential property may not exceed two percent (2%) of the gross assessed value of the property that is the basis for the determination of property taxes.

       (3) A taxpayer’s property tax liability on agricultural land may not exceed two percent (2%) of the gross assessed value of the land that is the basis for the determination of property taxes.

        (4) A taxpayer’s property tax liability on other real property may not exceed three percent (3%) of the gross assessed value of the property that is the basis for the determination of property taxes.         (5) A taxpayer’s property tax liability on personal property (other than personal property that is tangible property described in subsection (c)(4) or personal property that is other residential property) within a particular taxing district may not exceed three percent (3%) of the gross assessed value of the taxpayer’s personal property that is the basis for the determination of property taxes within the taxing district.     (g) This subsection applies to property taxes first due and payable in 2012 and thereafter. Property taxes imposed after being approved by the voters in a referendum shall not be considered for purposes of calculating the limits to property tax liability under subsection (f).     (h) As used in this subsection, “eligible county” means only a county for which the General Assembly determines in 2008 that limits to property tax liability as described in subsection (f) are expected to reduce in 2010 the aggregate property tax revenue that would otherwise be collected by all units of local government and school corporations in the county by at least twenty percent (20%). The General Assembly may, by law, provide that property taxes imposed in an eligible county to pay debt service or make lease payments for bonds or leases issued or entered into before July 1, 2008, shall not be considered for purposes of calculating the limits to property tax liability under subsection (f). Such a law may not apply after December 31, 2019.

Over 65 Circuit Breakers

The Over 65 Circuit Breaker is a different limitation on property tax liability. It is aimed at limiting the annual increases on individual tax bills for homesteaders on fixed incomes. In particular, it applies to homestead properties (dwelling plus up to one acre of land) occupied by owners over 65 years of age earning up to $30,000 per year ($40,000 including spouse’s income) that are assessed at $160,000 or less. This circuit breaker limits the annual increase in property taxes to qualifying homesteads to 2%.

Monroe County Circuit Breaker Impacts: 2013 vs. 2014

The following table summarizes the impacts of all of the circuit breakers in Monroe County for 2014, and compares them to their 2013 values.

The big takeaways are:

• The circuit breakers overall are responsible for the loss of $819,507 in revenue for Monroe County, spread across all units of local government (Part 2 of this series will explore how this breaks down across units)
• Monroe County does not (yet) have any 3% circuit breakers that apply — this means that our property taxes are still relatively low compared to our assessed values, and no property owner’s taxes are higher than 3% of the assessed value of the property.
• Homesteaders (the 1% circuit breaker) overall are receiving the majority of the benefit of the circuit breakers (and conversely the 1% circuit breaker is responsible for the majority of the revenue loss for Monroe County governmental units)
• Both the 1% (homestead) and 2% (other residential, and agricultural) circuit breakers increased substantially from 2013 to 2014. This means that the tax rates overall are rising at a faster rate than the assessed values.
• The Over 65 circuit breaker resulted in a substantial tax benefit to seniors at $197,528, and did not increase significantly from 2013-2014. This is to be expected. Property taxes did not rise substantially from 2013-2014, and the number of seniors in the community is relatively stable.

Monroe County vs. Other Counties

So how does the impact of the circuit breakers on Monroe County stack up against other counties? The following table shows the total 2014 circuit breaker amounts for each of the counties in Indiana (except for LaPorte, for which information isn’t yet available).

From this comparison, we can see that the impacts on Monroe County, ranking 54 of 91, are relatively low compared to many other counties.  It isn’t surprising that the circuit breakers hit the biggest counties/municipalities the greatest — Marion, St. Joseph, Elkhart, Lake, Allen. There are several anomalies in the list — for example, Delaware County, ranked 6th, saw a disproportionate hit from the circuit breakers. Tippecanoe County saw a much greater impact, at almost $8M, than did Monroe, at less than a million.

Of our neighbors, Lawrence County saw the highest impact, at $2,754,204, while Brown County saw the lowest impact, at a paltry $6,734.

Overall, Monroe County continues to see low property taxes, and relatively high assessed values (meaning strong real estate value). However, the increases from 2013-2014 are concerning, not because they have a particularly high impact in 2014 (they don’t), but because they could cause bigger problems in the future if the trend continues.

References

• 2013 Monroe County Circuit Breaker Report
• 2014 Monroe County Circuit Breaker Report
• 2014 Monroe County Circuit Breaker Report 2014_Statewide_Summary_of_Circuit_Breaker_Impact