Whose Taxes are Abated? The Answer May Surprise You

WestsideWho Pays Taxes in Indiana?

The discussion in the media about “dark box” assessments (the use of vacant stores as comparables for the assessments for property tax purposes of big box stores) has made me want to look more broadly about who pays taxes and who doesn’t in Indiana’s system of taxation. There is a feeling expressed by many residents that businesses are treated more favorably than individual taxpayers. This view is almost inevitably expressed any time a business is given an economic development tax abatement. On the other hand, politicians (particularly Republican politicians, unsurprisingly) often claim that Indiana needs to lower taxes on businesses in order to continue to attract jobs (see recent debates on the corporate income tax and business personal property tax).

As you might imagine, though, Indiana’s system of taxation is complex, and it can be difficult to disentangle the various threads, to determine whether or not the system is fair, both overall and across the various classes of taxpayers (businesses, homeowners, renters, farmers, etc.). I’m hoping to explore these issues of taxation — who pays and who doesn’t pay — over the next series of blog posts.

Today’s post explores the issue of tax exemptions: that is, when do property owners (individuals and organizations) pay taxes on less than the full assessed value of their property.

To do this, I’ll be looking at the real estate data for Monroe County for 2015 (for property taxes to be paid in 2016), which the Monroe County Auditor’s Office kindly provided for me. Note that there is an important caveat to this data: it does not include property owned by other units of government, which includes state (including Indiana University and Ivy Tech), federal, city, county, and school corporation. None of these governmental entities pay real estate property taxes at all (which makes some sense when you consider them as units that are providing governmental services. The data set also does not include personal property, which applies almost exclusively to business.

Tax Exemptions in Monroe County

Indiana has a number of purposes for which it exempts property from full taxation. The most familiar include the homestead deduction (which exempts some property value from homeowners who occupy their homes), the exemption given to non-profit organizations and churches, and tax abatements given to businesses as incentives for investment in job-creating development. But there are actually several dozen different types of real estate property tax exemptions given to property owners for a variety of purposes.

Large HouseFirst, how much property value is exempted from taxation overall in Monroe County? In 2015, it is approximately $3.2 billion (yes, billion), out of a total of $9.8 billion in gross assessed real estate value.

So whose taxes are exempted? I’ve taken the 2015 real estate data and collapsed the dozens of exemption types) into 11 categories, which I think are more illustrative. For example, I collapsed the homestead deduction, supplemental homestead deduction, and mortgage deduction into the category “Homestead”. I collapsed the two types of economic development incentives — tax abatements and enterprise zone abatements — into the category “Economic Development”. Etc.

Property Tax Exemptions by Category
Property Tax Exemptions by Category

As you can see from this table, the vast majority of property tax exemptions are given to homeowners — over $2.6B, or 82% of the total $3.2B in exemptions granted. This may — but probably shouldn’t — come as much of a surprise: the property tax system we have is a political artifact, and residents, not businesses, vote. Further, homeowners vote at a higher rate than renters, and homeowners with greater wealth (often meaning higher-end homes) vote at a greater rate still. So it really isn’t surprise that our tax exemption system provides enormous tax benefits to homeowners — abatements that dwarf all of the rest of the types of tax exemptions combined.

Sherwood Oaks Christian ChurchThe next largest beneficiary of favored property-tax status — still a distant second to homeowner exemptions — religious institutions! Churches and other religious institutions enjoy $158M in exemption from property taxes.  Coming in third is economic development incentives, including both tax abatements and enterprise zone abatements, which are similar, but are only allowed in one of a fixed set of so-called “enterprise zones” throughout the state. I will do a separate blog post and provide more detail on these economic development exemptions.

There are several exemption categories that might broadly be thought of as the non-profit sector. This includes:

  • educational exemptions — which does NOT include public schools or IU or Ivy Tech — think private educational organizations as well as IU fraternities and sororities
  • hospital  — in particular IU Health Bloomington Hospital (I will do a separate post on this one at some point)
  • charitable — what most people think of as the nonprofit sector, including Middleway House, Community Kitchen, Stone Belt, etc.
  • membership organizations — including the YMCA, Boys and Girls Club, Sycamore Land Trust, and other charitable organizations — and oddly the Indiana Railroad company

There are several other categories of exemptions, including what I call socioeconomic exemptions. These include exemptions available for blind or disabled property owners, seniors, and veterans. Energy efficiency exemptions include exemptions for solar and geothermal installations. Finally, there are exemptions for low-income housing, as well as a couple of very small exemptions that I have lumped together under miscellaneous (cemeteries, rehabilitation of historic properties, and model homes).

Hopefully this has been illuminating, and perhaps you have been surprised by which classes of taxpayer have been most favored in Indiana’s property tax system. I plan to explore many related topics in future blog posts, and will be drilling down on several categories of tax exemption, including those given to non-profits, hospitals, and for economic development.

7 thoughts on “Whose Taxes are Abated? The Answer May Surprise You

  1. I think the more interesting discussion on this topic is the taxation of business and who is actually paying those taxes. Most people think it is a way to “tax the rich”, but in reality, the effect of taxation, particularly in residential rental property is a tax on the poor, who often have no choice but to rent. The increases in taxes are always passed on to the renter through increased rental rates.

  2. Thank you Geoff for tackling this issue and making it understandable to the rest of us. Good stuff. I have heard that the credits we give to homeowners is extremely costly. I didn’t realize how bad. Do landlords get a similar tax break? Where does it fall in these categories?

    Thanks Matt for raising the renter issue. People assume we don’t pay property tax, but we do through our rent.

    1. Lillian — this is a very important point. Landlords do NOT get either the homestead deduction nor the supplemental homestead deduction — so as you point out, renters don’t either. Homesteaders are very much tax-favored — but renters are not, and pay a disproportionate share (indirectly) of property taxes.

  3. A few more facts are needed here: homeowners receive the highest dollar amount of exemptions, but on how much assessed value? In other words, what’s the percentage that’s exempted? Same info is needed for each of the other categories.

    Also, is there any data which speaks to the effects of those exemptions, on housing construction, business startups, jobs created, etc.

  4. Good initial work, Geoff. I wonder if mortgage deductions can be considered solely as a benefit to borrowers for homes or also should include those making the loans; and by accelerating demand, the home construction and retail businesses also.

    I also believe that the concerns about business exemptions are related less to the size on the whole but their necessity, as it seems a very small percentage of operating costs for businesses (thus a very limited incentive to locate).

    1. Yes, completely agree on both points. I thought long and hard about whether to categorize the mortgage deduction along with the other homestead deductions. While it is a very small part of the overall homestead category, on its own it is still fairly substantial — $55.7M. And I have no doubt that the primary beneficiary of this exemption is the mortgage originator. I’d be pretty sure that if the General Assembly ever chooses to consider eliminating the mortgage deduction, it will be the loan originators, not taxpayer groups, who lobby most strongly in favor of the deductions.

      And on the second point — while I think the same argument about necessity could be made about almost any exemption on this list, it is true that if a real estate tax abatement really made the difference in making a business a going concern — the business is probably too marginal for a local government to want to spend any effort to attract. It seems that most of the literature on tax abatements put them in the category of “benign” — delivering both minimal costs to other taxpayers but also minimal benefits.

      Unfortunately as you well know, they have become more of a race to the bottom. It would be better off if the practice could just be ended nationwide, in a way analogous to the Obama administration’s plan to eliminate subsidies of pro-sports stadiums by tweaking the rules for tax-free municipal bonds.

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