When Going Up Means Going Down: How Do the Property Tax Circuit Breakers Actually Work?

Monroe County Courthouse at Night
Monroe County Courthouse at Night

During the discussions about the City of Bloomington’s proposed annexation, I have received a lot of questions from readers about the property tax circuit breakers (“tax caps”) — like, how do they actually work, how do they affect the taxpayer, and how do they affect the local unit of government? I thought I’d answer that question first by going through a very simple (artificially simple) example.

Before I even begin with the details, let me emphasize the most mind-bending aspect of the property tax circuit breakers — an increase in property tax rates can actually make the revenue to units of government serving the property go down. How does that work?

For our example, we have to pick a taxing district. Let’s choose unincorporated Richland Township (i.e, the part of Richland Township that is outside the Town of Ellettsville). For 2017, the following table shows the tax rates that make up the overall tax rate for unincorporated Richland Township:

Screenshot 2017-04-19 19.34.56

The overall property tax rate for unincorporated Richland Township for 2017 is $1.7915 per $100 of Assessed Value. The above table shows how that rate is divided up among the various taxing units (units of government) serving that district.

So now we need to pick a property to use as an example — and I’ve picked a very specific property — a homestead with a gross assessed value of $318,600. Why have I chosen this value? Because given the above tax rate ($1.7915) and certain simplifying assumptions (no property tax relief from the income tax), this property is exactly AT its circuit breaker tax cap for Richland Township.

How do we know this? Let’s do a few calculations. First of all, the circuit breaker tax cap for a homestead property is 1% of its gross assessed value. In our example, it is $3186 (1% of $318,600). That means that the taxpayer cannot be made to pay more than $3186 in property taxes. Second of all, let’s calculate the net assessed value that the taxpayer is actually taxed on. Since this property is a homestead, it is eligible for a $45,000 homestead deduction and a 35% supplemental deduction of the remaining value, leaving a taxable net assessed value of $177,840. This means that our $318,600 property will be taxed on $177,840. Note that there may be additional deductions that this taxpayer is eligible for; however, for this example, we’ll stick with the homestead and supplemental deductions.

Applying our tax rate of $1.7915 per $100 of assessed value to our net assessed value of $177,840, we have a total property tax bill of $3186. Note that this tax bill is exactly at its circuit breaker limit of $3186!

Based on the above tax rates, each unit of government that serves this property receives the following property tax revenue:

Screenshot 2017-04-19 20.08.53

And again — this property is right at its 1% circuit breaker limit of $3186, so currently it cannot be forced to pay more than $3186.

So now let’s consider a very artificial situation. Let’s say that for 2018 every taxing unit’s property tax rate stays exactly the same except that Monroe County takes on some additional debt for capital projects, raising its property tax rate from $0.3832 to $0.4300. The following table shows what the 2018 property tax rates are in this hypothetical example compared to the 2017 rates.

Screenshot 2017-04-19 20.19.16

As I mentioned before, in this very artificial example, only the Monroe County property tax rate has changed from 2017 ($1.7915 per $100) to 2018 ($1.8383 per $100).

So first, let’s calculate this taxpayer’s 2018 property taxes overall. The following chart illustrates the taxes that would be collected by each taxing unit from this taxpayer for 2018:

Screenshot 2017-04-19 20.42.54

In 2017 they were $3186. In 2018 they are $3,269.23 ($1.8383 per $100 of AV, with the AV at $177,840). This is an increase $83.23.

But….remember that the circuit breaker is at $3186 — so $3186 is the most this taxpayer will pay! So even though the individual tax rates of each of the units of government serving this property would call for $3269.23 in taxes, the taxpayer only pays $3186. This means that there are $83.23 of taxes that the taxpayer does not pay and that the local units of government do not collect. This $83.23 is known as the circuit breaker credit — good for the taxpayer, not so much for the units of government serving the taxpayer.


But how is this circuit breaker credit divided up among the units of government? Even though it was only Monroe County that raised its tax rate (in this very hypothetical example), all of the units of government share in the loss of revenue in proportion to their tax rates.

So let’s allocate the circuit breaker credit (revenue loss to the units of government) based on each unit’s proportion of the total tax rate:

Screenshot 2017-04-19 21.06.20

Before even looking at the numbers in detail, the following fact should jump right out at you:


Now the last step in the process is to calculate the actual amount collected for each unit in 2018. So let’s put it all together:

Screenshot 2017-04-19 21.20.09

The column labeled “2018 Net (Taxes – Circuit Breaker) represents the actual taxes collected from this taxpayer for 2018. Note that it sums up to $3186. This should not be a surprise, as the tax cap for this taxpayer was $3186 — they cannot be taxed more than $3186 with an assessed value of $318,600!!

But the final kicker comes from looking at the rightmost column, labeled 2017-2018 Change. This is the change in revenue from each taxing unit from 2017 to 2018. Of course the total should be $0 — since the property was at the 1% circuit breaker, no net additional revenue could be collected.

But look more closely at each individual taxing unit. Only the unit that increased taxes — Monroe County in this artificial example — actually increased its revenue from 2017-2018 — and not as much as it would have increased it without the tax caps. But every other unit, even though it did not increase its tax rates — shared in the circuit breaker loss caused by the one unit that did increase its tax rates.

So just to pick out one example — the additional debt taken on by one unit of government (Monroe County) actually caused another unit (such as R-BB School Corporation) to lose revenue.

Monroe County’s gain ($63.76) is actually R-BB School Corporation’s loss ($50.52).

So hopefully this little exercise was useful — hopefully you can now see that with the property tax circuit breakers, one unit that raises its tax rates can actually cause a real loss to the other taxing units.

Circuit Breaker (Tax Cap) Impacts for 2015 in Monroe County

The Indiana Department of Local Government Finance just released the report on circuit breaker impacts on local units of government for 2015. The report for Monroe County specifically can be found here.

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 two types of circuit breakers: the 1%-2%-3% circuit breakers (which limit property tax liability to a certain percentage of assessed value) and the Over 65 circuit breakers (which limit property tax increases to lower-income seniors). I wrote about the circuit breakers for 2014 in more detail here and here.

As you can see in several of the charts below, 2015 saw a slight increase in the circuit breakers from 2014, compared to a substantial increase from 2013 to 2014. This is very welcome news to local units of government, many of whom were very concerned after the large increase in 2014.

The following table shows the amount of circuit breaker credits by circuit breaker type, by year, from 2010-2015.

Screenshot 2015-04-16 21.14.36

The following chart illustrates the same data graphically:

Screenshot 2015-04-16 21.26.35

One can easily make the following quick observations from these two charts:

  • Almost all of the increase in circuit breakers since 2011 come from the 1% (owner-occupied residences). This is not surprising, as Indiana’s property tax system is generally considered very favorable to homeowners (vs. other classes of property owners, such as businesses)
  • This means that our assessed values in Monroe County kept pace with property taxes
  • The circuit breakers for 2% (non-owner-occupied residential, agricultural, and long-term care facilities properties) and over 65 have been very stable over time (other than a dip in the 2% circuit breaker in 2013)
  • 2015 is the first year that Monroe County has seen any circuit breaker credits for 3% (commercial and industrial) properties — for a whopping total of $9
  • The overall increase in circuit breaker from 2014-2015 was very small, which will work to the benefit of local units of government (though not as good as a decrease, obviously!)

The following chart breaks down the impact of the 2015 circuit breakers by taxing unit.

Screenshot 2015-04-16 20.52.27

As this chart shows, only 3 units, Monroe County, City of Bloomington, and MCCSC saw circuit breaker increases of more than $10K. The Town of Ellettsville actually saw a $6702 decrease in its circuit breaker from 2014.

Summary of 2014-2015 Circuit Breaker Changes

  • County-Wide
    • Increase from $819,507 to $865,759
  • Monroe County Government
    • Increase from $153,018 to $164,157
  • County General
    • Increase from $111,920 to $120,905
  • Summary
    • Still an increase from 2014-2015 – but a very small increase\
    • Increased much less in 2015 than in 2014

Circuit Breaker (Tax Cap) Impacts for 2014: Part 2

Courthouse Fish
Courthouse Fish

Last week I wrote about the impact of the circuit breakers on Monroe County  — Circuit Breaker (Tax Cap) Impacts for 2014, Part 1 — which summarized the overall impacts on Monroe County (an overall revenue loss of $819,507 for 2014, an increase of $272,558 over 2013). This reduction in revenue for local governments is spread across all units of government in Monroe County that receive property tax revenues (the County, all three municipalities in Monroe County, the two school corporations, 11 townships, the public library, the Perry Clear Creek Fire Protection District, the Solid Waste Management District, and Bloomington Transit). In this post, I’ll break the $819,507 revenue loss by unit of government.

Circuit Breaker Losses for Monroe County Units of Government

The data for all units of government in Indiana for 2014 is available here:

The following table shows the circuit breaker losses for each unit of government in Monroe County. In addition to the 2013 and 2014 circuit breaker losses, I added two columns to compare the circuit breaker losses to the overall property tax levy for each unit of government.


2014 Circuit Breaker Impact by Taxing Unit in Monroe County
2014 Circuit Breaker Impact by Taxing Unit in Monroe County


Overall, both in terms of absolute values and percentages, the impact on units of government in Monroe County (with a couple of exceptions) is relatively minimal. This means that, in 2014 at least, the circuit breakers are not harming local governments too severely; alternatively, this can be rephrased to say that the circuit breakers are delivering minimal reduction in property tax to the taxpayers.

Ellettsville and Richland-Bean Blossom

The two exceptions appear to the be the Richland-Bean Blossom School Corporation, in which the $127,271 circuit breaker loss represents 1.6% of their overall property tax levy, and the Town of Ellettsville, in which the $100,002 circuit breaker loss represents a substantial 6.0% of their overall levy. Why is this?

The primary reason that both of these units took a relatively large hit from the circuit breakers is that the overall tax rate for the taxing district referred to as “Ellettsville Town” (the portion of Ellettsville that is located in Richland Township) is relatively high — $2.4241 per $100 of assessed value. This is the highest tax rate in Monroe County (in comparison, the tax rate for the portion of the City of Bloomington in Bloomington Township is $2.0762). The Ellettsville Bean Blossom taxing district (the portion of Ellettsville in Bean Blossom Township) is only slightly less, at $2.4220. The reasons why taxes are so high in Ellettsville are a topic for a different day!

From Tax Rates to Circuit Breakers

A tax rate of $2.4241 (essentially 2.4241%), is naturally going to generate some circuit breaker impact, and the reasoning is intuitive. Since the circuit breaker limit for non-homestead residential properties is 2% of assessed value, any tax rate of over 2% is bound to affect non-homestead residential properties. Similarly, any tax rate of over 3% will affect business properties. Since Monroe County has no tax rate over 3%, we should not expect to see any business property affected by the circuit breakers (and indeed we are not seeing any affect at all from the 3% circuit breaker). Note that homestead properties (the 1% circuit breaker) are more complicated — the homestead deduction and supplemental homestead deduction ensure that homestead properties are taxed at a net assessed value substantially less than their gross assessed value.

So we know that the (relatively) high tax rate of the Ellettsville Town (and Ellettsville Bean Blossom) taxing districts will ensure that the circuit breakers will impact some taxpayers in those two taxing districts. So how is that circuit breaker loss allocated to the units of government that serve that district? Let’s consider an example: a rental property in Ellettsville Town, assessed at $100,000. The tax rate of $2.4241 would result in a property tax liability of $2421.10 for the owner. However, the circuit breaker for non-homestead residential properties is 2%, which would mean $2000 for our example. This means that the circuit breaker would reduce the owner’s property tax liability by $424.10 (note that this doesn’t reduce the property owner’s demand for government services!!).

So how does that reduction in revenue of $424.10 get doled out to the units of government that serve that property? In proportion to the contribution of each unit of government to the overall tax rate. Again, consider our example for Ellettsville Town. The tax rate for Ellettsville town is the sum of all of the tax rates of units of government that serve that district. The following table shows those individual tax rates:

2014 Tax Rates for Ellettsville Town
2014 Tax Rates for Ellettsville Town

So from this table, you can see that 37% of the tax rate comes from the Town of Ellettsville, and 42% of the tax rate comes from the Richland-Bean Blossom School Corporation. This means, for our hypothetical property owner, that about $156.91 (37% of the 424.10 circuit breaker) comes out of Ellettsville and $178.12 (42%) comes out of the Richland-Bean Blossom School Corporation. This jibes with the overall circuit breaker impact for Ellettsville of $100,002 the slightly higher impact for Richland-Bean Blossom School Corporation of $127,271.

So How Bad Could it Be?

Let’s just consider the case of the Richland-Bean Blossom School Corporation. A hit of $127,271 on a school corporation that is already, like almost every other school district, starved for resources, will never be easy to absorb, and certainly will mean real cuts. Remember that the circuit breakers do not in any way reduce the demand for or cost of services; they only reduce the resources that the governmental unit has to provide those services!!

However, there are other school corporations that have been hit much harder. For example, consider the Hamilton Southeastern School Corporation. Their circuit breaker impact for 2014 was an enormous $3,141,623 — over $3M to cut from the school budget just in 2014 as a result of the tax caps! Per the National Center for Educational Statistics, the Hamilton Southeastern School Corporation has around 19,053 students — meaning a $164.89 cut per student from the tax caps. In comparison, the Richland-Bean Blossom School Corporation has 2770 students, meaning that the circuit breakers cost only $45.95 per student.

In conclusion, we are fortunate in Monroe County to have high property values and low tax rates, which work together to keep the impact of the circuit breakers low — even in the more highly-taxed Ellettsville taxing districts. However, even a $100K cut — essentially a $100K unfunded mandate — can seriously hurt. And we should stand behind our fellow school districts, and other units of government, that are facing backbreaking unfunded mandates that can seriously jeopardize their ability to provide basic services.

Circuit Breakers, Protected Taxes, and Idled School Buses

Very interesting article in the Indiana Business journal this week about the negative impact of recent changes in Indiana property tax legislation on schools:

A little background first: Indiana school corporations are funded through several different property tax levies, none of which are (with a few exceptions) interchangeable. Ever since the property tax circuit breakers (AKA “1%-2%-3% property tax caps”) were put in place, these levies have been divided into two categories: exempt and non-exempt. Exempt levies are those that are are outside of the circuit breaker (i.e., not subject to the circuit breaker tax caps), and consist of operating levies and debt service levies passed by referendum.  Non-exempt levies are all of the rest: debt service, pension debt, capital projects, transportation, and school bus replacement levies.

When all combined levies for a particular taxpayer exceed the circuit breaker limits (1% for homestead owners, 2% for multi-family residential and agricultural, and 3% for business), the overage must be cut from the levies of all of the taxing units that contributed to the combined levies (i.e. county, city, township, school corporation, public library, etc.).  Until 2012, taxing units had some flexibility as to which levies they applied the circuit breaker losses to. For schools, this meant that they could spread the circuit breaker losses among their various funds. Note that all debt payments still had to be made first before funds were allocated anywhere else — but the school corporation still had the flexibility to spread the circuit breaker cuts among all of the levies as long as the debt payments were made according to the terms of the bonds.

Legislation in 2012 created a new category of property tax levy: protected. Debt service and pension debt levies (both of which are non-exempt, meaning that they are subject to the circuit breaker caps) are now considered protected, meaning that these levies must be fully funded before any circuit breaker cuts are applied.  This greatly reduces the flexibility that school corporations have had in spreading the circuit breaker losses among their various levies to minimize the disruption to operations of the schools. Further, this legislation doesn’t actually accomplish anything — schools were already required to prioritize debt payment before anything else — it simply makes school corporations overfund debt service levies at the expense of non-protect levies: capital projects, transportation, and school bus replacement.

This article describes the impact of this change on a number of Indiana school corporations, who now have to face the very real possibility of reducing or eliminating school bus service, or deferring critical maintenance on school properties in order to fully fund debt service levies even beyond what is actually necessary to make debt payments.

There is some hope that the General Assembly might address this issue of protected taxes during the 2014 session; several bills have been filed in both the House and Senate to address this issue. However, these school districts mentioned in the article are merely fighting for the ability to mitigate the impact of these state-mandated cuts to their budget. The bigger story is the impact of the circuit breaker itself on school budgets. Despite all of the rhetoric about the criticality of education to the economy of Indiana, no legislators seem to be interested in making a serious attempt to roll back these property tax caps that have devastated many of our schools in Indiana.