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.

The Phantom Council and Personal Property Taxes

There is a lot of attention  during this session of the Indiana General Assembly on personal property taxes (i.e., taxes on business equipment), spurred by a call from Governor Pence for their elimination. I’ll talk about the impact of the Governor’s proposal, as well as several of the bills in the Indiana General Assembly, on local governments in a separate post. My purpose here is to talk about a little-known institution called the County Income Tax Council — a body that has been referred to as the “phantom council.”

The connection is that one of the primary legislative vehicles for reduction or elimination of the personal property tax is House Bill 1001, which gives counties the option of eliminating personal property taxes on newly acquired personal property. This option, at least in the version of the legislation on the floor as of today, is exercised, not by the County Council, which normally exercises fiscal authority over county-wide taxation, but instead by the County Income Tax Council.

What is the County Income Tax Council?

The County Income Tax Council is a body created by statute (IC 6-3.5-6-2) for each county in Indiana to exercise oversight over the County Option Income Tax (COIT), one of 6 local income taxes allowed by Indiana statute. Its statutory duties and powers are: to impose or rescind the county option income tax, increase, freeze, or decrease the tax rate, and increase the COIT homestead credit for the county.  The County Income Tax Council also has some powers with respect to the wheel and vehicle excise taxes. And now — the General Assembly is proposing to give this body the power to eliminate personal property taxes on newly acquired personal property. For reasons I will explain below, this is highly problematic — in fact, the whole existence of the County Income Tax Council is problematic.

In keeping with the monicker “the phantom council”, the County Income Tax Council is not a regular deliberative body with individual members. Instead, it is  a “virtual council” that rarely, if ever meets. It is defined by statute as follows:

Every county income tax council has a total of one hundred (100) votes. Every member of the county income tax council is allocated a percentage of the total one hundred (100) votes that may be cast. The percentage that a city or town is allocated for a year equals the same percentage that the population of the city or town bears to the population of the county. The percentage that the county is allocated for a year equals the same percentage that the population of all areas in the county not located in a city or town bears to the population of the county. On or before January 1 of each year, the county auditor shall certify to each member of the county income tax council the number of votes, rounded to the nearest one hundredth (0.01), it has for that year. (IC 6-3.5-6-3)

In other words, this council is made up not of individuals, but of fiscal bodies of other units of government.

How Does This Play Out in Monroe County?

In Monroe County, the county income tax council is thereby made up of the fiscal bodies of the county (the Monroe County Council) and the fiscal bodies of each of the municipalities in the county — the Bloomington City Council, the Ellettsville Town Council, and the Stinesville Town Council.  As described above, the votes are allocated amongst these bodies in proportion to their populations (and the county is given the population only of the unincorporated areas). For 2014, this means that each body gets the following “votes” in the phantom council:

  • Monroe County Council: 36 votes
  • Bloomington City Council: 59 votes
  • Ellettsville Town Council: 5 votes
  • Stinesville Town Council: 0 votes

All votes are cast by the body as a whole — in other words, all of the Bloomington City Council votes as a single bloc, Monroe County Council as a single bloc, etc.

Taxation Without Representation?

The important thing to notice about this breakdown is that the Bloomington City Council has an absolute majority on the County Income Tax Council. This is generally going to be the case in any county that has a single large municipality. In other words, it doesn’t matter what the County or Ellettsville or Stinesville say — the Bloomington City Council has the power to set income tax policy for the entire county. This raises a serious issue of representation. While every resident of Monroe County, including all residents of cities and towns, are represented by 4 (out of 7) members of the Monroe County Council (1 district and 3 at-large members), there are many residents of Monroe County — in fact, all residents outside of the City of Bloomington corporate limits — who are not represented by any City Council member.

Taking this argument one step further, because elimination of the personal property tax doesn’t simply reduce tax revenue — it actually shifts the tax burden to other property owners (i.e. raises the taxes of homeowners, to the benefit of businesses), we are actually faced with a situation in which a city council could vote to raise the taxes on residents who have NO representation on that council. This is a loophole that needs to be eliminated.

When Does the Income Tax Council Meet?

 So when does the Monroe County Income Tax Council — controlled by the Bloomington City Council — meet? In practice — never. The statute (IC 6-3.5-6-13.5) states that “A county income tax council must [emphasis mine] before August 1 of each odd-numbered year hold at least one (1) public meeting at which the county income tax council discusses whether the county option income tax rate under this chapter should be adjusted.” However, at least in the time that I have served on the County Council (since 2009) there has definitely not been a meeting of the Income Tax Council, and I believe that there has not been a meeting quite a bit before that. In fact, the most recent evidence I can find of a vote of any kind from the Income Tax Council is from 1995 (interestingly, in the form of a vote from the Bloomington City Council, then presided over by current Monroe County Commissioner Iris Kiesling). This lack of meeting, despite statute saying that the council “must” hold a public meeting on odd-numbered years, is similar to the experience of officials in other counties I’ve spoke with about the matter, and bolsters the notion of the income tax council as a “phantom council.”

What, Then?

 Most broadly, the county income tax council needs to be eliminated. The current situation allows, in some situations,county tax policy to be dictated by municipal councils who don’t represent the entire county. The obvious broader fix is simply to replace the county income tax council with the county council — the county fiscal body that is already empowered with oversight of all other countywide fiscal policy. As I mentioned above, the county council already represents all residents of the county, including those in cities and towns. The converse is not true. There is actually a bill this session, Senate Bill 258, that replaces the county income tax council with the county council; however, it doesn’t appear to be going anywhere this year.

Even if the General Assembly can’t find its way to close this loophole this session, it should still at least amend HB1001, which looks likely with a republican supermajority to pass in some form, to give the ability to opt out of personal property taxes, to the county council — the county’s fiscal body representing all county residents — rather than the phantom council.

Gateway a Useful Tool for Reporting on Local Government Finance

The Indiana Gateway for Government Units — generally just called “Gateway” — is a tool developed in 2010 by a collaboration between the State of Indiana and Indiana University (the Indiana Business Research Center) to make local government financial submissions easily accessible to the public. Local units have been required to use it for the past two years for submission of standard budget documents during the fall budget process.

Although some data has been available to the public since 2011, very recently some major upgrades were released that makes it much easier for local officials and members of the public to retrieve local government financial information. Because Gateway is now to the point where it can actually be useful to members of the public, I though I would bring it to the attention of the readers of MoCoGov.

The Report Builder for Gateway is available at: https://gateway.ifionline.org/report_builder/

The Report Builder provides a number of pre-made reports for all levels of local government — counties, cities and towns, townships, libraries, fire districts,   school districts, solid waste management districts, etc., and the user interface is pretty intuitive.

The following are a couple of reports that might be particularly interesting to taxpayers (along with some instructions for accessing the reports).

  • Employee Compensation (100R)
    • Provides the salaries of all public employees for all levels of local government, state government, public universities, and even public charter schools
    • Choose Employee Compensation (100R) ->  Employee Compensation. Choose your county and then the unit of government within that county. For state and public university employees, choose “State” as your county.
  • Budget Estimate and Tax Rate
    • Provides the information on the Form 4B — sometimes called the “16-line statement” — submitted by local governments for each fund with a tax rate.  Includes the adopted budget, the property tax levy, and the property tax rate for each fund adopted during the fall budget process for the next year.
    • Choose Budgets -> Budget Estimate – Financial Statement – Tax Rate.  Choose your county, year, unit, and fund.
    • For example, see the report for the 2013 Monroe County General Fund below.  You can see, for example, that the general fund budget adopted by the County Council and then certified by the Department of Local Government Finance is $20,300,041, with a property tax levy of $15,097,664, and a tax rate of 0.2389 for every $100 of assessed value.

2013 4B for Monroe County General Fund

  • Budget Summary
    • Provides a summary of budget estimates for each unit of government, for each fund and department, summarized by budget category (i.e., personal services, supplies, services and charges, and capital outlays).
    • Choose Budgets -> Budget Summary
  • Line-Item Budget Estimate
    • Provides a detailed line-by-line budget for each unit of government, for each fund and department.
    • Choose Budgets -> Line-Item Budget Estimate
  • Net Assessed Value by District
    • Provides the net (after exemptions and deductions) assessed value for each taxing district in a county
    • Choose Assessed Value -> Certification of Net Assessed Values by District
    • This report is particularly interesting because it shows not only the assessed value for real property and personal property (i.e., industrial equipment), but also shows the amount of assessed value captured by Tax Increment Finance (TIF) districts for each taxing district.
    • The following screen shot shows the report for Monroe County for 2013

Screen Shot 2013-03-17 at 7.51.05 PM

  • Debt Management
    • Multiple reports that show all debt owed by local government. This set of reports is particularly interesting, because it shows not only the standard property tax-based general obligation bonds (for example, the Showers purchase bond), but also equipment lease-purchases, such as the Vactor and street sweeper trucks purchased by the new Monroe County Stormwater Management Program, and the Innkeeper’s Tax-backed land purchases for the Convention Center
  • Redevelopment Commissions
    • Includes links to all of the annual reports for each of the Redevelopment Commissions in each county. The Redevelopment Commissions are responsible for the TIF districts in each county. The Monroe County Redevelopment Commission annual reports concern the county’s 3 TIF districts, and the Bloomington Redevelopment Commission annual reports concern the City of Bloomington’s 6 TIF districts as well as the City’s Certified Tech Park.
  • Disbursements by Fund and Department Report
    • Shows the actual expenditures (as opposed to the budgeted expenditures) for each fund and department of a local unit of government for a prior year.
    • Choose Annual Financial Report -> Disbursements by Fund and Department. Expenditures are summarized by category (i.e., Personal Expenses, Supplies, Services and Charges, and Capital Outlays).
  • Grants
    • Grants have become an increasingly essential funding mechanism for many aspects of local government. The Grants report shows all of the Federal (including Federal pass-through) grants received by each unit of government during the previous year. Note that this report does not include local grants and grants from non-government foundations.
    • Choose Annual Financial Report -> Grants, and choose the unit of government.

My examples above only scratch the surface of the data available in the new Gateway reports. I encourage everyone interested in local government to give the system a try!

Ohio Governor Proposes “Frack Tax” — But Concerns Lie Ahead

An article in the Cincinnati Enquirer today discusses the proposal of Ohio Governor John Kasich to create a new “frack tax” — a severance tax (a tax on the extraction of a nonrenewable resource) on the sales of oil and gas — that Kasich estimates will raise around $413M by 2017. The Governor, however, is proposing to use this new revenue to offset a proposed cut in individual and corporate income tax.

Of course oil and gas industry representatives claim this tax could result in less investment in oil and gas production in Ohio. This threat is almost certainly without merit, given the potential profits to be made from extraction from Ohio’s Utica shale (not to mention that there is a good argument to be made for disincentivizing fracking, although again, a tax is unlikely to do that given the potential profits).

But the interesting argument, from a tax policy perspective is that, as the article discusses, this tax as proposed could potentially put Ohio in a bind down the road a few years. As with any extractive industry, particularly one with such global price volatility, revenues are not predictable and will inevitably decline. If Ohio uses the frack tax to offset cuts in the (much more stable) income tax, the state could face a revenue crisis if and when oil and gas revenues decrease — and it is unlikely that state elected officials will find the political will to raise the income tax back up when the need arises.

Indiana will be facing the same situation with its gambling tax revenue.  Created to offset a number of other taxes, gambling revenue has been remarkably stable in Indiana in the past; however, new casino development in neighboring states — Ohio, in particular — will undoubtedly cause the revenue to decline substantially.

It is often politically more palatable to replace a broader-based tax (like income or property) with a more narrowly-based excise tax. But jurisdictions that do this frequently find themselves in a budget crisis down the road when the excise tax revenue becomes unstable or declines.

The frack tax is ultimately a positive development. However, it should not be used to allow corresponding cuts in income taxes. Instead it should be used for one-time investments (infrastructure repairs, for example) and to add to reserves, particularly since there may be long-term environmental costs of fracking that aren’t yet known.

Analysis Shows Indiana Tax Structure One of the Most Regressive

The Institute on Taxation and Economic Policy (ITEP), a non-partisan research institute, just released the fourth edition of their landmark study “Who Pays? A Distributional Analysis of the Tax Systems in all 50 States.”  The study analyzes the tax structures of all 50 states — the  degree to which each state relies on the different types of taxes (income, property, and sales and excise taxes), the rate structures of each of these taxes, and the overall rates paid by different income groups of taxpayers.

Indiana, unfortunately, made #9 on the list that the authors call the “Terrible 10” — the 10 states with the most regressive tax structures (i.e. tax structures in which the share of family income paid in taxes goes down as income goes up).

In Indiana, the poorest taxpayers (those in the bottom 20% of the income distribution) pay 12.3% of their income on average in state and local taxes. On the other hand, the top 1% pay only 5.4% of their incomes in state and local taxes. Features that make Indiana’s taxes more regressive includes the flat income tax rate and relatively few low income tax exemptions, as well as its dependence on sales and excise taxes. Mitigating factors include the refundable Earned Income Tax Credit and the fact that groceries are exempt from sales tax.

Just as a point of comparison, it is probably not surprising that Vermont has one of the least regressive tax structures. In Vermont, the bottom 20% pay 8.7% of their income in state and local taxes, while the top 1% pay 8%. Not progressive (as the Federal tax system is) — but not nearly as regressive as many other state and local systems.

The study also provides an analysis of the regressivity of various types of taxes. In general, sales and excise taxes are highly regressive — particularly if groceries are included in the base (fortunately in Indiana they are not). Property taxes are mildly regressive. Income taxes can range from mildly regressive to progressive, depending on the way the local income taxes are structured.

Rounding out the Terrible 10 are:

  1. Washington
  2. Florida
  3. South Dakota
  4. Illinois
  5. Texas
  6. Tennessee
  7. Arizona
  8. Pennsylvania
  9. Indiana
  10. Alabama