The truth about property taxes
When the Legislature’s Blue Ribbon Commission begins its look at the state’s taxes this summer, invariably there will be talk of business needing to pay its “fair share.” That’s certainly true, but what is fair?
In the case of property taxes, Hoosier companies currently pay 50 percent of the state’s total property tax. But that fails to tell the full story.
Property tax is supposed to be paid according to how much property you own and how much it is worth. Everyone pays a rate that is applied to their property’s assessed value. At least it starts out that way, before deductions are applied. Who gets deductions? The single biggest group, far and away, is homeowners. They definitely should get a break — how much of a break is the question. Should business pay $2.80 for every $1 that a homeowner pays toward police, fire and schools? Currently, that is the number. Should Hoosier homeowners pay so little that only one state in the country is lower? Should business property owners pay so much that only seven states are higher? Well, both of those are happening.
The disparity between what homeowners pay and what businesses pay is measured each year by the Lincoln Land Institute/Minnesota Center for Fiscal Excellence. The recent 2014 report shows that the “fairness” ratio puts Indiana in the position of seventh worst in the nation.
Why this great disparity? It’s all in the deductions. The standard homeowners deduction allows for subtraction of the first $45,000 in assessed value. On top of that, a supplemental homestead deduction allows subtraction of 35 percent of the balance. Take a $100,000 home: Deduct $45,000 (the standard deduction) and you get $55,000; 35 percent of $55,000 (the supplemental deduction) is about $19,000 — subtract that, and the homeowner is now taxed on just $36,000 instead of $100,000. At a tax rate of 2 percent (close to the average), the homeowner pays $720 in property tax. Meanwhile, the business owner with a $100,000 property (and no similar deductions at the same 2 percent tax rate) will have a $2,000 tax bill — nearly three times higher.
But let’s not forget the other taxes. Small business owners pay individual income tax on their profits just like workers pay on their wages. In fact. around 25 percent of all individual income tax collections come from business owners. Big businesses pay the corporate income tax rate, which even after the most recent reductions are completely phased in by 2021, will still be 50 percent higher than the individual rate. And businesses are huge consumers; they annually pay over 30 percent of the sales tax collected.
So it’s not like property taxes are the only place businesses are hit with taxes, but it’s the area that is the most egregious, and the disparity is simply out of hand.
— Bill Waltz
Vice president of taxation
and public finance