Tax Increment Finance For (all of us) Dummies

Tax Increment Finance
For (all of us) Dummies

by Martina Webster

Hoosiers, we just paid our fall property tax installments back in November. Do you know how they were calculated? Where did your government come up with that number? And are property taxes really worse than the alternatives?

The first thing you may not know is your home is assessed based on its market value. Locally, we had an assessor pull up the value on a lot of undervalued properties. When that happens, there’s a couple of things to remember when you get a higher assessment.

First, if it is more than a 5 percent increase, you can challenge the assessor to prove the value. But before you do that, be sure you’re not cutting off your nose to spite your face. If you’d put your house on the market for $200,000 and have posted that value online, don’t be surprised if the assessor calls you out on that. If you or a real estate agent says it’s worth $200,000 when you are putting it on the market, don’t fight the assessor who raised your value from $100,000 to $150,000. You’re still undervalued.

Remember, the state constitution caps your obligation at 1 percent of the assessed value no matter what. So a jump from $100k in value to $150k is a total maximum increase of $500 for the entire year: $1,000 to $1,500. When you factor in your exemptions, it’s probably even less than a $500 increase. Your property taxes are based on the total of all net assessed values of a taxing unit. This means that adjusting some property's assessed values to better reflect actual value could be a good thing. (Put a pin on this thought and we’ll come back to it later.)

The second thing is that the property taxes you pay go to many different units of government. All these different units actually compete for that same maximum cap of 1 percent of your home’s value. These taxing units are governed by individual (elected) boards and do not often coordinate, cooperate or even talk to each other. You may believe you are paying all of your property taxes to the county but it is simply responsible for collecting and disbursing. You can see the various taxing units that your taxes fund at the bottom of your tax bill.

In 1973, the Indiana Legislature passed significant change in Indiana tax law (the Bowen Tax Reform) and capped a taxing unit’s spending. The amount of money required to fund a local government unit from your property taxes is called the levy.  Each year, the Department of Local Government Finance calculates the growth quotient that is applied to the previous year’s maximum levy. The unit is then required to stay under that total amount.

On its face, this sounds like a wonderful limited government idea: Force your local government to live within its means. In reality, they just pushed the burden from property taxes (which are far more locally controlled) to sales and income taxes. These sales and income taxes are controlled at the state level. The state gets to disburse them as it determines.

Think about it that for a moment. Most state senators and representatives in Indianapolis do not come from your area. They do not know your area’s needs like the you do, and that is bad public policy.

(OPTIONAL BREAK FOR PART II)

No sooner than the ink had dried on the Bowen property-tax relief bill of 1973 than the ever-big spenders lobbied for a new idea. It came from California, naturally, and the called it Tax Increment Financing (TIF).

In 1975, the Indiana legislature passed legislation allowing TIF districts to be created here. The initial goal was presented as modest: Carve out a section of a town or a city and developing it with TIF so the area would not be stagnant. TIF was supposed to be a way to allow government to spend money to encourage growth in a blighted area without impacting the maximum levy limit.

The interesting thing about these TIF districts is that the taxing units didn’t catch on right away that the tax money coming into the redevelopment commissions was calculatedoutside the maximum levy.

The taxing units themselves are limited on spending by their maximum levy amount. The Department of Local Government Finance calculates the growth quotient each year. That growth quotient is then applied to the unit’s last approved budget, and that’s how you get your unit’s current maximum levy. You may have a lot of growth going on in your area but the growth quotient is calculated at the state level and applied to all units across the state equally.

This maximum levy must then be budgeted among the various functions that that particular local government unit controls. Now, let’s go back to that assessed-value concept that we pinned earlier. The tax-rate formula could be simple but government, perhaps intentionally, has made it difficult to grasp. The tax rate of a government unit is found by taking the unit's levy divided by the total of its net assessed values thus: Tax rate= levy/NAV.

NAV is Net Assessed Values. This is calculated from the total market value of all parcels in a taxing unit’s geography (the Gross Assessed Values) minus exemptions (such as your homestead), credits, abatements, tax-exempt properties (government and religious owned) and finally  —a drum roll here — Tax Increment Financing. The levy stays relatively the same.

Remember, TIF dollars are collected outside those maximum levy calculations. A redevelopment commission, therefore, gets to be a taxing unit that controls its own money without bothering with a pesky maximum limit. This might have been an OK idea when they were used in limited capacities (to fight blight). Now, though, local governments recognize them as the honey pots they are — more money, outside the maximum levy.

For years, politicians have convinced taxpayers that TIF money is not taxpayer’s money; it’s said to be separate and won’t affect you. As a Realtor, I can tell you that it doesaffect you. If an increase in net assessed values of a taxing unit helps lower your tax rate, what does it mean to you if those big shiny new buildings being built inside a TIF district don’t get added to the tax rate equation?

First, just for example, new commercial areas will increase the demand for more police. So a town or city’s police force will have to grow. Unfortunately, the maximum levy won’t be allowed to grow along with it. Your town or city will have to figure out how to fund more police but legally can’t use TIF dollars to do so.  So a bigger slice is taken out of an often already tight pie. Also, those new commercial-industrial buildings are often the highest assessed values in a taxing unit. So, again, you’re taking out assessed value that could help homeowners reduce their tax rates, and those businesses pay up to a 3 percent property tax cap.

In many cases, what they have done is transferred the burden of paying for essential services from the commercial properties to the residential parcels. This will only work until all the residences hit the 1 percent cap. Then I predict that the same politicians who used sleight of hand to move the burden from one taxpayer to another will start screaming that the sky is falling and demand a "fix" to the tax-cap "problem." (You can call me Nostradamus.)

Nobody likes property taxes, largely because we see the actual bill. These taxes, though, are at least determined locally (by a county assessor). They are collected and disbursed locally (by a treasurer) and finally they are controlled locally (by the various elected boards of the taxing units). You have more control over property taxes, TIF permitting, than you do sales and income taxes — the "invisible" taxes you pay every day.

Martina Webster, a Realtor for 18 years, represents District 1 on the Sellersburg Town Council. She wrote this at the request of the Indiana Policy Review Foundation.