LEGISLATIVE SERVICES AGENCY Office of Fiscal and Management Analysis 200 W. Washington Street, Suite 302 Indianapolis, Indiana 46204-2789 (317) 233-0696 (317) 232-2554 (FAX) MEMORANDUM To: Members of the General Assembly From: Bob Sigalow Re: Elimination of Personal Property Assessments and Elimination of the 30% Valuation Floor for Personal Property Date: December 23, 2013 ____________________________________________ Net taxes on business personal property1 were $1,022 M in 2013 and are currently estimated at about $1,063 M for taxes payable in 2015. The following analysis is based on estimated 2015 taxes. Net taxes reflect the final tax bills after application of all credits, including circuit breaker credits. Estimates in this analysis were based on a model using Pay 2013 auditor’s tax data, Pay 2013 personal property return data, and Pay 2014 assessor’s real property data, where available, to estimate 2015 taxes. Total Elimination of Personal Property Assessments Statewide, the total elimination of personal property assessments would result in a personal property tax reduction of $1,063 M in 2015. Tax shifts to real property would amount to about $375 M, and circuit breaker losses would rise by about $554 M. Overall, TIF proceeds would decline by about $39 M. Additionally, the loss of personal property assessments would cause a $153 M gross levy reduction in rate-controlled funds. Revenue from the Rail Car Property Tax would also be eliminated. Rail Car Property Tax collections are transferred to the Northern Indiana Commuter Transportation District (NICTD) and amounted to $6.8 M in 2013. The property taxes paid by one railroad, the Chicago South Shore & South Bend Railroad (South Shore), are also transferred to NICTD. The 2013 taxes for this railroad were $200,600. Elimination of personal property would result in a total revenue loss of $7.0 M per year for NICTD. Elimination of 30% Valuation Floor The elimination of the 30% valuation floor would result in a personal property tax reduction of about $229 M. Tax shifts to other property would amount to about $84 M, and circuit breaker losses would rise by about $110 M. Overall, TIF proceeds would decrease by about $6.7 M. Additionally, the loss of personal property assessments would cause a $36 M levy reduction in rate-controlled funds. Revenue losses for NICTD from rail car taxes and the tax on the South Shore Railroad would amount to about $3.2 M. 1Mobile homes assessed as personal property are not included in this analysis. These mobile homes accounted for $560 M in net assessed value and $10.5 M in net property tax in 2013. Memorandum Page 2 Impact by Property Type and Unit Type The following table contains the estimated net property tax changes by property type under both scenarios. Estimated 2015 Net Property Tax Change (Millions) Total 30% Floor Property Type Elimination Elimination Personal Property $ (1,062.7) $ (228.7) Homesteads 142.5 32.6 Other Residential 32.7 7.1 Apartments 6.8 1.4 Agricultural Real 55.3 12.1 Other Real Property 138.3 31.0 Total Net Tax Change $ (687.2) $ (144.5) Notes: 1. This table does not include the $7.0 M reduction in personal property taxes billed separately to rail car companies and the South Shore Railroad. 2. Totals may be off due to rounding. The following table contains the estimated circuit breaker impact and the estimated gross levy loss in rate-controlled funds by taxing unit type. A circuit breaker impact report with details by taxing unit is attached (Attachment A). Estimated 2015 Impact by Unit Type (Millions) Rate-Controlled Gross Circuit Breaker Losses Levy Loss Unit Type Total 30% Floor Total 30% Floor Elimination Elimination Elimination Elimination Counties $ 70.6 $ 14.6 $ 17.1 $ 4.1 Townships 15.5 3.0 2.3 0.5 Cities and Towns 174.6 35.6 6.3 1.5 Schools 150.7 31.2 123.1 28.9 Libraries 23.9 4.7 0.3 0.1 Special Units 47.3 10.0 3.7 0.9 Non-TIF Total $ 482.5 $ 99.0 $ 152.7 $ 36.0 TIF Districts 73.8 12.2 Total Including TIF $ 556.3 $ 111.3 Notes: 1. The gross levy loss for rate-controlled funds is stated before reductions for circuit breaker losses. The final revenue loss in these funds would be less than the gross levy loss. 2. Totals may be off due to rounding. Two reports (Attachments B and C) detail the tax shifts by property type, total circuit breaker changes, and the estimated loss of gross levy in the rate-controlled funds within each county, based on estimated Memorandum Page 3 2015 taxes. These reports contain the changes in both dollar and percentage terms. Consideration should be given to the dollar changes to keep the percentage changes in context. Small dollar changes on small bases can produce large percentage changes. The overall estimated tax and circuit breaker changes may not add to zero in a county. There are two reasons for this. First, there will be a loss of net property tax revenue in the rate-controlled funds. Second, the change in net taxes includes changes in TIF proceeds. Tax Increment Financing When the tax rate increases, real property TIF revenues will also increase, subject to the tax caps. Counties with real property TIFs will see an increase in net tax revenue from real property TIF. Counties that have personal property TIFs will see the elimination of personal property TIF proceeds if personal property assessments are eliminated. Elimination of the 30% assessment floor could cause increases in personal property TIF revenue in some TIF districts and decreases in others. The following table contains the estimated TIF impact by TIF type. Estimated Change in 2015 Net TIF Revenue (In Millions) Total 30% Floor TIF Type Elimination Elimination Real Property $ 32.3 $ 7.5 Personal Property (70.8) (14.2) Total $ (38.5) $ (6.7) LOIT Replacement The last report (Attachment D) estimates the local option income tax rate that would be necessary to replace the taxes now paid by the owners of personal property. The statewide average income tax rate needed to replace all personal property tax in 2015 is estimated at 0.77%. The highest estimated rate is 2.78% in Spencer County, and the lowest is 0.10% in Brown County. The statewide average income tax rate needed to replace personal property taxes lost to the elimination of the 30% assessment floor in 2015 is estimated at 0.17%. The highest estimated rate is 0.84% in Howard County, and the lowest is 0.02% in Brown County. Additional Information - Elimination of Personal Property Assessments For Pay 2013 (2012 in LaPorte County), there were approximately 453,000 personal property tax records, including business personal property returns, utility, and railroad assessments. Personal property accounts for about $49 B in gross assessed value. Net AV, after deductions and exemptions, is about $43 B, or about 14.5% of the total property tax base. The elimination of this valuation from the tax base would cause the statewide average 2015 tax rate to rise from an estimated $2.45 to $2.81, or by an average of $0.36 per $100 AV. The higher tax rates would cause a shift of taxes to owners of other property types. Additionally, the higher tax rates would Memorandum Page 4 increase exposure to the circuit breaker caps. All of the $1,063 M in net personal property taxes would be eliminated. Net taxes would increase for real property owners by $375 M, and circuit breaker losses for taxing units would increase by $556 M. The levy in rate-controlled funds, mostly cumulative funds and the school capital projects fund, is sensitive to changes in assessed value. The loss of personal property assessments would cause a $153 M gross levy reduction in rate-controlled funds. This levy reduction is the pre-circuit breaker amount, so the final revenue loss would be smaller than the gross levy loss. Marion County has the largest amount of taxes paid by owners of personal property, estimated at $185 M in 2015. Lake and Allen Counties follow at $114 M and $52 M, respectively. Ohio County has the smallest amount at $268,000. Marion County’s circuit breaker losses would increase the most at an estimated $121 M, followed by Lake County at $74 M and Allen County at $33 M. The smallest increase would be $0 or near $0 in Brown, Morgan, Ohio, and Pulaski Counties. Additional Information - Elimination of the 30% Valuation Floor The current Department of Local Government Finance personal property assessment rule specifies a depreciation schedule for business personal property. Most taxpayers list the cost of depreciable property in one of four “pools”, based on the declared useful life of the property. Each pool has a different set of depreciation rates for each year of age of the property. The cost of the property is multiplied by the appropriate “percent good” factor in the depreciation schedule to produce the true tax value (TTV). The total TTV of all of a taxpayer’s depreciable property located in the same taxing district must equal at least 30% of the total cost. This is known as the 30% valuation floor. Utilities, railroads, and rail cars are assessed under different methods. For these taxpayers, the total statewide assessed value is established, subject to the 30% floor, and then it is apportioned to various taxing districts. Taxpayers who own an integrated steel mill or an oil refinery/petrochemical company may elect to use the Pool #5 depreciation schedule.