Supplemental Deduction Makes Property Taxes Regressive

Everyone has received their property tax bill for 2009 and the topic is hot once again. There is a lot of talk about the insufficiency of the tax caps because assessed values rose in many places. The folks whose AVs declined must be out celebrating because they are not piping up. I must reiterate, though, that tax caps do play a role in damping down any tax increases provided by your schools, your city or town, your township government, or any municipal corporation like libraries or county health & hospitals. Remember - that is the source of the problem - folks who think its fine and dandy to spend more and more of your money. Mathematically, the assessed value (AV) is indeed a variable in the equation that is unfettered. Socially, the assessed value is the source of much concern and often cited as the place where elected officials can get the money they want by illegally increasing the value of property beyond its market value. According to documents posted on the State Department of Local Government Finance, the total Assessed Value of the Marion County rose from $402,782,369 for the 2008 budget to $405,066,609 for the 2009 budget. It is the latter for which we are now paying property taxes. But, that represents an increase in AV of just over half a percent (0.567%). If you believe that your property was assessed incorrectly, please file an appeal. You can do that by visiting the County Assessor website's "Property Tax Appeals" page. You have 45 days from receipt of your bill to file an appeal - so do it today !!

A little noticed aspect of the property tax formula turns the egalitarian-sounding tax caps upside down. That is the "Supplemental Deduction" - line 2b for those following along at home. Line 2a is the old "Homestead Deduction" that every owner occupied residential property receives - total of $45,000 or 60% of the gross AV, whichever is less. The supplemental deduction is 35% of the next $600,000 of AV, followed by 25% of any AV over $645,000. You can find that information and more on the County Treasurer's FAQ page.

I backward engineered the tax bills to see the effect of these deductions on the tax rate required to make homeowners hit the property tax caps. This ignores other deductions that can be applied to a property tax bill due to some aspect of the homeowner or their finances. Your final bill will also be affected by the credits for property tax relief that are being phased out.

A million dollar home would get $45,000 + $210,000 + $88,750 = $343,750 total deductions (homestead plus 35% supplemental plus 25% supplemental). So, by my calculations, the tax rate would have to hit 1.5% before the million dollar home hit the 1% cap.

A $600,000 home would get $45,000 + $194,250 = $239,250 total deductions and the tax rate would have to hit 1.7% before this home hits the 1% cap.

Whereas a $100,000 home would get $45,000 + $19,250 = $64,250 total deductions and the tax rate would have to hit 2.8% before that home hits the 1% cap.

And lastly, a lowly $50,000 home would get only $30,000 deduction (can only deduct up to 60% the AV of the home with the homestead deduction) and the tax rate need only be 2.5% before that home hits the 1% cap.

So, the million dollar mansion hits the protection of the caps before lower priced homes. The protection of the caps is further away as your property's assessed value fades from the mansion level until about $75,000 in assessed value, where the situation slowly begins to reverse.

For the 1.5% property tax caps -- the million dollar mansion hits that cap when the tax rate is 2.3%, the $600,000 home hits when the rate is 3.8%, the $100,000 home hits when the rate is 4.2%, and the $50,000 home hits when the rate is 3.5%. So, those who hit the caps this time are more likely to be your very expensive homes or your extremely inexpensive homes.

It sure would be nice if all were treated equally or, gasp, if those more able to pay were charged a higher rate.