When Going Up Means Going Down: How Do the Property Tax Circuit Breakers Actually Work?

Monroe County Courthouse at Night
Monroe County Courthouse at Night

During the discussions about the City of Bloomington’s proposed annexation, I have received a lot of questions from readers about the property tax circuit breakers (“tax caps”) — like, how do they actually work, how do they affect the taxpayer, and how do they affect the local unit of government? I thought I’d answer that question first by going through a very simple (artificially simple) example.

Before I even begin with the details, let me emphasize the most mind-bending aspect of the property tax circuit breakers — an increase in property tax rates can actually make the revenue to units of government serving the property go down. How does that work?

For our example, we have to pick a taxing district. Let’s choose unincorporated Richland Township (i.e, the part of Richland Township that is outside the Town of Ellettsville). For 2017, the following table shows the tax rates that make up the overall tax rate for unincorporated Richland Township:

Screenshot 2017-04-19 19.34.56

The overall property tax rate for unincorporated Richland Township for 2017 is $1.7915 per $100 of Assessed Value. The above table shows how that rate is divided up among the various taxing units (units of government) serving that district.

So now we need to pick a property to use as an example — and I’ve picked a very specific property — a homestead with a gross assessed value of $318,600. Why have I chosen this value? Because given the above tax rate ($1.7915) and certain simplifying assumptions (no property tax relief from the income tax), this property is exactly AT its circuit breaker tax cap for Richland Township.

How do we know this? Let’s do a few calculations. First of all, the circuit breaker tax cap for a homestead property is 1% of its gross assessed value. In our example, it is $3186 (1% of $318,600). That means that the taxpayer cannot be made to pay more than $3186 in property taxes. Second of all, let’s calculate the net assessed value that the taxpayer is actually taxed on. Since this property is a homestead, it is eligible for a $45,000 homestead deduction and a 35% supplemental deduction of the remaining value, leaving a taxable net assessed value of $177,840. This means that our $318,600 property will be taxed on $177,840. Note that there may be additional deductions that this taxpayer is eligible for; however, for this example, we’ll stick with the homestead and supplemental deductions.

Applying our tax rate of $1.7915 per $100 of assessed value to our net assessed value of $177,840, we have a total property tax bill of $3186. Note that this tax bill is exactly at its circuit breaker limit of $3186!

Based on the above tax rates, each unit of government that serves this property receives the following property tax revenue:

Screenshot 2017-04-19 20.08.53

And again — this property is right at its 1% circuit breaker limit of $3186, so currently it cannot be forced to pay more than $3186.

So now let’s consider a very artificial situation. Let’s say that for 2018 every taxing unit’s property tax rate stays exactly the same except that Monroe County takes on some additional debt for capital projects, raising its property tax rate from $0.3832 to $0.4300. The following table shows what the 2018 property tax rates are in this hypothetical example compared to the 2017 rates.

Screenshot 2017-04-19 20.19.16

As I mentioned before, in this very artificial example, only the Monroe County property tax rate has changed from 2017 ($1.7915 per $100) to 2018 ($1.8383 per $100).

So first, let’s calculate this taxpayer’s 2018 property taxes overall. The following chart illustrates the taxes that would be collected by each taxing unit from this taxpayer for 2018:

Screenshot 2017-04-19 20.42.54

In 2017 they were $3186. In 2018 they are $3,269.23 ($1.8383 per $100 of AV, with the AV at $177,840). This is an increase $83.23.

But….remember that the circuit breaker is at $3186 — so $3186 is the most this taxpayer will pay! So even though the individual tax rates of each of the units of government serving this property would call for $3269.23 in taxes, the taxpayer only pays $3186. This means that there are $83.23 of taxes that the taxpayer does not pay and that the local units of government do not collect. This $83.23 is known as the circuit breaker credit — good for the taxpayer, not so much for the units of government serving the taxpayer.


But how is this circuit breaker credit divided up among the units of government? Even though it was only Monroe County that raised its tax rate (in this very hypothetical example), all of the units of government share in the loss of revenue in proportion to their tax rates.

So let’s allocate the circuit breaker credit (revenue loss to the units of government) based on each unit’s proportion of the total tax rate:

Screenshot 2017-04-19 21.06.20

Before even looking at the numbers in detail, the following fact should jump right out at you:


Now the last step in the process is to calculate the actual amount collected for each unit in 2018. So let’s put it all together:

Screenshot 2017-04-19 21.20.09

The column labeled “2018 Net (Taxes – Circuit Breaker) represents the actual taxes collected from this taxpayer for 2018. Note that it sums up to $3186. This should not be a surprise, as the tax cap for this taxpayer was $3186 — they cannot be taxed more than $3186 with an assessed value of $318,600!!

But the final kicker comes from looking at the rightmost column, labeled 2017-2018 Change. This is the change in revenue from each taxing unit from 2017 to 2018. Of course the total should be $0 — since the property was at the 1% circuit breaker, no net additional revenue could be collected.

But look more closely at each individual taxing unit. Only the unit that increased taxes — Monroe County in this artificial example — actually increased its revenue from 2017-2018 — and not as much as it would have increased it without the tax caps. But every other unit, even though it did not increase its tax rates — shared in the circuit breaker loss caused by the one unit that did increase its tax rates.

So just to pick out one example — the additional debt taken on by one unit of government (Monroe County) actually caused another unit (such as R-BB School Corporation) to lose revenue.

Monroe County’s gain ($63.76) is actually R-BB School Corporation’s loss ($50.52).

So hopefully this little exercise was useful — hopefully you can now see that with the property tax circuit breakers, one unit that raises its tax rates can actually cause a real loss to the other taxing units.


Circuit Breaker (Tax Cap) Impacts for 2015 in Monroe County

The Indiana Department of Local Government Finance just released the report on circuit breaker impacts on local units of government for 2015. The report for Monroe County specifically can be found here.

The circuit breakers — also referred to as “tax caps” — refer to various statutory (and constitutional) limitations on the property tax responsibility of individual property taxpayers in Indiana. There are two types of circuit breakers: the 1%-2%-3% circuit breakers (which limit property tax liability to a certain percentage of assessed value) and the Over 65 circuit breakers (which limit property tax increases to lower-income seniors). I wrote about the circuit breakers for 2014 in more detail here and here.

As you can see in several of the charts below, 2015 saw a slight increase in the circuit breakers from 2014, compared to a substantial increase from 2013 to 2014. This is very welcome news to local units of government, many of whom were very concerned after the large increase in 2014.

The following table shows the amount of circuit breaker credits by circuit breaker type, by year, from 2010-2015.

Screenshot 2015-04-16 21.14.36

The following chart illustrates the same data graphically:

Screenshot 2015-04-16 21.26.35

One can easily make the following quick observations from these two charts:

  • Almost all of the increase in circuit breakers since 2011 come from the 1% (owner-occupied residences). This is not surprising, as Indiana’s property tax system is generally considered very favorable to homeowners (vs. other classes of property owners, such as businesses)
  • This means that our assessed values in Monroe County kept pace with property taxes
  • The circuit breakers for 2% (non-owner-occupied residential, agricultural, and long-term care facilities properties) and over 65 have been very stable over time (other than a dip in the 2% circuit breaker in 2013)
  • 2015 is the first year that Monroe County has seen any circuit breaker credits for 3% (commercial and industrial) properties — for a whopping total of $9
  • The overall increase in circuit breaker from 2014-2015 was very small, which will work to the benefit of local units of government (though not as good as a decrease, obviously!)

The following chart breaks down the impact of the 2015 circuit breakers by taxing unit.

Screenshot 2015-04-16 20.52.27

As this chart shows, only 3 units, Monroe County, City of Bloomington, and MCCSC saw circuit breaker increases of more than $10K. The Town of Ellettsville actually saw a $6702 decrease in its circuit breaker from 2014.

Summary of 2014-2015 Circuit Breaker Changes

  • County-Wide
    • Increase from $819,507 to $865,759
  • Monroe County Government
    • Increase from $153,018 to $164,157
  • County General
    • Increase from $111,920 to $120,905
  • Summary
    • Still an increase from 2014-2015 – but a very small increase\
    • Increased much less in 2015 than in 2014

End of the Year Fiscal Update for Monroe County Government

At last week’s Monroe County Council work session, I gave a presentation to the council and the public on the fiscal state of Monroe County Government as of the end of 2014, particularly from the perspective of the county’s primary general operating funds — the General Fund (property tax) and the County Option Income Tax (COIT) fund (income tax), as well as the Rainy Day fund (essentially, our savings account).

In short, the county’s financial position is strong. The most important slide in the presentation was the following, which summarizes the two general funds (property tax and income tax) as well as the Rainy Day fund:

2014 General Funds Summary

Although the County had $2.2M less in cash on hand at the end of 2014 as it did in the beginning, this was due primarily to planned spending on one-time capital expenses, including $1.8M to equip the 911 Dispatch Center and $155K for the Monroe County Urbanizing Area plan. In addition, because settlement (the process by which the property tax collected by the county gets distributed to all of the taxing units that receive property tax) was not complete by the end of 2014, the county only received 95% of the property tax it should have received  for the second half of the year. The remainder will be paid in 2015.

A couple of other important findings in the report:

  • We paid out approximately $200K in expenses that did not by law require an appropriation by the Council. These expenses include special prosecutors, certain election expenses, elected official travel to certain state-mandated meetings, and State Board of Accounts audit expenses. This $200K per year number is relatively stable from year to year, so my recommendation is that the Council budget that amount per year, even though we don’t have any control over it.
  • Both general funds (property tax and income tax) end the year with healthy balances. The general property tax fund required a transfer of $2.7M from rainy day to stabilize it after several large one-time capital purchases over the last several years (Johnson Hardware Building, 911 Dispatch Center equipment, and the Monroe County Urbanizing Area plan).
  • We still have a $3.3M balance in the Rainy Day fund, which gives us a buffer in case property tax settlement continues to be delayed, or if income tax should take an unexpected nosedive.
  • County departments reverted (i.e. didn’t spend) approximately $1.3M of their appropriations in 2014. $605K of this was in personnel. Personnel reversions also appear to be quite stable from year to year. Personnel reversions generally occur because of employee turnover. When a position is vacant — even for a day —  it leaves unused personnel (salary and benefits) appropriations. Even when that position is filled, it is generally filled with someone whose salary is at the entry level for that classification — creating more reversions. The council was in general agreement that departments should transfer any of their unused personnel appropriations before requesting any additional appropriations towards the end of the year.
  • The circuit breakers (tax caps) are taking an increasing (but still not yet alarmingly large) bite out of property tax revenues in Monroe County. I have written about circuit breakers before here and here.

The last slide in the presentation summarizes the 2015 budget that the Council adopted in October:

2015 Budget Summary

As this chart shows, the budget that was passed is a balanced budget (actually, is about $122K in surplus). However, there  are a lot of things that this small surplus doesn’t take into account both good, like the additional 2014 property tax revenue that we will receive in 2015, as well as 2015 reversions, and bad, like the circuit breakers and any additional appropriations that we might have to make beyond what was budgeted for 2015.

The entire report can be found here: 2014 Budget Wrapup Presentation G McKim

What Defines Agricultural Land?

There was an interesting article in today’s Indy Star for those interested in tax policy: Tax bills shock Hoosiers whose farmland is reclassified.

The gist is that agricultural land in Indiana is assessed at a much lower value than residential land. However, what exactly determines whether land is classified as agricultural apparently leaves a lot of discretion to the county assessor. By law, land should only be assessed as agricultural land if it is used for agricultural purposes. But it isn’t always obvious what constitutes agricultural purposes. As some counties change the standards for what constitutes agricultural purposes — or, from another perspective simply correct past errors in classification, some rural property owners have seen big increases in their assessed value, and therefore their property tax bills.

The property tax circuit breakers (tax caps) make matters even more complicated. While land classified as residential is assessed at a higher rate than agricultural land, the homestead (owner-occupied residential) tax cap is at 1% of the assessed value. While agricultural land is assessed at a lower value, the tax cap is at 2% of assessed value. So the actual property taxes paid by the owner will depend on whether or not their property is already at the tax caps.

Our own County Assessor and president of the Indiana County Assessors Association, Judy Sharp, is quoted extensively in the article describing the difficulty in determining what constitutes agricultural use. She is also quoted in support of legislation that Representative Bob Cherry (R-Greenfield) says he intends to introduce this session that would specify that for land whose use doesn’t change, the classification for property tax purposes can’t change either. However, this legislation may, despite protecting taxpayers from increases in property taxes due to corrections in classification, also make it very difficult to correct past errors and county-by-county inequities in classification of agricultural land.

2014-Pay 2015 Net Assessed Values Certified for Monroe County

The Monroe County Auditor’s Office just released the 2014 Pay 2015 Certified Net Assessed Values for all taxing units in Monroe County, a key step in the annual budget cycle. Net assessed value (NAV) is what results after deductions, exemptions, and other adjustments are applied to the gross assessed value. Net assessed value is what is used to calculate property taxes paid in 2015 — both the overall tax rates and the individual property tax bill. Thanks to the staff of the Auditor’s Office for getting this information out to us!

Our 2014-Pay 2015 NAV is $6,459,490,036 (yes, that is almost $6.5 billion!), an increase of $89,317,707 over the 2013-Pay 2014 NAV of $6,370,172,329.

Remember that in general, an increase in NAV doesn’t mean that individuals pay more in taxes (although it does give the constitutional circuit breakers less effect) — it means that the existing property taxes are spread across a higher tax base. Increased assessed value is generally a good sign for both taxpayers and local units of government alike.

The following table I put together shows a quick history of our net assessed value from 2009-2015:

Monroe County Net Assessed Value 2009-2015
Monroe County Net Assessed Value 2009-2015

Data Source: Department of Local Government Finance


State Releases Assessed Value Growth Quotient for Local Governments

Monroe County Courthouse Under Renovation
Monroe County Courthouse Under Renovation

Today, the Indiana State Budget Agency (SBA) released the Assessed Value Growth Quotient (AVGQ) for 2015: 2.70%, a slight increase from 2.6% in 2014.

The AVGQ is essentially the “cost of living adjustment” for property taxes for all local units of government — the maximum amount by which local units of government are allowed to increase their controlled property tax levies by. For Monroe County Government, 2.7% is the maximum that the following levies combined can be raised for 2015: General Fund, Health, Aviation, County Fair, Reassessment, and Cumulative Bridge.

Although named the Assessed Value Growth Quotient in the statute, the AVGQ actually no longer has anything to do with assessed value. It is calculated as the 6-year moving average of nonfarm personal income growth. The theory behind it is that the costs of government should not be increasing at a greater rate than the taxpayers’ incomes are going up.

Also note that the AVGQ is independent of the circuit breakers or so-called “tax caps” (see here and here for more background). The circuit breakers can kick in and prevent a local unit of government from actually receiving the full growth in property tax levies specified by the AVGQ. In addition, the AVGQ doesn’t affect property taxes collected to service debt for capital projects (although the circuit breakers do affect these property taxes).

The AVGQ is calculated uniformly statewide — so that the limit on levy growth is the same for every local unit of government, whether the local economy is booming or busting, and regardless of the demands (or willingness of the taxpayers to pay) for services. There are, however, procedures for appeal for what is called an “excess levy” for specific cases, including: annexation, excessive growth over a 3-year period, shortfalls due to certain errors, and emergencies.

The following table shows the 6-year calculation for budget year 2015.

AVGQ Calculations for 2015
AVGQ Calculations for 2015

Note that the change from 2008-2009 is -2.91% — that means that during that year, personal incomes actually shrank. After two more years, that -2.91% will drop out of the 6-year calculation, and so unless we have another recession, we should see the AVGQ go back up to more historically normal levels.

The announcement is available here: 140701 – State Budget Agency Memo – Assessed Valuation Growth Quotient and the supporting calculations here: 140701 – State Budget Agency Memo – 2015 State Assessed Value Growth Quotient Worksheet.






Does New Development Generate New Property Taxes for Local Government?

Factory Development in Westside of County
Factory Development in Westside of County

An interesting discussion cropped up the other day on the Herald Times Online, in reaction to an article on the large new apartment development at Patterson Drive and Third Street in Bloomington (Massive project presents more evidence of the influence, effect of growth policies – behind paywall, unfortunately).

In short, one poster made a comment about the massive amount of property taxes that the county must be making from this new development. Another poster countered by saying that property taxes in Indiana have been “frozen” since 1973, implying that county government would not be seeing additional property taxes from the new development.

I weighed in essentially on the side of the second poster (with some exceptions), who argued that property taxes were “frozen”, and therefore new development doesn’t generate additional property tax revenues for local government. Since this is such a common topic of discussion and public misunderstanding, I thought I would address the question directly: do local governments get additional revenue from new development.

Property Tax “Freeze” in Indiana

In general, and contrary to popular belief, increased development does not result in an increase in revenue for local government in Indiana (with several exceptions, which I’ll mention below). The reason goes back to the property tax restructuring of 1973, during the Otis Bowen administration.

There are several excellent histories of  property tax legislation in Indiana, including:

I will not attempt to reiterate them here, except to say that since the Bowen Tax Package of 1973, property taxes for local governmental units in Indiana have essentially been “frozen” at their 1973 levels, along with a limited number of methods by which property taxes can be increased. Although there have been many legislative changes to the property tax formulas and assessment methods over the years since then, the current formula was established in 2002 (HEA 1001).

In short, local units of government receive in property tax revenue what they received the year before, plus a “cost of living” (my term) adjustment that is determined by the six year moving average of non-farm personal income growth. This adjustment is determined statewide — so that every county and every local unit of government gets the same adjustment. The general principle behind this is that the cost of government shouldn’t increase at a faster rate that the taxpayers’ incomes are increasing. So each unit of government is allowed a maximum levy that is slightly more than their maximum levy the year before.

How Property Taxes Are Calculated in Indiana

So why doesn’t the new assessed value from additional development result in a windfall for local government? It is because, after the changes in property tax legislation I mentioned above, property taxes in Indiana are calculated in reverse from how most people think of taxes. Typically, with most taxes, you have a tax rate that is set by legislation, and then a tax base (what is taxed), and the total amount received by government is the tax rate times the base. For example, the Indiana gross retail sales tax rate is 7%. The government receives 7% of whatever the total retails sales are. If sales are high, government receives a lot of tax. If sales are low, not so much.

However, with property tax in Indiana, we start with the maximum levy that I described above — the total amount the unit of government is allowed to collect. The assessment of individual properties only determines how the tax that generates that revenue is divided up among property owners. So the tax rates are determined by dividing the maximum levy by the total assessed value. Think about this. Because we start with the maximum levy, rather than some fixed tax rate, even if every single property owner’s assessed value doubled overnight, local government still wouldn’t receive a dime more (with the caveats that I’ll describe below).

So because the maximum levy is still the maximum levy (last year’s maximum levy plus the “cost of living” adjustment), regardless of new assessed value, new development doesn’t mean more taxes collected — it means that every other taxpayer’s share of the total is slightly less than it would be without the new development. In other words, new development means that everyone else’s taxes go down slightly (or don’t go up as much as they would without the new development) — but revenues for local government don’t increase.

As Always, There Are Exceptions

Of course, there are exceptions. There are a couple of cases in which new development does result in additional revenue to local governments.

First, there are so-called rate-controlled levies. These behave more like traditional taxes, in that they are established with a fixed tax rate, and so more assessed value translates to increased revenue. Generally these levies support cumulative funds for infrastructure — cumulative capital development, cumulative fire equipment, cumulative bridge fund, etc. This makes sense– in general, more assessed value means more needs for infrastructure maintenance. However, even these rate-controlled levies are restricted in growth in various ways after the 1973 property tax changes.

The second big exception is with respect to the circuit breakers (“tax caps”) — the 1%-2%-3% limits on an individual parcel’s property taxes as a percentage of gross assessed value of that parcel that were placed in the Indiana Constitution in 2008. Because new development (i.e. new assessed value) decreases the tax rates for everyone, it gives local units of government more headroom before the circuit breakers kick in, and so can avert what otherwise would have been losses of revenue through the circuit breakers.


There are a few other exceptions. And of course if the new development actually produces new wages for county residents then local governments would receive additional revenues in the form of increased income taxes on those wages.

But  it should be clear now that new development definitely does not result in a windfall for local government — or potentially even any increased revenue at all — and of course local government has to fulfill the increased demand on services that often accompanies new development —  a subject for a separate discussion.