Backgrounder: The Homestead Tax Credit

September 20, 2016

by Martina Webster

We should educate people on the tax-rate formula every chance we get. The more who understand the concept, the better the dialog on government spending.

For starters, could giving up a tax exemption lower your taxes? Consider that it is time for the Legislature to designate something other than the Homestead Credit as the marker for the benefit a property owner gets with the 1-percent property tax cap. Let me explain:

Tax Rate = Levy (budget needed) / (NAV/100) —The NAV is Net Assessed Value of the taxing unit. NAV is calculated by taking the Gross Assessed Values and subtracting off credits, abatements, exemptions and TIF (Tax Increment Financing). The Homestead exemption that many of us get on our homes is an exemption that gets subtracted from the gross assessed value of our county/town/school district.

Every year, however, more and more parcels are hitting the property-tax caps. With that, the need for the Homestead exemption disappears. If my home is at the 1-percent cap, I could eliminate my Homestead exemption and still not pay higher taxes.

Oops. That’s incorrect — at least currently. If I were to withdraw my Homestead exemption I would be taxed at 2 percent, like a landlord. Taxing units, particularly in cities and towns, lose millions of assessed value to Homestead exemptions that might really no longer be necessary.

The irony here is that if each of those exemptions fell off as a homeowner reached the cap it could potentially lower her taxes. It might not change a thing for that particular homeowner but, regardless, she is protected by the caps. If all the homeowners in a taxing unit dropped the exemption when they hit the cap, it could lower the tax rate for all parcels in that unit.

So yes, eliminating your Homestead exemption could lower your taxes. That is, if the legislature can find some other way to verify that you are residing in yoproperty-taxur homestead and therefore are under the 1-percent cap protection.

Now, I’m not asking for full-fledged repeal of the Homestead exemption across the state. I’m a Realtor and I know that in some cases it could have devastating effects on mortgage approvals. But each year more and more local governments are feeling the pain of the propert-tax caps. Once a homeowner hits the caps, the exemption could and should drop. It would help them, other parcel owners and the taxing unit overall.

In sum, legislators would be wise to create some other mechanism for county government to designate a homestead without tying an exemption to it.

Martina Webster, a Realtor for 17 years, represents District 1 on the Sellersburg Town Council. She wrote this at the request of the Indiana Policy Review Foundation.

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