The Proposed Permanent Property Tax Cap in Indiana May Limit TIF’s Effectiveness

In March 2008, Indiana adopted HEA 1001 which would provide property tax relief and protection against future property tax increases beginning with the 2009 property tax, payable in 2010, by capping property tax at 1% of assessed value for residential property, 2% for apartments and agricultural land and 3% for commercial property.  To limit the ability of future legislatures to amend or revoke the property tax caps, the Indiana General Assembly adopted joint resolutions, SJR1 in 2008 and HJR1 in 2010, which, if approved by a referendum, would amend the Indiana Constitution to permanently cap the property tax.  Indiana electors will vote on this matter on November 2, 2010.

Although the property tax cap system has already taken effect in Indiana, it will not have any impact on TIF unless the property tax cap level is reached.  For example, if a TIF district that only includes commercial development is established in 2010 with a base EAV of $1,000,000 and in 2011 the TIF district EAV grows to $5,000,000, without the cap system, a 4% property tax rate could generate tax increment in an amount of $160,000 (4% x ($5,000,000 – $1,000,000) = $160,000) in 2011.  With the 3% property tax cap in place, the tax increment generated in 2011 would be reduced to $120,000 (3.0% x ($5,000,000 – $1,000,000) = $120,000), or $40,000 less in available increment.

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