Circuit Breaker Changes Bring Good News – But Some Will Still See Revenue Loss

Submitted by: Gary Malone, Executive Partner

This article is the third in a series about recent changes to property taxes and revenue streams enacted in the 2007 Indiana General Assembly. We thank Buddy Downs and Karen Arland from Ice Miller LLP for their research and insights.

Before the property tax circuit breaker provisions enacted by the Indiana General Assembly in 2006 could go into effect, they were altered in the 2007 session. A circuit breaker puts a cap on property taxes for certain taxpayers. Circuit breaker credits are deducted proportionally from the revenue flowing to each entity in the taxing district, except for school tuition support funds. Redevelopment commissions can also exempt tax increment replacement levies for the tax credit.

The 2% circuit breaker that was to begin with property taxes payable in 2008 (2007 for Lake County) now affects homestead properties only. Beginning with property taxes payable in 2010, all other real and personal property will be subject to a circuit breaker now set at 3%.

During the 2007 session, the Legislative Services Agency (LSA) projected that these two circuit breaker changes would greatly reduce estimated revenue losses to cities, towns, schools and other entities. LSA estimated that 722 taxing units would still be affected, including 141 cities and towns and 133 school districts. Revenue loss was estimated at $100,554,000 - down from $575,366,000 from the previous legislation. LSA's numbers were based on a 25% assessment "trending" rate. Recent figures, however, show much lower trending rates in many parts of the state. It would be wise to have your own projections to know what to expect.

Entities with property tax collections reduced by 2% or more due to the circuit breaker are considered "distressed political subdivisions." The distressed political subdivision's county council - or two or more distressed political subdivisions - may petition the state circuit breaker board for relief.

The seven-member circuit breaker board will be comprised of the director of the Office of Management and Budget, the state examiner of the State Board of Accounts, the commissioners of the Departments of Local Government Finance and Revenue and three gubernatorial appointments. The Indiana Association of Cities and Towns, the Association of Indiana Counties and the school superintendents' association may each nominate someone for the Governor's appointments.

The distressed political subdivision petitioning for relief must have a financial plan, including proposed efficiencies, consolidations, alternative revenue sources, cost reductions or other actions to enable it to cease being distressed. The political subdivision must then enter into an agreement with the appeal board for a financial plan that must also be approved by all political subdivisions in the county.

In our next issue, we'll describe how county income taxes can be used for property tax relief or for funding levy growth or public safety. If you have questions about how trending and the circuit breaker may affect your political subdivision, please contact us at footnotes@umbaugh.com.