The impact of property tax legislation on Indiana households.

• Author: DeBoer, Larry

Many Indiana homeowners saw big increases in their property taxes in 2007. In response, Governor Daniels and the Indiana General Assembly have proposed tax reforms that include large property tax reductions for homeowners. The proposals fund these reductions in part with an increase in the sales tax.

This leads to some obvious questions. If households pay less in property taxes but more in sales taxes, do they pay more or less in taxes overall? What are the characteristics of households who pay more or less? How many households likely will pay less, and how many will pay more?

Answering such questions requires a model of Indiana household tax payments, and some idea about the composition of Indiana households. This article describes such a model, and offers some answers to these tax policy questions. A more detailed description of the model is available in an expanded article at www.ibrc.indiana.edu/ibr.

Representative Households

The household tax model uses the characteristics of representative households to calculate taxes paid. The identity of the representative households determines the results of the analysis, so it is important to define them carefully.

The U.S. Census Bureau (1) now conducts an annual American Community Survey (ACS) of three million people nationwide. The survey provides demographic and economic estimates for the states and some of the larger counties. The most recent data are for 2006. The ACS provides estimates of household incomes and home property values.

According to the ACS, homeowners are 72 percent of the 2.4 million Indiana households; renters are 28 percent. Almost one-third of households own homes valued between $100,000 and $200,000. The median home value is $120,700. Median income for all Indiana households is $45,394. The median for homeowners is $55,634; for renters, it is $24,922.

These marvelous new data are necessary to determine representative households. Indiana is now a market value state, so home values provide the starting point for calculating property tax payments. Household income is the starting point for calculating county, state, and federal income taxes.

That leaves sales and excise taxes, which are based on spending on taxable goods and (some) services. The U.S. Department of Labor's (2) Bureau of Labor Statistics conducts an annual Consumer Expenditure Survey, which can be combined with the ACS data to measure spending. The expenditure survey shows average annual spending on seventy-three categories of goods and services--from alcoholic beverages to women's clothing--for households at many income levels. Data are not available by state, so national figures must be used.

Since the average Indiana household has 2.6 people, all the households in the model are assumed to have three people, two adults and a child. (3) The spending data for three-person households are matched to the income data from the ACS to estimate how much each household spends on each category.

The households' value of vehicles is the depreciated value of all vehicles owned. It is based on data from the Federal Reserve Board's Survey of Consumer Finances, (4) which shows the national average values of assets (including vehicles) by family income level. This figure is used for calculating local motor vehicle excise taxes.

Tax Calculations

The data on the property, income, and spending of representative households are used to calculate tax payments for the various taxes. Included are property taxes, general sales taxes, state and county income taxes, state excise taxes on tobacco, alcoholic beverages and motor fuel, local excise taxes on motor vehicles, federal income taxes, Social Security taxes, and federal excise taxes on tobacco, alcoholic beverages, and motor fuel.

The tax payments implied by the model are tested by adding up the tax payments for households and comparing them to total tax collections in Indiana. Tax calculations are made for sixty households based on the income and home value categories from the ACS. The tax payments by each household are then multiplied by the number of households in each category, and the results compared to the state totals.

Results for the federal, state, and county income taxes and homestead property taxes are remarkably close to state totals. Results for sales taxes are difficult to test, because the share of the sales tax on business-to-business sales is unknown. The results are similar to past estimates, however. Excise tax revenues--especially for tobacco--vary widely from actual collections...