The Consequence Of Eliminating The Homestead Credit

The Ballard administration has proposed eliminating the homestead credit provided to residential property owners in Marion County as a way of closing a $50-60 million budget deficit it claims the city-county government is facing in 2013 by about $8 million. Opponents of eliminating the homestead credit were perplexed when the Ballard administration claimed they would need to find $13 million in additional budget reductions if the homestead credit was not eliminated. Eliminating it will save $8 million, but keeping it will cost $13 million. Are you confused? I was. You will even be more confused when you learn who wins and who loses from the elimination of the credit.

Fellow blogger Pat Andrews inquired about this discrepancy in the savings versus cost of providing the homestead credit. It turns out that the cost of the homestead credit is paid off the top of the revenues the consolidated city collects from the county option income tax (COIT), which raises about $155 million annually, so as not to shortchange taxing districts on property tax revenues. The consolidated city gets about 88% of the remaining COIT revenues, while the balance is distributed among the excluded cities and the townships. You may recall that the Ballard administration last year opposed efforts to divert part of the COIT revenues to the Indianapolis-Marion County library to prevent cuts in its budget it was faced with making. Ryan Vaughn, then-President of the City-County Council, claimed that diverting the money to libraries would shortchange public safety funding, which gets the lion's share of the COIT revenues. The library district gets 80% of its revenues from the property tax. Eventually, the legislature approved giving the library district a share of the COIT revenues, which amounted to about $150,000 a year, and the council transferred close to $300,000 from other funds to the library. The library district had wanted about $3 million.

Here's where it gets interesting. Because homeowners' property taxes will increase as a result of the elimination of the homestead credit, a number of homeowners who have not yet reached the state's 1% property tax cap will see their total tax bills reach the cap. According to preliminary numbers Andrews has been able to get her hands around, higher property tax bills bumping against the cap will cause taxing units dependent on property tax revenues to collectively lose about $9 million. [Note these are merely preliminary estimates at this point] Schools could be hit with a loss of at least $3.5 million in property tax revenues. The balance of the property tax losses would be shared by townships, the consolidated city, the excluded cities, the Health & Hospital Corporation, IndyGo and, yes, the library district. So what the library district gained in additional COIT revenues could be lost entirely as a consequence of eliminating the homestead credit. The only taxing district that gains from the elimination of the homestead credit is the consolidated city. As Paul Harvey used to say, "And now you know the rest of the story."