Ruling strikes down Indiana residential property tax policy

In a case originating in Lake County, Indiana Tax Court Judge Justin McAdam last month struck down the statutory one-acre limit on homesteaded residential property eligible for a maximum annual property tax charge equal to or less than 1% of its assessed value.

McAdam said nothing in the Indiana Constitution authorizes the Legislature to restrict the application of the state’s 1% property tax cap to a single acre of residential property, and homeowners with lots larger than one acre may be entitled to have the 1% cap applied to their entire property depending on how the rest of their land is used.

“The statutory framework implementing the constitutional 1% cap limits the cap to no more than one acre of land surrounding a dwelling and allocates land in excess of one acre to the other caps. This is less than the Constitution requires and fails to fulfill the constitutional mandate contained in Article 10, Section 1,” McAdam said.

“The constitutional tax caps establish strict limitations on the state’s ability to tax property, setting a ceiling on the amount of tax that can be levied and a floor on the type of property entitled to the benefit of each cap. The Constitution does not grant the Legislature the discretion to narrow a class of property constitutionally allocated to a specific tax cap.”

Currently, owner-occupied homesteads larger than one acre typically are subject to the 1% property tax cap for the acre of land containing and surrounding the residence, with the remainder subject to the 3% property tax cap for nonresidential real property.

In light of his ruling, McAdam said large lot owners, like Dr. Tulsi and Kamini Sawlani, of Crown Point, who challenged the statute — and other similarly situated Hoosier homeowners — might be able to enjoy the 1% property tax cap on their entire 3.981-acre plot of land, so long as it’s used as part of their principal place of residence.

“Where land fails to qualify for the standard deduction solely because it exceeds the one-acre limitation, the property may be evaluated through the existing appeal process to determine whether it would otherwise be eligible for the deduction without the one-acre limitation. This approach allows for a case-by-case evaluation of the one-acre limitation’s constitutionality as applied to taxpayers with properties exceeding one acre, while maintaining the statutory framework’s facial constitutionality,” McAdam said.

Following the July 24 ruling, Lake County Assessor LaTonya Spearman said it’s unfortunate the Legislature used undefined and imprecise language in the tax caps constitutional amendment and implementing statutes, and she hopes state lawmakers promptly will make any needed adjustments.

The decision also is likely to be appealed in coming weeks to the Indiana Supreme Court by the state attorney general’s office which is charged with defending the constitutionality of Indiana statutes approved by the Legislature and enacted by the governor.

If allowed to stand, however, the decision potentially will reduce the property taxes paid by owners of large residential properties and either shift that burden onto homeowners situated on less than one acre of land who aren’t already at the 1% property tax cap or possibly reduce the financial resources available to local units of government, including public and charter schools.

Local governments in Northwest Indiana and across the state also are facing potential revenue reductions if Republican Mike Braun or Libertarian Donald Rainwater is elected governor at the Nov. 5 general election.

Braun is proposing reverting residential property tax bills to 2021 levels, reducing the amount of a home’s assessed value subject to tax, strictly limiting future property tax increases, and making it more difficult for taxing units to temporarily increase property tax revenue through a voter referendum.

“Nothing is more important than ensuring Hoosiers can afford to live in their homes without being overburdened by rising property taxes driven by rapid inflation in home values. As governor, I will introduce a bold agenda to deliver historic property tax relief for all Indiana residents,” Braun said.

Rainwater, on the other hand, is calling for replacing local property taxes with, in effect, a sales tax on residential property sales — paid either up-front or at 1% of assessed value for 7 years — after which no further property tax ever would be owed.

“Mr. Braun’s tax plan may slow the growth of property taxes, it does not solve the overall issue that Hoosiers can never truly own their property in Indiana. As long as property taxes are billed in perpetuity, the state government effectively holds the controlling interest in the property,” Rainwater said.

Neither candidate has said whether or how they would replace the property tax revenue lost by local units of government, of which a large share typically goes toward police, firefighters and other protective services.

Meanwhile, Indiana Democrats note the state’s current property tax system was created and maintained by Republican governors and the Republican-controlled General Assembly, and Hoosiers looking to change it should first change the political party in power.

“Hoosiers deserve real relief from rising property taxes, not gimmicks that would balloon local deficits, endanger local services and suffocate Indiana’s housing market,” said Indiana Democratic Chairman Mike Schmuhl.

“It’s time to break their supermajority hold on the state legislature and elect Jennifer McCormick as our next governor for property tax reform that protects public schools, keeps seniors in their homes and ensures resilience for local services.”