Dirty Briefs: Repeal of Property Taxes in Indiana

By Holden D. Reins, Esq.

On December 4, 1998, the Indiana Supreme Court revisited several legal issues relating to Indiana's property tax assessment system.

Under the Indiana Constitution, the State of Indiana must provide a "uniform and equal" system for the assessment and taxation of real property. The primary issue before the Court involved whether Indiana's then property tax assessment apparatus met this constitutional requirement. The Indiana Supreme Court declared that it did not, but the Supreme Court gave no direction as to how the legislature should solve the problem.

The Indiana Legislature finally decided to use a ‘fair market value’ system to assess real property. Since implementation of the ‘fair market value’ system, taxes on both residential and non-residential real estate have risen to the consternation of real property owners.

Issue 1: Why does Indiana have a tax on real property?

A tax levied on real state is mandated by Article 10 on the Indiana State Constitution. That Article reads:

ARTICLE 10. Finance. 

    Section 1. (a) The General Assembly shall provide, by law, for a uniform and equal rate of property assessment and taxation and shall prescribe regulations to secure a just valuation for taxation of all property, both real and personal. The General Assembly may exempt from property taxation any property in any of the following classes:
        (1) Property being used for municipal, educational, literary, scientific, religious, or charitable purposes.
        (2) Tangible personal property other than property being held as an investment.
        (3) Intangible personal property.
        (4) Tangible real property, including curtilage, used as a principal place of residence by an:
            (A) owner of the property;
            (B) individual who is buying the tangible real property under a contract; or
            (C) individual who has a beneficial interest in the owner of the tangible real property.
    (b) The General Assembly may exempt any motor vehicles, mobile homes, airplanes, boats, trailers, or similar property, provided that an excise tax in lieu of the property tax is substituted therefor.

 Article 10, Section 1 (a) states that the General Assembly "shall provide, by law, for a uniform and equal rate of property assessment and taxation..." (emphasis added.) The term ‘shall’ requires that the General Assembly pass statutes to assess the value of ‘and’ levy levy taxes on the assessed property. 

Issue 2: Why is the ‘Fair Market Value" of real property now used to assess real estate for taxation.

The State of Indiana previously taxed real property based upon its "true tax value." The "true tax value" of real property was based upon a complex set of formulas developed and applied by the State. The State's application of these formulas frequently produced property assessments that differed from the property's fair market value, sometimes by significant margins. Concerns about the fairness of the previous property tax system had been the source of the litigation against the Constitutionality of such regulation.

Article 10, Section 1 (a) states that the General Assembly "shall prescribe regulations to secure a just valuation for taxation of all property, both real and personal." (emphasis added.) Once the Indiana Supreme Court ruled the ‘true tax value’ assessment system unconstitutionally unequal and lacking in uniformity, the General Assembly was required (shall) to devise a set of regulations that provided equality and uniformity. The General Assembly chose the ‘fair market value’ approach to equality and uniformity. The Supreme Court of Indiana gave the General Assembly no guidelines to use in devising a new set of regulations to ‘secure a just valuation’ of real or personal property for tax purposes. 

Issue 3. How can Article 10 of the Indiana State Constitution be modified to repeal any tax on real property?

Article 16 of the Indiana State Constitution provides for amendment and repeal of any portion of the Indiana Constitution, repeal being an amendment to eliminate a provision of the constitution. Article 16 reads:

ARTICLE 16. Amendments. 

    Section 1. (a) An amendment to this Constitution may be proposed in either branch of the General Assembly. If the amendment is agreed to by a majority of the members elected to each of the two houses, the proposed amendment shall, with the yeas and nays thereon, be entered on their journals, and referred to the General Assembly to be chosen at the next general election.
    (b) If, in the General Assembly so next chosen, the proposed amendment is agreed to by a majority of all the members elected to each House, then the General Assembly shall submit the amendment to the electors of the State at the next general election.
    (c) If a majority of the electors voting on the amendment ratify the amendment, the amendment becomes a part of this Constitution.
(History: As Amended November 3, 1998).

    Section 2. If two or more amendments shall be submitted at the same time, they shall be submitted in such manner that the electors shall vote for or against each of such amendments separately.
(History: As Amended November 8, 1966).

To repeal Article 10, or any portion thereof requires that a Constitutional Amendment to that effect "may be proposed in either branch of the General Assembly." If the proposed amendment is "agreed to by a majority of the members elected to each of the two houses" the amendment is then "referred to the General Assembly to be chosen at the next general election." The executive branch of the Indiana government has no active participation in the amendment of the Indiana Constitution.

"If, in the General Assembly so next chosen, the proposed amendment is agreed to by a majority of all the members elected to each House, then the General Assembly shall submit the amendment to the electors of the State at the next general election." The two houses of the next General Assembly must agree to the proposed amendment as written and approved by the prior General Assembly. No changes are allowed in the text of the proposed amendment. If changes are made in the text of the proposed amendment then the amendment is deemed to be a NEW amendment and the process starts anew.

"If a majority of the electors voting on the amendment ratify the amendment, the amendment becomes a part of this Constitution." From the initiation of the process until ratification, the process requires a minimum of 3 years and a maximum of 6 years, since a new General Assembly is elected every other year and a general election is held only 3 times every 4 years, the first year AFTER a presidential election year not having a scheduled general election in Indiana.

Issue 4: Can the General Assembly provide real property tax relief without repeal of Article 10 of the Indiana Constitution?

Article 10 provides for 2 exemptions to assessment and taxation on real property held in Indiana.         

Section 1. (a) (1) Property being used for municipal, educational, literary, scientific, religious, or charitable purposes.

Currently, these real properties are completely exempt from property tax assessment and taxation.

This subsection of Article 10 describes a building and the immediate, required land around the building (curtilage) that is being used as the principal place of residence for the property owner, an individual who is purchasing his principal place of residence utilizing a ‘land contract,’ or an individual who is the beneficial owner of his principal place of residence when that property has been placed in either a ‘land trust’ or a ‘life estate.’ This means that each individual could, if authorized by the Indiana General Assembly, own one residential property used as that individual’s principal place of residence without incurring any property tax obligation on that property. By analogy, the General Assembly may exempt a portion of the tax due on such a qualifying real property, since they have the power to exempt the entirety from taxation, so long as equally exempted.

Conclusion:

Issue 1: Why does Indiana have a tax on real property?

Property taxes are mandated by Article 10 of the Indiana State Constitution.

Issue 2: Why is the ‘Fair Market Value" of real property now used to assess real estate for taxation.

After the ‘true tax value’ regulations were found to be unconstitutional under Article 10, the Indiana Legislature promulgated new regulations basing the mandated property tax on ‘fair market value’ of a particular piece of real estate.

Issue 3. How can Article 10 of the Indiana State Constitution be modified to repeal any tax on real property?

The mandate of taxing property can only be repealed by an Amendment to the Indiana State Constitution as delineated by Article 16 of the Indiana State Constitution.

Issue 4: Can the General Assembly provide real property tax relief without repeal of Article 10 of the Indiana Constitution?

Article 10 provides that owner occupied residential real estate MAY be exempted in part or whole from property taxation.

H.D. Reins, Esq.
September 30, 2007

Source: Muncie POT Party Blog

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