State-funded homestead credits will go away next year, and several tax experts predict that property tax bills will rise, especially for rural homeowners who are unlikely to benefit from recently enacted tax caps.

The homestead credit uses a complex formula to reduce the property tax bill for owner-occupied primary residences.

That reduction is in addition to the standard $45,000 homestead deduction and other supplemental deductions that reduce the portion of a home's value used to calculate property taxes.

In 2008, the state legislature provided $870 million to increase the homestead credit for Indiana homeowners, reducing their tax bills.

That relief was meant to be temporary until proposed caps on property taxes and other changes took full effect, explained Larry DeBoer, a professor of agricultural economics at Purdue University and an expert on Indiana property taxes.

In 2009, the state spent $140 million to subsidize homeowners' property taxes through the credit. And in 2010, Indiana spent $90 million as other tax benefits kicked in, said Mary Jane Michalak, spokeswoman for the Indiana Department of Local Government Finance.

Now, the credits are going away, and DeBoer says they provided more tax relief than the tax caps.

"Tax bills will go up for most people next year," he said.

The impact

This year for Allen County, the state homestead credit was 3.7 percent. In theory, homeowner's tax bills could increase that much in 2011, Auditor Lisa Blosser said.

But for homeowners already benefiting from the tax caps – meaning they are paying only 1 percent of the value of their home – they will not pay anything extra. For homeowners not at the cap level, their bills will increase, Blosser said.

Only 24 percent of Allen County homeowners benefited from the caps this year. Some additional properties will benefit next year.

Rural areas like Wells County and much of DeKalb County generally do not benefit from the tax caps because they pay fewer taxes than homeowners in larger cities like Fort Wayne.

Without getting help from the caps, rural homeowners were the taxpayers benefiting most from the state's homestead credit, Purdue's DeBoer said.

"When it goes away, they will lose that benefit," and tax bills will rise, he said.

And adjustments to locally funded homestead credits, which are being considered in Wells County, could further increase bills, he said.

"We're definitely concerned about it," Wells County Auditor Laura Brubaker said.

Few property owners in Wells County have benefited from the tax caps, so there is room for bills to grow, Brubaker said.

But Wells County has kept property taxes down for homeowners by relying more on local income tax revenue.

In DeKalb County, the higher taxes for homeowners could push some homeowners' bills high enough to trigger the tax caps, Auditor John Fetters said.

"There are too many different elements in the process to predict what's going to happen," Fetters said.

Still saving

Despite the expected increase in tax bills, DeBoer has predicted that homeowners will still pay less in 2011 than they did in 2007 – before the state property tax overhaul began.

By next year, Wells County homeowners will see tax bills that are about 30 percent less than in 2007.

That's in line with what Gov. Mitch Daniels proposed when he called for significant property tax reforms in late 2007, said Darren Bates, a consultant to Wells and other Indiana counties.

In comparison, this year Wells County homeowners paid half the taxes that they paid in 2007, according to tax records.

aiacone@jg.net