Indianapolis is in the running for the second Amazon headquarters. Indy is one of 20 cities on the list, but still, there’s a chance. That’s a $5 billion investment, with 50,000 employees at an average salary of $100,000.
The effects would be big, but let’s look at the little piece that I know about. How might the Amazon investment affect local property taxes? Tax rates in Marion County range from $2.25 to $5.50 per $100 assessed value – from 2.25 percent to 5.5 percent. Which rate would depend where in the city Amazon would locate.
Take an in-between rate like $3 and multiply by the $5 billion investment, and you get $150 million. Total property taxes are about $1.1 billion in Marion County now, so that’s nearly a 15 percent increase in revenue.
That’s big. It’s also wrong, for lots of reasons.
The property tax is based on the assessed value of land, buildings and business equipment minus deductions. Indiana will offer Amazon a package of incentives, which could include local property tax abatements. Abatements reduce the taxable assessed value of a property, cutting the owner’s tax bill. Abatements can start as high as 100 percent, and then gradually fall to zero over several years. A larger part of the investment would be taxed as the abatement runs out.
This implies, though, that the full initial investment would never be taxed. Business equipment depreciates rapidly for property tax purposes, usually on an eight-year schedule. By the time the abatement wears off, as little as 30 percent of the original equipment investment could be taxed.
Amazon likely would negotiate for a lower assessed value on its buildings. They might argue that the $5 billion investment includes features specific for its business model, which would have little value to another buyer if the property were sold. A comparable sales assessment might be much less than the initial investment.
So that $5 billion investment would not produce $5 billion in new taxable assessed value. Still, it would be sure to add hundreds of millions at least. That would yield more revenue, right?
Maybe it would. Maybe it wouldn’t.
Local property tax collections are limited by a maximum levy. The maximum increases each year based on the six-year average growth of Indiana income. In coming years that growth limit will be about 4 percent per year. Most local governments tax right at their maximum levies.
If assessed value grows faster than the 4 percent limit, property tax rates will fall. That’s because we recalculate tax rates each year, dividing the levy by assessed value. Rates go down if assessed value grows faster than the levy.
Amazon will pay millions in new property taxes, but as rates fall most of this payment will cut existing tax bills. That’s great for taxpayers, but it doesn’t add much to local government budgets.
Then there are the Constitutional limits on tax bills – the circuit breaker caps. Caps are set at a percentage of assessed value before deductions. If a tax rate is so high that a tax bill would exceed the cap, the taxpayer doesn’t pay the full tax bill, and the local governments receive less revenue. Amazon probably would get enough abatements that their tax bill would not exceed their cap. They’d pay their full amount.
But tax rates would fall with Amazon’s new assessed value. Fewer existing taxpayers would hit their caps. In effect, Amazon would pay taxes that existing taxpayers don’t pay, because they pay their capped bill.
Taxpayers get about $150 million in circuit breaker credits in Marion County. You’d need a taxpayer-by-taxpayer analysis to really know how much credits would drop, but a plausible guess is in the $10 million to $30 million range. That would be added revenue for local governments.
Amazon’s effect on property tax revenues wouldn’t be as big as a $5 billion investment implies. But it could still be pretty big. And those 50,000 employees would pay property taxes on their houses, and local income taxes, and other taxes and fees.
Of course, budgets have a spending side too. Amazon employees and their families would want local services. How many new schools would we need for 10,000 or 20,000 new kids?
The views and opinions expressed in this column are those of the author and not necessarily those of Farm World. Readers with questions or comments for Larry DeBoer may write to him in care of this publication.