Indiana advocates, led by NLIHC State Coalition Partner the Indiana Association for Community Economic Development (IACED), are working to address the growing practice of denying property tax exemptions for nonprofit-owned affordable housing, which they say puts this housing stock at risk. IACED is reaching out across the charitable spectrum and continuing to educate legislators in order to build political support for their position.
In 2008, Indiana enacted tax reform giving jurisdictions greater incentive to begin assessing property taxes on nonprofit-owned affordable housing. Advocates argue this practice of denying tax exemptions for nonprofit-owned housing limits the ability of nonprofit developers to keep properties affordable for low income individuals and families, and unduly places the burden of raising tax revenue on nonprofits.
Under Indiana’s constitution, properties being used for charitable purposes qualify for exemption from property taxes. Historically, the state has defined charitable status broadly, and has extended it to affordable housing. Prior to tax reform, jurisdictions determined tax rates by dividing tax revenue by the total assessed value of property. Assessors therefore had an incentive to keep assessed values low, and to allow relatively small exemptions.
Tax reform placed caps on property tax rates. After jurisdictions reach the capped level of property taxation, the only way to generate additional revenue is to increase the total number of assessed properties. As a result, many assessors are now denying exemptions for nonprofit-owned affordable housing developments.
In 2009, the Indiana Tax Court delivered a decision that assessors have said strengthens their arguments for denying exemptions for affordable housing. The court determined in the case Jamestown v. St. Joseph County Assessor that an affordable housing complex with a Section 221(d)(3) mortgage did not qualify for exemption. While the court later stated that the Jamestown case did not create new standards for assessment, many assessors have interpreted the case more broadly and used it as justification for rejecting exemptions.
Housing developers and advocates argue that assessors are misapplying the decisions in Jamestown and similar court cases. They say the growing practice of denying exemptions will make it harder for developers to operate existing properties and build new ones, and will ultimately lead to a decrease in housing affordable to low income individuals and families.
“The Indiana Board of Tax Review and many local assessors aren’t taking into account the ripple effects this change will have on the economy and on communities,” said Andy Fraizer, Executive Director of IACED. Advocates argue that a decline in affordable housing results in a loss of job creation and economic activity, and when a community’s needs increase, the burden falls to the state and local governments. “These increased costs will more than outweigh any additional revenue generated from taxing these properties,” Fraizer said. Advocates also note that as less affordable housing is constructed and operated, Indiana could lose out on revenue and grants from HUD and other federal agencies.
In the 2011 session of the General Assembly, IACED worked with State Representative Milo Smith (R) to introduce H.R. 1285, which proposed tying property tax exemption status to an organization’s 501(c)3 status. The bill raised some concern among legislators that, if passed, the number of organizations eligible for exemption would dramatically increase. Advocates worked to educate legislators that, instead, the purpose of the bill was to clarify that property owned and operated by nonprofits for charitable purposes shall remain exempt. The legislation ultimately passed the General Assembly with an amendment that sent the issue to an interim study committee for review. IACED believes the review is a step in the right direction and will continue to educate legislators about the issue.
Additionally, advocates are building support by reaching out to a wide range of charitable nonprofits. “This is an issue that affects affordable housing developers, but also other service providers. It has united a lot of groups,” said Fraizer. “We are working together to make sure it is addressed, in order to avoid a hugely negative effect on Indiana as a whole.”