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Paying tax early proves costly

By Kay Bell · Bankrate.com
Tuesday, June 19, 2012
Posted: 4 pm ET

Americans are anxiously awaiting the Supreme Court's decision on the health care law, but some Indianapolis homeowners already got word from the high court and they are not happy.

The Hoosier State capital did not violate the constitution's equal protection clause, said the high court, even though the city's change in tax collection policy cost some homeowners substantially more in property tax payments than others.

The case began with a sewer improvement project for an Indianapolis neighborhood which the city decided should be paid for by assessing the 180 affected properties. In 2004, those homeowners were given the option to pay the $9,278 added property tax to cover the sewer upgrades by a lump sum payment or via installments for as long as 30 years.

Thirty-eight homeowners immediately paid the tax assessment in full.

But the very next year, Indianapolis officials changed their minds about the public works project and decided to go with a new financing method. The revised plan would charge each connecting lot owner a flat $2,500 fee and make up the difference by floating bonds eventually paid for by all city residential lot owners.

In conjunction with this financing change, Indianapolis forgave the original sewer tax balances that were being paid in installments by 142 of the previously assessed homeowners.

The 38 homeowners who had paid in full, however, were out of luck. Indianapolis refused to refund any of their lump sum payment amounts.

So the lump sum taxpayers sued. They claimed that because they paid all they owed and most of their neighbors didn't and never would have to, the payment switch was unfair. They wanted refunds to make them equal as required by state law.

Despite some lower court victories, the highest courts in Indiana and the United States ruled against the small band of homeowners.

The problem, said the U.S. Supreme Court in a 6-to-3 ruling, was not a change in the treatment of the homeowners' tax bills. That equality was set in the city's initial property tax assessments of similar pieces of real estate. State law only assures equality in setting assessments, said the court. It does not promise compensation if administrative changes ultimately produce inequality in the collection process.

The country's highest court also noted that Indianapolis would face a major bureaucratic hassle, though they didn't use that exact word, in coming up with a way to even things out among the lump-sum- and installment-paying homeowners.

Of course, the taxpayers who paid their full bills in one lump sum got to deduct that property tax amount from their federal taxes that year. I know that's small comfort, especially when you feel like you're paying more taxes than you should while others are essentially getting a free ride. Welcome to one of the traits that all tax systems, be they at local, state or federal levels, share.

And at least the 38 unhappy sewer-tax payers got larger tax benefits than their installment-paying neighbors. And I'm presuming that they did pay up in full primarily for federal property tax deduction purposes.

I suspect, however, that they'll now follow the advice that a lot of tax experts give when it comes to tax bills: Pay no tax before its time.

Make sure you know about tax deadlines and ways to reduce your state and federal tax bills by subscribing to Bankrate's free Weekly Tax Tip newsletter.

You also can follow me on Twitter @taxtweet.

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