Sunday, January 31, 2010

Wall Street Journal: Indiana embraces property tax cap despite pain

The Wall Street Journal has an article about how Indiana is pushing for caps on property taxes. Compared to the other major forms of state taxes, such as sales tax and income tax, property taxes are normally the least cyclical - meaning that when the economy is down, they don't vary as much as the other two because property tends to hold its value (the bubble aside). Capping property taxes is dangerous for the state's tax base, and it forces the state to shift its tax base towards the other two types of taxes and to fees:

Indiana lawmakers are moving to enshrine property-tax caps in the state constitution, despite cuts in fire, police and other local services the limits have caused.

The push marks the latest round in a revenue tug-of-war between state and local governments amid plunging tax collections nationwide. States, forced to cut their budgets, have often held back funds pledged to local governments. In response, some cities, towns and school districts have raised property taxes—their main source of revenue—to partially fill gaps.

But property-tax increases started raising the ire of residents even before tax revenue fell off. A 2007 spike in Indiana's property-tax bills, just as the recession was gathering steam, led to a "tea party" protest, the ousting of the mayor of Indianapolis and a 2008 law limiting property taxes, which as of Jan. 1 may be no more than 1% of the assessed valuation for residential homes, 2% for rental properties and farms, and 3% for businesses.

The effective tax rate for homes in 2007 ranged from 0.19% to 3.13%, and the cap is expected to save homeowners $404 million statewide in the current fiscal year.

Cities already are laying off police officers and firefighters, as well as raising business fees, because the caps have reduced local tax revenues. The state Farm Bureau, which advocates for farmers, has raised concerns that homeowners are getting the biggest tax breaks despite using the most local-government services. Some companies dislike the caps because they set property-tax rates for businesses at three times the rate for homes.

Yet the proposed constitutional amendment is popular with Indiana residents, who will vote on the measure in November. A survey last month from Ball State University in Muncie, Ind., found that 64% of voters favor the amendment. Even the mayors of some cities hit hard by the measure support it.


Some legislators worry it is too soon to install the property-tax formula in the state constitution, because the caps only took full effect Jan. 1. "If we should find out three years down the road that the process needs to be changed, we will be at a great disadvantage," said state Sen. Vi Simpson, a Democrat from Ellettsville who opposed the amendment.

When lawmakers imposed the caps, they raised the state sales tax to 7% from 6%, directing that extra revenue be used to fund schools. But sales-tax revenue has declined so much during the recession that Gov. Mitch Daniels, a Republican, is ordering public schools to cut $300 million, or 3.5%, from their budgets.

The city of Muncie, with about 65,000 residents, was forced by the property-tax caps, disappearing industry and other revenue-shrinking factors to cut 32 firefighters—or about 29% of the department—and close two of seven fire stations. The city has stopped dispatching fire trucks to nonemergency medical calls.

Mayor Sharon McShurley, a Republican, said Muncie must cut $3 million to $8 million from its budget over two or three years because of the property-tax caps. Last year, Muncie's budget was $19 million, down $5 million from the previous year, as the caps were phased in.

Yet Ms. McShurley, who was elected in 2007, favors the caps. A shrinking budget has forced city hall to become more efficient, she said, by automating payroll deposits and giving all city employees email access. "It's a first for a lot of people, thinking about city government having to get smaller," she said.

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