ULTRAM ONLINE NEWS BLOG

Observers: Real change brings real pain

Streamlining local government, imposing stricter spending controls and eliminating property taxes are all among the ideas being floated as lawmakers look to fix a tax system that has left homeowners across the state reeling.
3 BIG REASONS FOR BIGGER BILLS
The staggering property tax increases being levied on some Hoosier homeowners can’t be boiled down to one factor. Among the reasons:

Inventory tax ends
Legislators voted in 2002 to phase out the inventory tax — a tax on goods that sit on store shelves, cars in auto lots and equipment in warehouses. The idea was to make it easier for Indiana to attract businesses.

If left in place, the inventory tax would have brought in an estimated $288 million in taxes this year, according to the state budget office.

Local governments don’t actually have to give up that revenue and cut spending. Instead, all taxpayers had to make up the difference, meaning homeowners assumed some costs previously borne exclusively by businesses.

Counties were required to phase out the tax by 2006, for taxes due this year.

Lawmakers gave counties the option of eliminating the tax early, and making up for the lost revenue by increasing a local income tax by as much as 0.25 percent.

Forty-three counties adopted a local option income tax to blunt the effects of the elimination of the inventory tax. Marion County did not.

Assessment changes
Indiana used to value property based on the amount it would cost to replace it, minus depreciation.

In other words, assessors figured out how much money it would cost to build a new house if the existing one burned down, and then subtracted some amount based on the age of the home. It didn’t matter what neighborhood the house was in or how much it might sell for.

A group of taxpayers in Lake County filed a lawsuit in the Indiana Tax Court in 1993 challenging that system. In 1998, the Indiana Supreme Court ordered the state to begin using objective, verifiable data to assess property.

Beginning in 2002, for taxes due in 2003, the state started assessing property based on fair market value, or what it would sell for.

As a result, some homeowners — particularly those with older homes in more expensive neighborhoods — saw their assessments, and their tax bills, increase significantly.

Homes again were assessed based on market value last year. The new values are reflected in current bills.

The results of the reassessment on homeowners could be especially profound in Marion County. State officials are investigating whether commercial properties were undervalued, shifting even more of the burden onto residential tax bills.

Local spending
Government is spending more, and taxpayers have to pay more to cover the tab.

Combined, all of Marion County’s government units — including the county, city, townships, schools, library and others — raised 10 percent more in property taxes this year than last.

Not all of that is the fault of local government.

For instance, the state tells school districts how much they must raise to cover their share of operating budgets, and counties have to pay for child welfare with property taxes — even though the state runs the program.

But school construction, debt and other locally controlled spending play a significant role in driving up taxes.

OTHER STATES TACKLE PROPERTY TAXES

Ohio
Except in limited circumstances, local governments must ask voters’ permission when they want to raise more money through property taxes. Schools alone have put proposed property tax increases on the ballot more than 10,000 times from 1984 to 2006, with voters agreeing to increase payments a little more than half the time.

Massachusetts
Proposition 21/2limits local governments from increasing property tax collections more than 21/2 percent from one year to the next, with the exception of revenue added from new development. If local governments or schools want to spend more than that for operating costs or capital expenses, they must put the question on the ballot and let voters decide.

Maryland
Rather than leave the job of assessing property to local officials, the state Department of Assessments & Taxation handles all assessments for the state. The state’s 200 assessors are appointed, rather than elected.

New Jersey
The state increased the sales tax by 1 percent in 2006. Half of the money raised is being dedicated to property tax relief, and voters will decide in November whether to use the other half to offset property taxes.

California
Proposition 13, approved by voters in 1978, limits property taxes to 1 percent of a home’s assessed value. It also limits increases in assessments to 2 percent a year, unless the house is sold.

Sources: Ohio Department of Taxation; Howard Fleeter, consultant for Education Tax Policy Institute of Ohio; Citizens for Limited Taxation of Massachusetts; Maryland Department of Assessments & Taxation; news reports.

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Property tax reform has been attempted before, as recently as this year, but changes often amount to little more than Band-Aids that provide short-term relief.
The enormity of this year’s problem — tax bills in Marion County have jumped an average of about 35 percent — and the public outcry that has ensued, may finally provide the catalyst for more dramatic change, several legislators say.
“I don’t think there is anyone who can’t see that this is hurting people and is unfair,” said Sen. Luke Kenley, R-Noblesville, a leader in property tax reform efforts.
Whether lawmakers are called into a special session this summer or they tackle the issue during their regular session next year, there is no simple remedy.
No state has a model property tax system, so stealing the playbook from somewhere else isn’t an option. And each potential solution creates different consequences, from budget crunches for local governments to increases in other taxes and fees.
Finding agreement between Democrats and Republicans will be tricky at best. Several lawmakers, however, said they have no choice but to do something.
“It’s like everyone is running around rearranging chairs on a financial Titanic,” said Rep. Win Moses, D-Fort Wayne, a former mayor of Fort Wayne who wants to see hard spending caps coupled with a rise in the sales or income tax. “I am absolutely convinced we will crash at some point.”
Here is a look at some ideas being considered, and the advantages and disadvantages of each.

Spending controls
While Indiana has limits on how much local governments can spend — and as a result, tax — some states are much stricter.
Under Indiana law, cities, counties, townships and other agencies cannot expand operating budgets by more than the six-year rolling average of the growth in nonfarm personal income. Recently, that’s amounted to about 4 percent.
But there are so many exceptions that spending throughout a county can still rise by double-digit percentages. The rule doesn’t apply to school operating levies, or budgets that pay for debt service or capital projects, for example. In other words, there’s no automatic limit on how much can be spent to build that new library or school.
While Indiana has a remonstrance process — essentially a signature-collecting contest — that allows property owners and voters to halt large construction projects, some states give voters even more say.
In Massachusetts, communities are allowed to increase spending only 2.5 percent a year and must ask voters whether they want to raise more.
Ohio goes further and requires voter approval for almost any increase in property taxes.
House Minority Leader Brian Bosma, R-Indianapolis, is calling for a referendum for all major construction projects and said he is interested in Ohio’s system.
The results of such restrictions are a mixed bag.
Barbara Anderson, executive director of Citizens for Limited Taxation in Massachusetts, said the law there has helped to keep property taxes from spiraling further out of control.
But Gerald Prante, an economist at the Tax Foundation, a non-partisan tax research organization in Washington, D.C., said spending limits work only if residents are willing to “starve the beast” and reduce services, something many people balk at.
Barbara Shaner, associate executive director of the Ohio Association of School Business Officials, said the referendum rule can be particularly divisive.
“It creates a lot of bad feelings in communities because people take sides,” she said.

Government change
Possible assessment problems that undervalued commercial property could help explain staggering residential tax increases in Marion County.
The Daniels administration is reviewing the situation and could order a new assessment.
Kenley said the situation highlights a system that includes too many assessors at too many levels of government, each with varying skills and training. Altogether, there are 1,100 assessors in Indiana.
The result, he said, is a series of unavoidable problems.
Maryland, by contrast, has one statewide agency responsible for assessing property.
Kenley wouldn’t take it that far but said he plans to resurrect a proposal to reduce the number of assessors here. Under the plan, trustee-assessors — township trustees who also serve as assessors in smaller communities — would relinquish appraisal duties to county assessors. Other townships could also choose to have the county take over the job.
The governor has also supported dramatically reducing the number of assessors.
The idea, though, has met opposition and will again.
Thelma Kelley Jeffries, the trustee-assessor in Monroe County’s Clear Creek Township, said the state would lose valuable knowledge if it yanked assessing duties from her and her colleagues.
“The trustee-assessor, the local grass-roots government, knows the businesses, knows the area, knows the township,” she said. “The other people who are hired to do some of the assessing may drive out and can’t even find the address because they don’t know where they are going.”
Assessors might not be the only ones in the crosshairs.
Gov. Mitch Daniels, who on Saturday unveiled a short-term tax-relief proposal, said Hoosiers should expect an announcement on something that “would go to the root cause, and that is, we have too much government in this state. Too many layers, too many subdivisions, too many offices.”
Daniels did not say exactly what he might propose but in the past has pushed measures that would make it easier for townships and other units of government to share services to save money, or to consolidate without seeking permission from the state.

This entry was posted on Sunday, July 15th, 2007 at 7:56 pm and is filed under Ultram News. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.