March 9, 2008

By Senator David Long

Last week’s editorial series in The Journal Gazette raises several interesting points and questions about property tax reform – many of which are being considered by Senate and House negotiators finalizing House Bill 1001. Unfortunately, the ultimate conclusion of The Journal Gazette appears to be that property tax reform is not needed. I completely disagree.

The tax relief and reform package that Republicans have proposed will cut and permanently cap local property taxes and place spending controls on government spending. Without these changes, property taxes will continue their dramatic growth, which will hurt the Hoosier economy and negatively impact one of Indiana’s greatest assets: affordable home ownership.

As we enter what could be a historic week for Indiana taxpayers, I would like to update fellow Journal Gazette readers.

How did we get here?  Why a sudden crisis? 

First, it is important to remember that all taxes are a result of government spending. Second, property taxes are determined, collected and spent at the local level mostly by schools, towns, cities, counties and libraries. Indiana’s property tax “crisis” results in large part from sticker shock of a six-year implementation of a new court-ordered assessment system based on market values. And not just any court: the Indiana Supreme Court, which ruled Indiana’s property tax system unconstitutional, because it found like properties under like conditions were taxed very differently.

As local spending continued, it was bound to catch up with taxpayers. Statewide, local tax levies have outpaced inflation two-to-one during the past 10 years. Here in Allen County, local levies have increased 63.1 percent since 1998 while inflation has increased just 24.7 percent. Taxpayers rightly demand government must learn to live within its means.

Is this more of a problem in Marion County, or do we honestly have a statewide concern? 

Clearly other parts of the state are impacted, but local and state figures confirm taxpayers in Allen, Adams, Wells, Huntington, Whitley and Steuben counties faced 2007 homestead tax bill increases as high as 13 percent. DeKalb County homeowners were hit with increases from 13 percent to 23 percent; Noble and LaGrange counties were hardest hit with increases from 23 percent to 42 percent. Remember, property taxes reflect spending by our schools and local governments. The current state budget subsidizes their spending with a record $2.1 billion in property tax replacement and an additional $550 million in direct relief over two years. The Republican tax plan will include another $700 million in new relief for homeowners and will remove $1 billion in spending from backs of property taxpayers.

Why protect homeowners over other property owners? Isn’t that unconstitutional? 

Historically, our federal and state governments were founded on the concept of private property, giving preferences in law and policy to home ownership. Our antiquated property tax system stems from the agrarian 1800s when land ownership translated into income. Today, most parcels are residential and not income-producing. Rental properties, farms and business properties are somewhat different. Senate Republicans recognize these distinctions and advocate phased-in caps on Indiana’s local property taxes – 1 percent on owner-occupied homes; 2 percent on other residential and agricultural; and 3 percent on outright business parcels. Adding these caps to Indiana’s Constitution gives them permanence for taxpayers, and such amendments will eliminate any question about their constitutionality.

Won’t this put a squeeze on schools? 

Indiana’s Constitution guarantees the availability of a free education for every student and identifies state government as the entity to provide public K-12 schools. Traditionally, Indiana has funded public K-12 schools very well. Most recent figures show spending per Hoosier student was $10,672 on average in 2005-06, while the nationwide average was $8,973. State government already pays on average about 85 percent of school general fund expenses. Our Senate plan removes the balance of school operating expenses from property taxes while maintaining their management at the local level through administrators and school boards.

To further help reduce other local fiscal obligations, Senate Republicans propose removing school pension bonds and special-education pre-school from property taxes. We advocate using $100 million in state funds to protect schools from the strain of phasing-in circuit-breaker caps on property taxes and creating a $400 million Tuition Reserve Fund to safeguard schools in times of economic downturn.

What about local government? 

Under current law, local governments have flexibility to move from antiquated property taxes to more modern Local Option Income Taxes, which are based on ability-to-pay and pay-as-you-go principles. LOITs may be used to fund additional property tax relief, government operations and public safety. Additionally, the phase-in of property tax caps gives local units time to identify and implement new cost-savings efforts. While many local officials prefer property taxes because they see them as stable and predictable, those who pay them see them as unpredictable, unfair and unaffordable – especially seniors on fixed incomes taxed on unrealized appreciation and young homeowners with moderate incomes taxed on mortgaged assets.

Will this plan hurt low-income Hoosiers? 

No. A report prepared by respected Purdue tax economist Larry DeBoer found more than 75 percent of Hoosier taxpayers would benefit from this plan. And even those who might see an overall rise in their tax liability would be minimally impacted. In addition, the Senate plan proposes increasing the Earned Income Tax Credits, renters’ and low-income senior deductions to make the plan more helpful to moderate- and low-income Hoosiers.

Won’t property taxes just continue to rise? 

Not necessarily. An increase in assessed value does not automatically mean an increase in tax bills. If tax rates decline, then an increase in assessed value should not mean an increase in your taxes. If local governments control their spending and limit increases to the rate of inflation, any increases in homeowners’ property tax bills will be negligible. But in any case, if the caps are placed into the Indiana Constitution, every Hoosier homeowner’s property tax bill will be permanently capped at 1 percent – unless taxpayers themselves locally choose to exceed the cap. Politicians would no longer have that right – only local taxpayers themselves through referenda on major government construction projects. Additional spending controls under the Republican proposal include closing loopholes, strengthening budget reviews and restricting government debt.

Gov. Mitch Daniels strongly endorses this plan. I invite our Senate and House Democratic colleagues to join us in embracing a plan that is good for Hoosier homeowners and addresses the needs of schools, local governments and low-income Hoosiers.

http://www.journalgazette.net/apps/pbcs.dll/article?AID=/20080309/EDIT05/803090309/-1/EDIT01