Larry DeBoer, Everybody’s Favorite Economist (TM), has a good post on the subject of how inflation might impact local government finance in Indiana. If inflation caused property values, assessed values, income, and permitted levies to all increase at the same time, it wouldn’t be that much of a problem. But the system isn’t structured to allow that to happen. There is a lag between properties increasing in value, the properties being assessed for that increased value, and the increased assessment hitting the tax bill. Permissible tax levies are allowed to increase by the state’s growth quotient which takes into consideration the previous 6 years, so low inflation years prior to a high inflation year will limit the inflationary effect on the growth quotient. There’s also a 6% limit on the increase in maximum levies, so such levies could not catch up to inflation that exceeds 6%.
Larry explains the issues better and in more depth than I do, so his post is definitely worth checking out directly.
He doesn’t mention what happens if interest rates on mortgages start going up. along with house prices. Say interest rates kick up to six percent or more. Then less people will be able to afford to buy houses and instead go back to renting. I assume this would impact local governments that have high growth areas more then established areas with no growth. Higher interest rates would slow the housing market and may actually depress house prices. I may be missing something here but it seems logical.
After some thought (stuck in Kohl’s parking lot waiting for the better half) no one wins if housing prices go down. The higher growth areas would have a better chance at weathering the storm. New businesses would help but with higher interest rates it would slow economic growth. Throw in those nasty tax abatements and the home owners and small businesses would be the ones to carry the tax burden. But we knew that already.