At long last, Gov. Daniels has announced a tax plan. According to his announcement, property taxes on residential homeowners would be limited to 1% of the home’s assessed value and would receive an increased homestead exemption. Taxes on residential rental properties would be capped at 2% and at 3% for business properties. Gov. Daniels would also like to raise the sales tax 1% to pay for these caps and dedicate certain gambling revenues to property tax subsidies.

Furthermore, property tax replacement credits to local government would be eliminated, but the state would assume school operating and transportation costs. Local governments would still be required to pay for the physical school structures and, under the Daniels Plan, more red tape would be placed on taxing decisions by local government.

I don’t have any strong reaction to the plan, probably because I don’t understand it well enough. A lot of it looks like legislation Sen. Kenley was looking for last year, so it’s probably not all bad. For my part, I’m not so much leery of Republicans trying to screw Democratic constituencies on this one; but I am worried about the State looking to solve its problems by screwing local government (see, e.g. the “balanced” 2005 state budget).

The Indiana Chamber of Commerce seems to be awfully cautious about the Daniels Plan at this point. And, that stands to reason. A significant part of the recent increase in property taxes for residential homeowners comes from shifting the burden away from business property over the past decade.

Ruth Holladay has commentary on the Daniels Plan. I have to disagree with her when she says, “But Daniels, like him or detest him, seems ahead of the game.” It took him 3 years to do squat about the property tax issue. Calling that “ahead of the game” is ridiculous.

Other commenters:
Abdul
Taking Down Words
Hoosier Pundit

Lesley Stedman Weidenbener has a column in the Louisville Courier Journal which I think unduly minimizes the fault state legislators bear for the current property tax problems. She bemoans the ignorance of the electorate shown by a recent Chamber of Commerce poll. This is justified to some degree — folks don’t seem to know that property taxes get spent almost entirely at the local level. But, I think she is wrong where she seems to place most of the blame for the current property tax increases on local officials. She does this somewhat indirectly, by saying that she doesn’t absolve the state of all blame which seems to indicate she absolves them of most of the blame.

But, the fact is that increases in local spending accounts for only 6% of the 24% average increases. Ms. Wedenbener has this paragraph in her column:

I don’t mean to absolve the state of any role. After all, lawmakers have made decisions recently — including the elimination of the inventory tax and the creation of a floating cap on property tax relief payments — that have affected homeowners’ bills, too.

These are two of the three main causes of the recent property tax spike. As I’ve mentioned here before, the spike can be mostly explained by:

1. Caps on the Property Tax Replacement Credit and Homestead Credit — These were State actions that were done to allow the State to balance its own budget; in effect, the State balanced its budget on the backs of local government.

2. Elimination of the inventory tax — An action by the State that shifted the tax burden from inventory tax payers to property tax payers.

3. Trending — Part of the State’s implementation of a State court’s 1998 decision that the State’s method of taxation was unconstitutional.

The fact is that the General Assembly and the Governor (primarily through the Department of Local Government Finance) are heavily involved in micromanaging the taxing authority of local government and, consequently, bear most of the blame in the recent property tax increases.

So, Ms. Weidenbener is right when she says:

But no solution will likely work unless Hoosiers get a better understanding of the issues, which means everybody involved has a little educating to do.

I’m just happy she gave me an opportunity to do a little educating.

Speaking of Ms. Weidenbener, she has an excellent article on the subject of retirements in the General Assembly and their potential to shift the balance of power from Democrats to Republicans. There are apparently 5 Democrats who aren’t going to run for re-election and one Republican. The Republican, Matt Whetstone, comes from an area that voted about 70% Republican and, therefore, his seat isn’t likely to shift parties. Some of the Democratic retirements leave more vulnerable seats — particularly Dave Crooks seat in Daviess County and Joe Micon’s seat in Tippecanoe County. Also retiring are Jerry Denbo (probably – not yet formally announced) out of French Lick, and Bob Kuzman from French Lick. In addition, up in Portage, Duane Cheney resigned and, his replacement, Jack Clem, passed away recently.

Niki Kelly, writing for the Fort Wayne Journal Gazette has an article entitled, “GOP analyst has tax relief proposal.”

I didn’t get a good idea of just which Republicans were behind this proposal, just that the Senate Republican fiscal analyst presented it. Basically, the proposal would eliminate the property tax relief credits and homestead credits and use that money to pay for welfare levies and school general funds. The State would have to come up with an additional $400 million to make this work. Residential homeowners would see no change in their property taxes, landlords would see a 3% drop, and businesses would see a 12% drop.

The article further mentioned that Sen. Kenley has advised there won’t be any substantial property tax legislation going through on Organization Day in November. However, it seems likely that the General Assembly will ratify some deadline extensions made unilaterally (read – illegally until the General Assembly say otherwise) by the Governor.

Niki Kelly has an article for the Fort Wayne Journal Gazette on the tax sale process. The context of the heightened concern about property tax sales is the recent increase in property taxes, but, as the article notes, it’s going to be a little while before anyone loses their home over the 2006 – pay 2007 taxes. You have to be delinquent about 18 months, have your property sold at tax sale, and then fail to redeem your property (by paying the unpaid tax plus fees and interest to the property tax purchaser) for a year after the tax sale.

Often times in the course of my debt collection business, I find myself telling folks that my job is to get my client’s bill to the front of the line but that I realize there are a few things I’m never going to get ahead of — a roof over their head, food on the table (and occasionally some court ordered fee that will land them in jail if they don’t pay.) Well, property taxes go in the “roof over the head” category. You ought to be paying that before you pay for your cell phone, before you pay for your cable, before you pay for your smokes, and before you pay for much more than food.

Probably my line of work has jaded me, but I see people kicked out of their homes all the time, primarily in the context of evictions and also in the context of foreclosures. I only do a handful of evictions and haven’t personally done any foreclosures, but I don’t see a problem with either legal proceeding. The point is, the government isn’t the only cold-hearted entity that requires you to pay money in exchange for maintaining roof over your head.

As for the current round of hand wringing over “throwing people out in the cold,” I wonder how these politicians have responded to the dramatic increase in foreclosures over the past few years. Or is it o.k. when a bank does it but not when the government does it?

The Evansville Courier Press has an editorial entitled Legislative Self-Restraint. They suggest further limiting the number of bills each legislator can introduced in a given session of the General Assembly. They already do this to some extent, particularly in the short session.

The concern is that, with so many bills flying this way and that, legislators can’t realistically read all of them and know what they say. Consequently, they end up relying on the readiest source of information available to them – other legislators and lobbyists.

What’s interesting to me, is the role technology has played in the proliferation of bills. The pace of legislation seems to have kept up with the ability of the General Assembly’s support staff to generate paper and documents. When word processing was more cumbersome, there was something of a physical limitation on the ability to generate and amend legislation. Now that limitation is much reduced.

I’m not against the Courier Press’s proposal to tighten limits on introduced legislation, but I wonder how far you could go before such limitations by each Chamber becomes unconstitutional. I would presume that limiting a legislator to 0 bills would have constitutional problems. (Though maybe not – the Rules of the Chamber, after all are subject to the votes of the members of that chamber.) If 0 is a problem, is a 1 bill limit a problem?

While the volume of bills produced is formidable, it seems that some legislators are much more diligent in reading through the legislation than others. Just as an example, when I worked at LSA (’96 – ’99) it was my impression that Sen. Pat Miller was in earlier than most and stayed later than most reading legislation. I don’t agree with a lot of her positions, but Sen. Miller’s work ethic was beyond reproach.

(H/t Blue Indiana ) Anita Munson, writing for the South Bend Tribune has an article entitled Indiana schools may face project cutbacks. It features Everybody’s Favorite Economist ™, Larry Deboer, and his explanation of how we got to where we are.

He’s been over it before, and this blog has pointed to his explanations before, but still they bear repeating lest the actual reasons get lost in the finger pointing:

1. In 1998, the Indiana Supreme Court issued a decision which took effect in 2003, holding that the old tax assessment system was not fair. (Thanks Town of St. Johns!) Basically, the old system was an artificial assessment system that undervalued old, residential homes (even, presumably, those on the nicer parts of Meridian Street). Meanwhile, business real estate was valued at something that was probably close to its actual value, resulting in a subsidy for owners of older residential properties.

2. Elimination of the inventory tax. The inventory tax was eliminated. The last year to get rid of inventory taxes was 2007, but county governments were permitted to do away with them earlier. County governments were also permitted to impose an income tax to make up for lost inventory tax revenue. Failure to impose such an income tax would result in the inventory tax burden being shifted onto property tax payers.

3. Trending. The 2003 reassessment was based on 1999 values. Recently, rules were imposed that required property values to be “trended” — meaning updated annually. The first step in trending was catching up property values – 1999 values were updated to 2005 values, meaning 6 years of appreciation having to be absorbed in one shot. Business owners weren’t hit as hard as residential properties. First, business equipment is supposed to be updated annually anyway, so there wasn’t a 6 year catch up on such equipment. Second, there was not a whole lot of data for assessors to go on to update values of big factories, for example. They just don’t get sold that often. If residential property gets updated while business property effectively is not, that results in a shift of the tax burden from business payers to residential payers.

4. Shift from State to Local Government. The State apparently reduced total tax credits by about 8% for property owners.

5. Increase in levies by local taxing units. This is the “increased spending” component of the equation. But, according to Mr. DeBoer, the property tax increase is a relatively small part of the equation. Only about 25% of the 24% average increase (6% then, I suppose) has to do with local tax levies. The remaining 18% of the average increase has to do with a shift in the tax burden (from State to Local and from Business to Residential).

The State is going to issue rebates of about $225 million once it gets paid licensing fees from two race tracks (Shelbyville and Anderson) that have been allowed to add slot machines to their facilities. Another $225 million in tax relief will be provided by the state from the gambling licensing fees in the form of an addition to the homestead credit next year. In addition, local governments have been given the option of raising income taxes to provide property tax relief.

First, a local income tax can be imposed if the property tax levy is frozen at its current level – normally, a locality is permitted by the State to raise its upcoming tax levy by a certain percentage of its current levy. Another local income tax can be imposed to provide relief from existing property taxes. The “relief” provided by this local income tax can be targeted at: a) all property owners; b) only homesteads; or c) all residential properties (including rental units). Finally, if income taxes #1 and #2 are imposed, then an additional income tax can be imposed to fund public safety. (Marion County was apparently given special dispensation to impose the public safety income tax without first imposing income taxes #1 and #2).

So, who or what exactly is responsible for raising property taxes?

The following account for 90 percent of the increase, DeBoer said:

Schools general fund, 25 percent; schools debt, 13 percent; cities/towns general fund, 12 percent; county general fund, 10 percent; schools’ capital projects, 9 percent; schools’ transportation, 6 percent; county welfare, 5 percent; special districts (such as solid waste), 4 percent; cities/towns, other funds, 3 percent; and libraries, general fund, 3 percent.

John Hill, superintendent of Plymouth Schools, has suggested that the State is increasingly putting more of the burden of funding schools on the backs of local government. In addition, the State apparently provides payments to schools in an untimely fashion, resulting in the Schools having to borrow money against the promised payments by the State, resulting in interest expenses.

Prof. DeBoer notes that, while the instability of Indiana’s property taxes are a problem, Indiana does not have high property taxes compared with the rest of the nation. In 2005, Indiana ranked 35th in the nation with “$1,079 as the median homeowner property tax payment.” Meanwhile, Michigan ranked 18th at $1,846 and Illinois ranked 7th at $2,904. Most of the states with lower property taxes than Indiana are in the South where “lawmakers have historically used sales taxes more than property taxes for funding.” (And, the article does not say this, but the South also tends to have the States that rank last in things like education.)

[tags]property taxes[/tags]

Niki Kelly, writing for the Fort Wayne Journal Gazette has an article entitled State Tax Review Delays Area Projects. The background is that the Department of Local Government Finance has started taking a hard line in getting data that’s required from counties and, I believe, getting it in exactly the right form. To get it, the DLGF is holding up budgets and using whatever leverage it has. In the case of St. Joseph County, at least, there are allegations that the timing of some of the budget reviews are politically motivated to make sure tax bills go out at the politically least convenient time.

Regardless of whether any political gamesmanship is underway, the DLGF’s tactics are troublesome because they represent an abrupt shift from past practice of the Department and the punishments are often time not well correlated to the offense allegedly committed. Among other things, in the case of the Fort Wayne area, municipal projects are being made to suffer for data allegedly not submitted by county offices.

[tags]property taxes [/tags]