The Journal Gazette, 600 W. Main St., Fort Wayne IN

INDIANAPOLIS – The Daniels administration has backed off a controversial proposed rule that critics say would have shifted the property tax burden from businesses to homeowners.

Just days before a public hearing on the issue, Cheryl Musgrave, Department of Local Government Finance commissioner, said “it is the right move, but this might not be the right time.”

The change – which no longer would have focused on the current use of a property – was contained in a proposed manual of rules for the next statewide reassessment, which is scheduled for 2011 and would affect property tax bills paid in 2012.

The manual must be adopted by July 1, and a public hearing on the issue is scheduled for 9 a.m. Monday in the Indiana Government Center Auditorium.

“We’ve been hearing from lots of folks on the topic, and we’ve been listening very closely to what everyone has to say,” Musgrave said. “It appears that the system is really stressed at this time. So this might not be the right time to make a change.”

Legislators in March finalized a property tax overhaul plan pushed by Gov. Mitch Daniels that will cut homeowner property taxes by an average 30 percent this year. It also contained caps that prohibit homeowner property taxes from exceeding 1 percent of a home’s assessed value.

It also eliminated hundreds of township trustees and consolidated assessing duties at the county level.

Monday’s hearing will proceed as scheduled, but it appears clear that state officials will modify the rule to take out the contentious areas.

Indiana currently uses “market value in use” to assess property, which means an appraiser or assessor ignores what the market may dictate as the most profitable use of that property and values it according to its current specific use.

But Musgrave and her staff wanted to move the state to “market value in exchange,” which is the standard relied on predominantly in 48 other states. This means assessing the property based on its potential use.

An example provided by the International Association of Assessing Officials would be a piece of farmland on the outskirts of a growing city.

The highest and best use of the property may be for a commercial use. But statutes may require the local assessor to value the farmland as it is being used in order to avoid a higher tax burden for the farmer.

Farmland was exempted even from Indiana’s proposed rule.

But David Bottorff, executive director of the Association of Indiana Counties, gives an industrial example:

Manufacturing plant “A” sells at a lower price to a buyer who plans to turn the facility into a warehouse. Manufacturing plant “B” can then point to that sale as a similar property that sold for less in an effort to get its own assessed value reduced. The use of the facility would no longer matter under market value in exchange.

“This change may seem subtle, but it will create a new set of ‘winners and losers’ in the property tax system,” Bottorff said in a letter to legislators. “In general, this change in policy will benefit special use properties and older industrial properties. The ‘losers’ of this change are likely to be homeowners.”

But Mark Cahoon, vice president of the Indiana Manufacturer’s Association, said the current system is far too subjective.

“What we would like is some consistency and predictability and recognition that there are market influences on the value of a property – not just an academic exercise,” he said. “We’ve been pictured as more strident because it’s a winners-and-losers thing. For some of our members, their assessments will go up and some will go down.”

Although not directly affecting residential values, if the assessed value in one category goes down dramatically, the tax rate for everyone goes up to make up the difference.

Allen County Assessor Stacey O’Day crunched the data on all 1,075 industrial properties in the county that have structures. Using the market value in exchange approach, she found an overall assessed value drop of $219 million.

That equates to between $6 million and $8 million in property tax revenue that has to be made up elsewhere.

“I’m an elected official. My responsibility is to examine what changes are being proposed and their effect on the taxpayers of Allen County,” she said. “It’s not that I agree or disagree with the methodology change. It’s more so that we need to let the dust settle in Indiana.

“We’re going through historic changes, and I don’t know if right now is the right time.”

Cahoon argues that the new 1 percent assessed value caps would protect the vast majority of homeowners from an additional property tax burden due to any shift. Therefore, the problem really is about less money for local governments to spend or whether they would raise local option income taxes.

A letter from the Indiana Association of Realtors delivered Thursday admitted to not knowing who will pay more and who will pay less under the change.

“In a perfect world, designing an assessment system from a blank slate, (we) would advocate for a market value in exchange standard. However, the lack of knowledge regarding potentially negative impacts of this rule leads us to recommend that the new rule NOT be adopted.”

Musgrave said she does not believe there would be a significant shift because the change would affect only a few special-purpose properties. She also said the Allen County data reviewed by O’Day used a square-footage model that she does not believe accurately predicts assessed value.

The public notice for Monday’s hearing said the Department of Local Government Finance relied on no supporting data, studies or analyses in proposing the rule.

But it doesn’t matter now, Musgrave said.

“Even if I had a stack of supporting studies, the system is under a lot of stress right now, and this is not the right time to make a change,” she said.

Instead, she thinks legislators will look at the issue during a summer study committee.

Sen. Luke Kenley, R-Noblesville, who crafted much of the property tax bill last session, thinks that is probably a good course of action.

He said he thinks the Department of Local Government Finance was trying to follow through on a directive from the legislature several years ago to clarify and develop more rules on the assessment process.

“I think their effort, although well intended, shows that we’ve got some work to do. I am particularly concerned that these are policy decisions that need to be made by the legislature and higher levels of executive branch on how different kinds of property are going to be assessed,” Kenley said.

He previously planned to speak at Monday’s hearing.

“Everybody has a pretty heightened level of sensitivity right now,” Kenley said. “Everyone is looking over their shoulder to try to make sure they aren’t the ones holding the bag. I think overall we’ve tried to balance all these entities.”

Rep. Win Moses, D-Fort Wayne, wasn’t quite as kind as his GOP colleague.

“If all the caps are in place it would shift the impact to local government,” he said. “It was an incredibly clever scheme in my opinion to help businesses out.”

And, Moses said, it would explain why businesses didn’t complain more during the session about being placed under higher assessed value caps.

“I tend more toward the Machiavellian,” Moses said. “It makes sense that business didn’t contest the reform more if they thought the definition of assessed value would change in their favor.”

Department of Local Government Finance officials did meet with business leaders during session regarding the manual, but Musgrave said she also has talked with county officials, a former agency commissioner and lawyers concerned about the definition.

“There are a lot of people, me being among them, who feel that the manual is confusing and contradictory,” Musgrave said. “Many folks thought this was a cleanup of definitions, but apparently this isn’t the right time.”

nkelly@jg.net