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Tax caps threaten services

Fort Wayne police officers weren’t happy when city officials began charging them for personal use of take-home cars. Imagine how they will feel if city officials are forced to reduce the number of cars – and the officers along with them.

It’s a very real possibility as the full effects of Indiana’s property tax caps are realized. Muncie officials shuttered fire stations and cut 32 firefighters and five police officers this summer. They also reduced hours at city hall and announced the city animal shelter would no longer take animals surrendered by owners. The Muncie Public Library shut down two library branches, and there are concerns that the city’s only public swimming pool, closed for repairs this year, will not reopen.

The severe budget cuts were necessary because of Indiana’s property tax circuit-breaker, which this year capped taxes on homes at 1.5 percent of their assessed value but will drop to 1 percent next year. While they represent a property tax break for some, the tax caps will ultimately represent cuts in services for all.

“The effects of the circuit-breaker are yet to be seen, and I suspect they will be more shocking than anticipated,” said Kurt Zorn, professor of public and environmental affairs and associate vice provost at Indiana University-Bloomington. He’s also the former chairman of the Indiana State Board of Tax Commissioners.

“We have this disconnect between taxes paid and services received,” Zorn said. “People are going to begin to see the connection and are going to have to make some choices in what services they expect. I think this is inevitable. We may actually see some taxpayers asking for their property taxes to be increased.”

When it comes to services residents have come to enjoy and to expect, it’s not unthinkable. Residents in the West Lafayette Community School Corp. held a fund drive this year to bring back six teachers laid off because of budget cuts. They are now planning a referendum to ask for a property tax increase – one of about a half-dozen school districts proceeding with referendum plans.

While Hoosiers have yet to see the worst effects of the tax caps, neither have many homeowners seen any benefit. For 2009 tax bills, only 61 homeowners in Allen County received a circuit-breaker credit – all for owner-occupied homes assessed between $301,000 and $1.9 million. The owners of median-priced homes are unlikely to see much benefit because the $45,000 standard deduction, a supplemental homestead deduction of 35 percent of the remainder and a $3,000 mortgage deduction will likely keep tax bills below 1 percent of their homes’ assessed values. In the meantime, all taxpayers have paid more as part of the property tax overhaul that increased the sales tax rate from 6 percent to 7 percent.

The issue is critical now because the Indiana General Assembly is set to make the tax caps permanent by carving them into the state constitution – a measure Zorn said is bad policy.

“First, we have made so many changes to local government finance, we need to see what the effects are before making this permanent,” he said. “That’s a logical procedural request. From a conceptual perspective, why are we putting tax policy in the constitution? Tax policy needs to be flexible.”

Zorn knows the response from tax cap supporters is that the tax break needs to be guaranteed. He doesn’t agree.

“I know people say we can’t trust our public officials,” he said. “I have a greater trust in democracy. I believe like-minded people will join together and vote someone out of office if they believe taxes are too high.”

Lawmakers should show the same trust in voters and reject the constitutional amendment to make the caps permanent.