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INDIANAPOLIS – A key House committee examining Indiana’s property tax caps learned Monday that cities, towns and other local government units are facing a number of revenue obstacles for the foreseeable future.
Opponents of the tax caps have long argued that local governments can’t provide services without the revenue that has been lost to the caps.
Legislators enacted a state law that limits homeowners’ property tax bills to 1 percent of their property’s assessed value. Other caps are are 2 percent for rental units and farmland and 3 percent for business property.
An updated estimate indicates the caps will save taxpayers $465 million in 2010, when they are fully implemented, and $488 million in 2011.
That is money that local schools, counties, cities and towns will not receive to provide services.
The House Ways and Means Committee heard testimony Monday that in addition to the full effect of the caps being felt in 2010, local officials also will see declining income tax revenue because of the recession.
Jim Landers, a fiscal analyst for the nonpartisan Legislative Services Agency, said income tax distributions for 2011 will be well below those of 2009 and 2010. And he said that generally, each tenth of a percent of local income tax will produce less money in the coming years until the economy rebounds.
A third threat to local revenue is the drop in the income-based assessed value growth quotient.
This formula limits how much property tax levies for operating expenses can rise each year based on a six-year average.
Last year, local government units saw a 4.8 percent increase in property tax revenue; this year, it dropped to 3.8 percent. And next year it is expected to drop to 2.8 percent.
Auburn Mayor Norm Yoder said that so far, the city has avoided laying off police and firefighters, but he needs the DeKalb County Council to adopt a local-option income tax soon to continue current operations.
“If the county council doesn’t get hungry for cash, we will starve,” he said.
Except in a handful of large cities, counties are in charge of adopting such taxes.
While the property tax caps are now part of state law, many lawmakers are pushing to place them in the Indiana Constitution to make them “permanent.” If a resolution amending the constitution passes this year, voters would have the final say on the matter in the 2010 fall election.
The committee will vote on House Joint Resolution 1 on Dec. 14. But others told the committee that citizens will never be permanently protected, because future lawmakers can manipulate related law so the caps have less effect.
Katrina Hall, a tax specialist with the Indiana Farm Bureau, said this can be done in a number of ways. For instance, legislators could allow cities and towns to have operating taxes passed by referendums, similar to those of local schools, that would not be subject to the cap.
Also, she said local government units are not allowed to make up for the lost revenue from one class of taxpayers – such as homeowners – by increasing tax rates on another class of taxpayers, such as businesses. But the General Assembly could allow this regardless of a constitutional guarantee on tax caps. “We are in a different world,” Hall said. “I hope the change in the overall economy will give you pause from moving forward.”
A number of citizens expressed support for the caps, though, including a Howard County councilman and small-business owner.
“Many local governments have fat in them, and the fat needs to be cut out,” said Paul Wyman. “You can trust Hoosiers to make the right decision.”
