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The Journal Gazette

Cities see less as taxes go up

Caps, other issues influence government’s bottom line

The Journal Gazette

A decade of massive changes in property taxes in Indiana – the engine for local government – has done little to change the bottom line for taxpayers.

From statewide reassessment to capping property taxes in the Indiana Constitution, Hoosiers have seen major changes in the property tax system almost on a yearly basis in the last 10 years.

But if you take schools out of consideration, a Journal Gazette analysis of state figures shows that 2011 property taxes in northeast Indiana were an average 31 percent higher than they were in 2002. Inflation over the same time period was 25 percent.

An Indiana Department of Local Government Finance report shows the region’s taxpayers forked over $87 million more in property taxes – again, not counting schools – than they did before a decade of changes began.

But the officials who spend those taxes are quick to point out that the amount they can collect is not expected to increase much in future years, regardless of inflation, because of state “circuit breakers” enacted a few years ago.

And though property taxes have gone up faster than inflation, local government officials say they have less money available than ever.

Circuit breakers – more commonly known as tax caps – can lower the amount collected dramatically and are already hitting urban areas. The city of Fort Wayne, for example, was theoretically allowed to collect $106 million in property taxes last year. But once the caps on individual bills were calculated, the city got only $93 million – a 12 percent cut.

The tax caps, which are now part of the state constitution, limit property taxes to 1 percent of the value of residential property, 2 percent on rental and farmland and 3 percent on commercial property. Those limits come after the taxes are calculated, which means it comes out of the government’s revenue.

“The circuit breakers are unlike any (property tax) credit we’ve ever had before,” said John Stafford, director of the Community Research Institute at IPFW. “You may have a certified levy of $10 million, but the amount you can collect is significantly less than that.”

How much less? It depends.

Urban areas are affected more than rural areas. So while Fort Wayne collected 12 percent less than its maximum levy because of the caps, Bluffton has only a few rental properties affected by the caps and saw almost no difference.

Add in declining property values because of the housing prices, Stafford said, and a taxing body can be squeezed even further.

Schools were not included in the newspaper’s analysis because in 2009, the state took over paying for their general operations, cutting the amount of property tax levies of northeast Indiana school districts 20 percent over the same 10-year time period – about 50 percent in one year alone.

Other local governments in northeast Indiana, meanwhile – such as libraries, cities and solid-waste districts – watched their levies rise an average of 31 percent over their 2002 figures. But ask them about it, and they’ll tell you budgets are tighter than ever.

“It’s like squeezing a balloon,” said Ted Ellis, mayor of Bluffton and president of the National League of Cities. “The air’s going to go somewhere.”

More to come?

It began with a court decision and ended more than a decade later with a constitutional amendment – but the transformation of local government funding may not be over.

Gov. Mitch Daniels, during a Jan. 26 visit to Concordia Lutheran High School in Fort Wayne, called local government changes “the best example” of unfinished business as his two terms end. Although the way local government is paid for might have been altered radically in the last decade, he said, local government itself has changed little.

“Among things that we’ve worked on hard, local government reform has come pretty slowly,” Daniels said. “I do think we’re going to enact two important bills this year, on nepotism and conflict of interest, and possibly a third on the three-headed executive, three county commissioners.”

But only that third item – if it passes – would fundamentally change government itself. And even then, it’s nowhere near the changes recommended by a blue-ribbon panel aimed at modernizing how Hoosiers govern themselves.

“That would get us up to nine or 10 of the 27 recommendations that the Kernan-Shepard commission gave us. So that would still leave a lot of work to do,” Daniels said. “I do think at least most of those others, one day, in the interest of taxpayers and good government, will have to happen in Indiana.”

In the meantime, some say budget strings may force changes.

“I suspect that when people are preparing the 2013 or 2014 budgets, you’ll begin to hear a more serious discussion about what we should be doing and what we can no longer afford to do,” Stafford said. “That’s the essence of what local government officials should be talking about – what services to offer, at what level, and how to pay for them – but we don’t frequently engage in those kinds of discussions.”

Stafford said the budget squeeze, which will only get tighter as costs continue to rise but property tax payers’ bills are capped, will force officials to make decisions they often take for granted.

“That’s one of the things the circuit breaker is going to bring to the table – should we be doing some of these things with user fees,” Stafford said. “On one hand, you pay for what you get. On the other hand, not everyone can afford to pay user fees. Again, those are great philosophical questions, but sometimes we make those decisions almost implicitly rather than explicitly.”

A decade of change

In 1998, the Indiana Supreme Court ordered the state to assess properties based on market value rather than accounting for depreciation. By 2003, that new system began to take effect – lowering taxes for new houses and raising them for old houses that had gained in value over the years.

That changed who was paying taxes more than how much governments collected, but it was the beginning of a decade of changes. Soon, the inventory tax was gone, shifting taxes from businesses to homeowners. Then came property tax replacement credits, which lowered bills by replacing it with state money. Next, the credits were scaled back, then welfare was taken out of county budgets and school general funds were taken over by the state. Most recently, the implementation of the circuit breaker, or tax caps.

On top of it all, the state changed how the maximum levy – the upper limit a taxing body can collect – is calculated. Governments that did not collect the maximum would be punished in future years, encouraging agencies to tax as much as possible, which only fed the cries for change.

So why do officials say they have less money if property taxes appear to be climbing faster than inflation?

Bluffton’s Ellis said it’s a combination of factors, most of them related to the economy.

First, gas prices rose dramatically just as the economy soured – both of which resulted in people driving less. That resulted in fewer gas taxes being paid, which resulted in less money for cities and towns to spend on roads and highways.

In the meantime, the higher crude oil prices resulted in higher prices for asphalt.

“That’s one of the invisible pressures,” Ellis said.

Another is income taxes: The state formula for distributing income tax revenue did not take into account that the taxes collected could go down in a bad economy, so the state handed out more money than local governments were owed.

That gravy train is not only gone, but it won’t be back until the amounts overpaid by the state are compensated.

Add in spiraling health care costs and inflation, Ellis said, and there just isn’t enough to go around.

Still, he said, a leaner government is a better one, and if citizens want more or improved services, they will have to decide whether they want to pay more to get them. That’s not necessarily a bad thing.

“Let me tell you, there’s not a mayor in Indiana that’s afraid to look a constituent in eye and say if you want this service you’re going to have to pay for it,” Ellis said. “There’s just not that many ways to kick the can down the road in local government. You either pay for it or you don’t do it.”

Angela Mapes Turner of The Journal Gazette contributed to this story.