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Tax caps force soul-searching

Why do we have city governments? One reason is that people living and working together in big groups need more public services. Traffic is heavier, so traffic lights must replace four-way stop signs. Buildings are taller and closer together, so fire protection requires more equipment and quicker response times. Crime is attracted to people and property, so the need for police protection is greater.

Added services require added revenue. Cities are allowed to charge additional property tax rates to pay for added services. A taxpayer living in Washington Township outside Fort Wayne pays property taxes to the county, township, school district and other local units at a rate of $1.90 per $100 assessed value. Inside Fort Wayne, with the added city rate, property owners pay $3.18.

Property taxes are always an issue, but the debate was especially intense in the decade of the 2000s. The big property tax reform in 2008 authorized a constitutional referendum in November 2010, and Indiana voters approved an amendment to write property tax caps into our state Constitution.

Homeowner taxes now are limited to 1 percent of assessed value, rental housing and farmland taxes are limited to 2 percent, and business property is limited to 3 percent. This year, the caps will reduce property taxes statewide by more than $750 million.

The caps and the other reforms since 2008 have reduced overall property tax bills in Allen County by 8 percent. Homeowner tax bills are down by 30 percent; rental housing tax bills are down 15 percent. Property taxes on business and agricultural property have increased.

The main goal of the property tax reforms was to reduce tax bills for homeowners. The reforms did that. Budgets have two sides, though, and the reduction in property tax bills has reduced the revenue available to fund local government services. In 2013, the tax caps will reduce the property tax collections of Allen County governments by 11 percent, which is about $41 million.

The caps are applied to each taxpayer’s total tax bill, and the same caps apply in both urban and rural areas. Since tax bills are higher in cities, more city taxpayers have their taxes capped. The higher tax cap revenue losses are distributed among all the overlapping governments in a city.

Under our tax caps, city governments lose the most revenue, and counties, schools and other local governments that overlap cities also see bigger losses. The city of Fort Wayne will lose 14 percent of its tax levy, more than $15 million. The Fort Wayne school district will lose 10 percent of its levy, close to $7 million. Statewide, about 90 percent of all tax cap losses are in cities and towns, or units that overlap cities and towns.

The tax caps reduce city taxes the most. That’s good for city taxpayers, but it’s tough on city budgets.

What do voters want, now that they’ve passed the tax cap referendum? Maybe they want our local governments to provide fewer services. Cutting property taxes is a way to force government to spend less. Maybe they want local governments to provide the same services for less money. Less revenue will force governments to find efficiencies. Or, maybe they just don’t like property taxes, and want to force governments to find other revenue sources.

These choices will be debated in counties, cities and school districts all over Indiana. The caps affect city budgets the most, so cities may take the lead in these debates.

That’s what Fort Wayne did with its recent adoption of a long-term budget and capital plan. It’s likely that more Indiana local governments will follow.

Larry DeBoer is a professor with the Department of Agricultural Economics at Purdue University. He wrote this for The Journal Gazette.