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The Journal Gazette

Saturday, December 12, 2015 10:10 pm

Cities find own answers to tax cap challenge

When Hoosiers voted overwhelmingly to write tax caps into the Indiana Constitution in 2010, they couldn’t know what the limits on property tax collections would do to the services those revenues support or the overall fiscal condition of their communities.

Five years later, we know much more about those effects, thanks to two new studies by the Indiana Fiscal Policy Institute. The caps, also known as circuit-breakers, serve as a tax reduction for property owners and result in revenue losses for schools and local governments. This past year, taxpayers saved $727 million on property tax bills; schools and local government lost more than 10 percent of the tax collections they would have collected without the tax caps.

Taxpayer wins are uneven, of course. Larry DeBoer, an agricultural economist at Purdue University, points to one inconvenient truth in examining overall effects of the tax caps: They are regressive because they reduce the tax bills of higher-valued homes by more than the bills of lower-valued homes. He also notes that owners of rental properties are the primary beneficiaries of tax cap credits, collecting 47 percent of the credits in 2014. 

Fiscal expert John Stafford, former director of IPFW’s Community Research Institute, examined the effect of the caps on the state’s largest cities in a companion report. While he excluded Indianapolis because of its combined city/county government structure, his study takes into account 18 communities that are home to about 1.5 million Hoosiers.

"The first thing that struck me was there are 18 different cities; there are 18 different circumstances," Stafford said in an interview. He said he found each community was shaped by its unique fiscal background, by spending levels and by decisions on how to address the challenge posed by tax caps.

For Fort Wayne residents, the study backs up the 2013 decision by Mayor Tom Henry’s administration and City Council to increase the local option income tax rate from 1 percent to 1.35 percent, with 0.25 percent designated for property tax relief.

"We were going to end up with some huge budget cuts or a negative tax balance," said Stafford, who served on a task force advising Fort Wayne officials. "Then it gets hard to bond. It may not immediately result in a change of services, but if you don’t end up with some balance, the first time an unexpected expense comes along, you’re in trouble."

Instead, Fort Wayne is one of six municipalities that Stafford identifies as a "gainer" – with 2015 income exceeding 2008 income after adjustment for inflation.

A city’s economic foundation was the major factor in how it fared financially under the caps. Older cities built on industry aren’t doing as well as Indianapolis’ fast-growing suburbs or the state’s largest university towns, but the report shows how some communities have adjusted spending, raised taxes and taken other approaches to offset the effects of tax-cap losses.

The General Assembly’s fiscal leaders should review the work as well and use it to fine-tune tax policy so that all corners of the state can prosper and to ensure all taxpayers are treated fairly.