Banking & Finance and Environment and Government

STATEHOUSE DISPATCH: This finally may be the year for property tax reform

February 12, 2007

Brace yourself for lots of action in the next two weeks, as the deadlines approach for bills originating in the House to be passed to the Senate, and vice versa.

While this is a long session of the General Assembly and one might assume this would lead to more deliberative contemplation, the extra days do not seem to make much difference as deadlines approach.

Some of the larger issues that require more massaging and compromise tend not to be drafted until the last minute, and still must be negotiated within the individual caucuses, and sometimes across the aisle, with the other chamber, and even with the governor and executive agencies before committee action.

We're seeing that this year with some key issues. The Hoosier Lottery privatization bill, and the so-called "slots at the tracks" package have yet to receive hearings. They will receive intense scrutiny in the next two weeks as they are readied for final floor action in their chambers of origin before the final week of February.

The key issue now taking shape is property tax reform.

Over the past three years, local governments have sought more fiscal flexibility-and have been willing to shoulder the attendant accountability. Lawmakers also have sought to reduce reliance on property taxes, but no package has proven sufficiently satisfactory to be considered as a real option for lawmakers.

Pressure was added this session because property tax "trending" was set to kick in, causing property taxes to rise for most homeowners. The "circuit-breaker," the tax cap for homeowners, also was projected to cause a cash crunch for some governmental units, particularly in Lake County. Compounding this was the pledge that many legislators took as candidates in 2006. They agreed to seek abolition of property taxes, even without an alternative funding source.

One Senate measure that attracted a lot of attention-and sponsors-was written by Sen. Thomas Weatherwax, R-Logansport. His bill simply would abolish the property tax over a five-year period. He would cap spending of property tax revenue, and shift savings into a fund that could be tapped to offset the loss of property tax revenue.

But estimates also suggest that the state would have to more than double the state sales tax and income taxes to replace the $5.6 billion in annual revenue lost by eliminating the property tax.

Enter Senate Tax & Finance Policy Committee Chairman Luke Kenley, RNoblesville, who has been working on this issue the past several years.

Kenley sees a big part of the problem being the property tax replacement and homestead credit shell game, with the state effectively encouraging property tax hikes at the local level and covering 20 percent of the increase. He wants those credits abolished, but sees the state stepping in to use that revenue to assume responsibility for juvenile correction, child welfare and school general fund levies currently funded by property taxes.

But as of late in the week, there was no formal draft of the Kenley plan to review.

The new vice chairman of the House Committee on Ways and Means, Rep. Robert Kuzman, D-Crown Point, has entered the fray with a proposal that seems to offer a framework within which both parties and chambers could work.

Kuzman wants to give local governments the prerogative to raise individual county option income tax rates as much as 1 percentage point, and also institute a 1-percent corporate income tax. Almost two-thirds of the former tax hike proceeds would have to be channeled into property tax relief, with the remainder used for new spending.

Kuzman would not freeze current property tax rates (as many legislators favor), but would temporarily freeze child welfare levies. He would create local tax control boards (although apparently not for school projects, which the governor and House Republicans want to implement), and would eliminate the practice of local government "banking" of levies.

Business interests are wary about the proposed local corporate tax. They perceive it as jeopardizing a positive state tax environment.

The atmosphere suggests that real property tax reform is in the air this session. The stumbling block in the past has been legislative resistance to proposing a workable replacement revenue mechanism, but reality seems to be setting in.



Feigenbaum publishes Indiana Legislative Insight. His column appears weekly while the Indiana General Assembly is in session. He can be reached by e-mail at edf@ingrouponline.com.
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