Mitch Daniels and Governor and Legislature and Property taxes and Government & Economic Development

Governor playing deal-maker with property-tax plan

October 29, 2007

The art of the deal is to get more than you give up. If Gov. Mitch Daniels convinces the General Assembly to pass his property tax plan intact, he'll meet the definition of deal-maker, and then some.

After a summer filled with protests from outraged homeowners, on Oct. 23 Daniels put a sweeping property tax plan on the table. By cutting and capping every Hoosier's household rates, the Republican governor gets the chance to play the populist hero in an election year.

But the bargain he's offered does far more than extinguish a long-simmering tax crisis. If enacted, it would give Daniels a platform to direct even more sweeping change. It would overhaul Indiana's highly politicized property assessment process. And it would essentially force local schools and government to slash spending.

On the other side of the equation, Daniels is risking the good will of business leaders--his core constituency--by hiking the state sales tax and capping their property taxes at rates higher than homeowners'.

It's a calculated bet. Where others saw a threat, Daniels spotted opportunity. And as any deal-maker knows, distress is a catalyst for an overhaul that wouldn't otherwise be considered.

"This is a big problem that has an awful lot of tentacles to it," said Ice Miller LLP partner Harry Gonso, Daniels' longtime friend and former chief of staff. "He is treating this as an opportunity to deal with the underlying issue as well."

Legislators immediately understood the implications of Daniels' property tax proposal. Republicans lined up in support. Senate President Pro Tem David Long, R-Fort Wayne, pledged to fast-track it through the Statehouse, with hearings starting after Organization Day Nov. 20. That's far earlier than normal for a Legislature that usually waits until January to get down to business. His counterpart, House Minority Leader Brian Bosma, R-Indianapolis, made a similar promise. But Democrats control the gavel in the lower chamber, and will certainly attempt to put their stamp on the plan there.

With voter ire on the line, no politician wants to risk the label of property tax spoilsport. So Democrats were careful to call Daniels' plan a good starting point. Former U.S. Rep. and gubernatorial candidate Jill Long Thompson's press statement was a typical response. She said she agrees with some elements, such as capping property tax rates, and claimed credit for already proposing them. Then came the inevitable swipe.

"Unfortunately, this plan fails to meet Gov. Daniels' own criteria of being fair, far-reaching and final," she wrote. "Placing the burden of a lowered property tax solely on an increased sales tax, a regressive tax that disproportionately affects lower and middle-income Hoosiers, is hardly fair. And calling for a plan that lacks review and restructuring of our entire tax code is anything but far-reaching and final."

Deal-makers anticipate such opposition. That's why they deliberately include bargaining chips in any offer.

"Even though he's taken on issues that make people mad, what nobody underestimates anymore is what a good strategist the governor is," said IUPUI political science professor Bill Blomquist. "Look at the campaign in 2004, one of the smartest we've seen in this state, and the way that he has put [previous] legislative packages before the General Assembly. He almost always had something in there he could bargain away to get things he wanted more."

"If you're smart in politics, and he is, you do have to think like that."

Observers can only speculate what tokens Daniels will be willing to deal. He certainly won't bend on the core proposition that Hoosier homeowners need property tax relief, Blomquist said. But how it's paid for, what it affects, and how long it lasts will all be settled at the bargaining table.

Property tax package

Tax credits and permanent rate caps are the centerpiece of Daniels' property tax plan. Through them, Indiana could eliminate the volatility that's plagued homeowners ever since the state started on the bumpy road toward a market-based assessment system. Most homeowners--and thus voters--are sure to appreciate the relief Daniels' plan would bring to one of their worst headaches.

And while businesses may grumble, Daniels is likely counting on the cushion of a second term to appease them.

"From the standpoint of the governor, [business leaders' complaints are] all small potatoes," Blomquist said. "If a big chunk of this passes, what you get is another four years in office. And then you can look for other things to make business happy and massage people's noses you got out of joint."

Daniels' reforms of the property assessment process will be more difficult to broker into the final deal. Accurate market assessment is the foundation of a truly fair property tax system. But former State Sen. Larry Borst, now a senior public policy consultant for Baker & Daniels LLP, has seen attempts to professionalize Indiana's elected assessors fail before. He expects lobbyists will chisel away again.

"Anytime you get something of this magnitude and complexity, there's going to be a lot of debate," he said. "It'll either go through in much the form it has now, or it'll be nitpicked to death."

Permanence will be the hardest concept for Daniels to negotiate. Steve Johnson, former president of the Indiana Fiscal Policy Institute, was among many who expressed concerns about enshrining property tax caps into the constitution. An amendment won't leave much wiggle room, if the resulting ripple effects on local governments and schools aren't to Hoosiers' liking.

"The constitution is basically a document setting out principles of governance. When you get to the point of setting issues in stone, you often end up with unintended consequences," Johnson said. "What will those be? Couldn't begin to tell you. But 10 years from now, you may see them."

Starving the beast

Since his earliest days on the campaign trail, Daniels has emphasized the need for Indiana to rein in its spending. Much of his first term in office was devoted to balancing the state's budget. By capping property taxes, he would restrict cash flow to city and county governments, forcing local officials to make hard spending choices.

Conservatives sometimes call it "starving the beast." And as much as they like their new stable property taxes, Hoosiers may end up hating the result.

"If there are no other revenue sources available, you're looking at cuts in services. It's a bit preliminary to say cities and towns would shut down. But significant issues would be involved," said Indiana Association of Cities and Towns Executive Director Matthew Greller. "We're not doing the fancy stuff. We're there to provide police protection and pick up the trash. When those cuts come, I think people will be even more upset than they currently are with the property tax situation."

Economic developers regularly argue that the education level of Indiana's work force is perhaps the most important factor in creating, attracting and growing businesses. Through the power of the purse, Daniels' property tax plan would give state government greater power to set the agenda for local schools' operations.

"I have never seen one government send another government a check that didn't have fine print on the back," Blomquist said.

The next six months will see a frenzy of Statehouse horse-trading over the details of property tax reform. As a consummate deal-maker, Daniels is clearly ready to haggle.

"This has been one of the most deliberative, thoughtful, contemplative decisions he's made ... but it's not over," Gonso said. "[Daniels wants the result to be] fair, far-reaching and final. It may not be exactly what he laid out, but if we come anywhere close, the state will be much better off."

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