City budget and Greg Ballard and Legislature and State Government and Taxes and Tax Caps and Government & Economic Development and Government and Philanthropy

Cash-strapped mayors may tap owners of tax-exempt property

December 12, 2009

A group of mayors led by Tom Henry of Fort Wayne and Greg Ballard of Indianapolis is seeking new sources of revenue to replace the millions they’ll lose because of property tax caps.

One of the mayors’ top priorities is to negotiate payments from hospitals and other not-for-profits that own billions in tax-exempt property. Such payments-in-lieu-of-taxes are common in college towns, but the mayors of Indiana’s largest cities want to make them mandatory and statewide.

Henry, a Democrat, is chairman of the Urban Mayors Caucus, which represents 32 Hoosier cities. The group formed earlier this year under the Indiana Association of Cities and Towns to call the Legislature’s attention to fiscal challenges that its members say are unique to urban areas.

Ballard, the Republican mayor of Indianapolis, is vice chairman, but it’s unclear whether he will back the group’s agenda.

Ballard

Ballard participated in a caucus meeting in Greenwood in November, and Henry told IBJ after the meeting, “I look forward to working with Greg and standing before our legislators, working on behalf of Indiana’s largest cities.”

However, Ballard’s communications deputy, Robert Vane, said the group “is not something in which we will be active.”

Henry

The caucus also plans to approach the Legislature on two other issues: the distribution of state highway money and authority to raise local sales taxes.

Currently, the highway-funding formula accounts for the length of roads in each county, but not the number of lanes. Considering numbers of lanes in the funding mix would benefit urban areas. Some counties charge a food-and-drink tax, if authorized to do so by the Legislature, but local governments cannot impose their own general sales taxes.

As a whole, the mayors’ agenda reflects cities’ need to cover looming personnel and capital expenses, Henry said.

“Do you want us to take a look at other forms of taxation, or user fees, perhaps?” he asked. “Or do you want us to continue to cut costs by unfortunately laying off people? In many cases that means firefighters and police officers.”

Sen. Luke Kenley, a Noblesville Republican who is chairman of the Legislature’s Tax and Fiscal Policy Committee, pointed out that cities and counties already have ways to make up for lost property-tax revenue. They can tax personal income and food and beverage sales, and impose user fees on specific city services, but most of those tools require approval of the Legislature.

“From a taxpayer’s standpoint, I’d say the best thing is, ‘Let’s figure out how to make it on the money we have,’” Kenley said.

Revenue lost

Cities are already dealing with the tax caps, which take full effect in 2010. The tax rate will be limited to 1 percent of assessed value for residences, 2 percent for rental property, and 3 percent for commercial property.

In Indianapolis, Comptroller David Reynolds estimates the caps will eliminate $30 million in revenue in 2010. The city budget for next year is $1.2 billion, with $324 million of that coming from property-tax revenue. (Several other taxes—most notably the county-option income tax, state and federal funds, and charges for services—make up most of the remainder.)

Ballard, who has cut $80 million in city expenses, was an enthusiastic supporter of the property-tax caps. His administration hopes to avoid layoffs by making the city more efficient, Director of Enterprise Development Michael Huber said.

Henderson

The mayors’ caucus includes relatively well-off suburban communities, including Greenwood and Carmel. Greenwood Mayor Charles Henderson doesn’t foresee a budget pinch from tax caps for at least two years, but he said, “Everything ought to be looked at in today’s environment.”

Picking their targets

Opposition from churches squelched past discussions in the Legislature about imposing fees on property held by not-for-profits.

Henry said the urban mayors aren’t going after houses of worship—though they have an eye on nursing homes and other church-owned facilities.

The main targets would be “entities clearly operating like a business,” said Matt Greller, executive director of the Indiana Association of Cities and Towns. Hospitals and universities, he said, are “very bottom-line-oriented and capable of paying for the service they’re receiving.”

Indiana Hospital Association President Brian Tabor said his not-for-profit members earn their tax-exempt status by providing charity care. The association represents some for-profit facilities, but it still would oppose mandated payment-in-lieu-of-taxes.

Some cities, such as Bloomington, negotiate payments from universities for fire protection, Greller said. The arrangements that exist don’t begin to cover the costs, he added.

The notion of mandating payments isn’t likely to advance in the Legislature on the first go-round, Henry admitted, but he hopes it will gain traction over time.

“I think it’s a matter of realizing how much revenue the cities were losing as a result of all those not-for-profits,” he said.

The caucus is gathering data to make its case. Some of the figures could be staggering. In South Bend, home of the University of Notre Dame, tax-exempt properties, not including churches, account for 14 percent of the assessed value, Greller said. In Muncie, it’s 30 percent.

In Marion County, tax-exempt property is worth $3.4 billion, or about 6 percent of the total assessed valuation of $56.9 billion.

Taking churches out of the picture, the figure drops to $2.6 billion, Greller said.

Hospitals are the largest non-paying property owners in Marion County. Clarian Health’s downtown Methodist Hospital campus tops the list with an assessed value of $203.8 million. (St. Vincent is close behind at $187.5 million.)

If taxed at the maximum commercial rate of 3 percent, Methodist would generate $6 million in tax revenue for the city. A negotiated payment would likely be much less. Clarian Health spokeswoman Holly Vonderheit said she couldn’t comment on the issue because no legislation has been drafted.

Some of the other major tax-exempt properties in Marion County house private schools and museums run by not-for-profits.

The Children’s Museum of Indianapolis at 30th and Illinois streets is assessed at $21.6 million. Representatives of the museum couldn’t be reached for comment.

Upside for cities

Indiana mayors would have an ally in Rep. Tom Saunders, R-New Castle, a former Henry County assessor who has filed bills related to tax-exempt property.

Saunders said not-for-profit organizations provide a public benefit, but they’re still competing in the marketplace and using local services.

One of the largest rental properties in the small city of New Castle, for example, is an apartment building, marketed to senior citizens, that is owned by the Friends Church of Columbus, Ohio.

“I’m sure they provide a great service,” Saunders said of the church. “But if people didn’t pay their bill, I’m sure they’d ask them to move somewhere else.”

The church pays New Castle $25 per rented apartment for fire protection, but Saunders said the church’s fee, which amounts to about $4,000 a year, should be higher.

Saunders said he’s contemplating a bill that would require not-for-profits to pay the portion of their tax rate that relates to fire and police protection. Church buildings would be excluded.

“It’s all a fairness issue,” Saunders said.•

 

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