Local Government and State Government and Taxes and Tax Caps and Government & Economic Development and Government

Tax caps lead to painful budget cuts in some counties

April 6, 2011

Indiana homeowners and businesses have seen their tax bills cut by more than $655 million since the General Assembly approved property tax caps in 2008. But the savings have come at the expense of local governments, which have been forced to cut millions and reduce services to compensate for the lost revenue.

Gov. Mitch Daniels says the caps make Indiana's property taxes some of the lowest in the nation. The caps limit property tax bills to 1 percent of a home's assessed values, with caps of 2 percent for farmland and rental property and 3 percent for business property. Lawmakers amended them into the state constitution in November in hopes of making them more difficult to undo.

Daniels told The Associated Press he sees a need for consolidation of "redundant" local units that are too small to operate efficiently.

"I think where there was overspending, (the tax caps are) bringing discipline," Daniels said. "In places where spending is more reasonable, there's still more opportunity for reform at the local level."

But for counties like Delaware, Madison, Marion and St. Joseph, the caps have instead brought about painful decisions about what government can pay for.

Marty Wolfson, professor and director of the Higgins Labor Study Program at the University of Notre Dame, said the law came at a time when the recession was depressing home values, which meant less tax revenue for local governments even before the tax caps took effect.

Unlike tax credits in other states, where homeowners who struggled to pay property taxes could be exempt, Indiana's caps missed the point because they benefit businesses at the expense of homeowners who have to pay the fee regardless, according to Wolfson.

"It's not the best policy to begin with. And it was made worse by the recession," Wolfson said. "There are these circuit-breaker laws in other states. And to my understanding, the other states that adopt circuit breakers tie this to the ability to pay the property tax liability."

Some worry the caps are beginning to erode local governments' core functions, especially public safety.

"There are some positive things in budget tightening and looking at what you really need and some things, but there comes a point when you're getting pretty close to cutting major services," said James Borgmann, director of Muncie Downtown Development Partnership. "I think what they're trying to figure out is 'Oh geez, where does it end?' They may get below basic services, the ability to cover basic services effectively."

Delaware County, which has the smallest population of the hardest-hit counties at 117,000 residents, recorded the highest per-capita loss, with a $25.4 million drop in revenue in 2010. That loss accounted for nearly 15 percent of the county's budget in 2010, according to an analysis prepared by the nonpartisan Legislative Services Agency.

St. Joseph County did without $35.6 million in 2010 because of the property tax caps. That's 12.4 percent of the county's budget. Marion County, the state's largest, saw $79.2 million in property tax credits, but that comprised only 7.3 percent of its budget.

In southern Indiana, Madison County lost more than $29 million. Vigo County saw the impact of the caps nearly triple between 2009 and 2010, leaving it to cover $15 million — or about 14 percent of its budget.

The Legislative Services Agency estimates Lake County would lose nearly $103 million in 2010, but the situation there is compounded by a state law freezing property tax revenue unless the county adopts a local income tax. Lake County is the only one of Indiana's 92 counties without such a tax. County officials said they would be forced to eliminate more than 100 jobs to close a $9 million shortfall in the county's 2011 budget because of the freeze and the property tax caps.

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