ECONOMIC ANALYSIS: How to extricate ourselves from the property tax mess

January 29, 2007

There once was a time when everyone watched network news, and there was one newscast in the heat of presidential primary season that I'll always remember.

After watching a succession of unsuccessful candidates in post-election press conferences blaming anything and everything-except themselves-for their poor showings, correspondent Roger Mudd had seen enough. Just once, he said, he would like to see candidates stand up and say it straight-they lost because folks liked the other candidates better.

One of these days, someone in power will stand up and tell us what really is going on with property tax policy in Indiana. Judging from the rhetoric of the debate, I don't think that day is going to come soon. But if it did, it might go something like what I lay out below.

The property tax has been in upheaval for several years now. First, it was assessment. It's hard to say if the system of assessment used before 2002 was working well, because no one could explain what it was. But it produced so many unbalanced situations-both between businesses and homeowners, as well as among different homeowners-that a tax judge threw the whole system out, and in 1998 the Supreme Court agreed.

When the smoke cleared, everyone's assessments changed. The Legislative Services Agency said commercial property valuation went up 46 percent, and industrial property was valued 15 percent higher. But homeowners saw a whopping 106-percent increase, with much of the burden hitting owners of older homes.

Of course, tax rates were adjusted downward to reflect the new assessments. Commercial and industrial properties got a tax cut, but 59 percent of residential property owners saw tax increases. And those increases would have been considerably larger-LSA estimates about 46 percent higher, on average-if the Legislature had not moved almost a billion dollars of spending completely off the property tax levy in 2002.

Now we have more curveballs coming. One of the devices used to balance the state budget was a capping of property-tax replacement spending by the state. That means taxpayers will be bearing much more of the burden of higher taxes from this point forward.

And why are they going up? Perhaps you've noticed in your latest assessment. Market-based assessment was not a onetime change. Valuations for real property-buildings and land-are trended to reflect market conditions. And in areas with slow or no growth, costs of providing services continue to grow, even though the base to support them does not. Plus, we're picking up the tab for dropping inventories from the tax base.

That trend caused the Legislature to throw us another curveball, in the socalled "circuit breaker" credit that eventually will limit the total tax burden statewide to 2 percent of valuation before deductions. The impact of this legislation on countless communities-including Muncie, South Bend and Gary-promises to be nothing short of catastrophic.

What's the solution? For some, it is running away from the tax altogether. But no one has come up with a way to replace the $5 billion or $6 billion of revenue, other than to offer a fervent hope that we can all suddenly live with a lot less government.

But if you will allow me a moment of blunt speak, I'll give you my take. First, let's get state government out of the local property tax business. Assessments and procedures should be uniform, yes. But if Muncie or Gary or any other city wants to set its rates at 2 percent or 3 percent, what is the state's skin in that game?

But at the same time, I would completely overhaul the method of setting rates. Let's have rates set by public referendum, with expirations making regular renewals necessary. Let's have predictability and transparency in a tax that no one likes to pay, but no one knows how to live without.

Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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