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EYE ON THE PIE: Fiscal bombs in Hoosier political waters

December 24, 2007

The Indiana Department of Local Government Finance (DLGF) issued a "Citizens' Guide to Property Taxes" on Nov. 20. That document contains the following paragraph:

"What factors contribute to property tax increases? Local spending is the reason for property tax increases-or decreases-depending on local fiscal management. Other factors that contributed to increases during the 2006-2007 pay cycle include the elimination of the inventory tax and the onset of the annual adjustment process, also known as 'trending.'"

Got that? Property taxes rise or fall because of local fiscal management. That is not even a half-truth. Property taxes rise and fall because of policies put in place by the state Legislature. The Legislature decided to eliminate the inventory tax. The Legislature authorized trending and DLGF monitored it. The Legislature increases or decreases the deductions and exemptions to assessed values. That same body decides how much money flows from the state's general fund to property tax replacement credits and homestead credits. The Legislature issues unfunded mandates.

DLGF is an arm of an administration that seeks to place local governments in a spending straitjacket. The governor has proposed that "total local spending cannot grow faster than a county's average personal income growth over a six-year period, unless approved by taxpayers in a referendum." In addition, "The Tax Board in each county must review and approve spending plans of all taxing units."

We have not heard much about these proposals, but they are submerged bombs in the waters of local democratic processes.

The County Tax Board will oversee the spending of all cities, towns, school corporations, library districts, county government and any other governmental units. Who sits on such boards? They are people appointed by elected officials, but none is elected to the Tax Board by the public. They will be the hidden final arbiters of decisions to improve our schools, parks and police.

Plus, the amount that can be spent by all governmental units in your county can increase by only the average growth of personal income over a six-year period. At best, the most recent personal income data are nearly two years behind the times. This means your county will be constrained by changes in a lagging number that reflects the past and has little to do with the needs and aspirations of today.

The latest data are for 2005 and show a range of six-year growth from 6.9 percent (Hamilton County) to 1.5 percent (White County). What of the simple need to pay government employees fair wages and keep up with technology in White County?

Personal income is not a measure of the ability of a county's residents to support local government. It is not the sum of the income realized by those who live in the county. It leaves out income from pensions and capital gains. As these rise, shouldn't it be possible to increase local spending?

Personal income includes current payments for benefits citizens may not realize soon or ever in their lives. For example, the money you and your employer put into a retirement program is included in personal income. But it may be decades before you get to spend that money. Why should it be counted as part of your county's ability to support local government today?

If the governor wants to assess a county's ability to pay for local services, he should consider adjusted gross income as reported on the Indiana individual income tax form. All we have to do is get the Department of Revenue to make that number available in a timely fashion to all citizens. Dare we dream?

The fiscal problems of Indiana are not based solely on the antiquated aspects of our local governments. Those contribute, but they are not the root of our troubles. To correct our problems, we need legislators who will end the ceaseless manipulation of taxes as favors for friends and as bribes for an ignorant electorate.

New champions of reason and reform need to win in the primaries and knock out the old guard in the next general election.



Marcus taught economics for more than 30 years at Indiana University and is the former director of IU's Business Research Center. His column appears weekly. He can be reached at mmarcus@ibj.com.
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