VOICES FROM THE INDUSTRY: As business property taxes rise, who really pays the bill?

All Indiana counties revised property tax bills as a result of an outcry by thousands of homeowners who fought back when they saw their 2007 tax reassessments and bills. Assessors had to go back to work and try again. So, they did.

The new bills are out, and while it may
be good news for homeowners, you can bet commercial property owners aren’t turning cartwheels in the parking lot. The average assessment for commercial properties (where you shop, work and dine) jumped an average of 49 percent in Marion County.

Assessors defend the increases on the newest calculations, saying many commercial properties were way undervalued. It’s the same argument assessors used with homeowners a year ago when the first batch of assessments rolled off the presses. After the new assessments hit mailboxes, many homeowners were furious-and rightly so-to find out their homes were assessed at double or even triple from previous years. The do-over has resulted in a shift of burden from homeowners to commercial property owners.

Homeowners, however, may want to keep the corks in the champagne until they
find out what the tally will be for “saving” on their property taxes. Shifting the tax burden from residential property owners to commercial property owners likely will have a boomerang effect, with the “savings” ultimately coming out of homeowners’ pockets through 100 small increases, rather than one large one.

Passing costs along

When you get your new homeowner’s property assessment and tax bill, be sure to thank your local business owner, especially the dry cleaner, your health club and the restaurant around the corner. But check your tab. You may find that it has gone up.

Increased costs to businesses ultimately mean increased costs to consumers. It’s rare that a segment of the economy (in this case, commercial property owners) will fully absorb a cost increase without passing it on. For most businesses, margins aren’t good enough to completely absorb the increase.

Landlords will pass the property-tax increase along to their tenants, and the tenants will pass the increase along to their customers. If they can’t pass on the cost to their customers, they will seek other economies: downsizing their work force, reducing capital expenditures for growth or downsizing their facilities.

Small businesses often suffer the most. Increased tax bills on top of increased gas prices are too much to expect from those who are trying to make a living providing
goods and services.

That’s one of the reasons that there has been an increased demand for flex office space over the last 12 months. Businesses are choosing flex over Class A space, because flex typically is much cheaper.

Indiana is not alone in its dilemma of how to pay for schools, police, fire and other governmental services without having to raise taxes. Homeowners and businesses don’t want to pay higher taxes. At the same time, none of us wants to see reductions in services, including police, fire and public works-especially those in charge of filling the pot holes, fixing sidewalks and removing snow.

Finding an answer

So, what’s the answer to solving the property tax crunch? Some people have suggested abolishing property taxes all together. Others want the structure of property taxes to change. Indiana lawmakers this year did a little bit of both-statewide reassessment and increased sales tax. You’d be hard-pressed to find anyone who believes this is the cure-all.

Here’s a fact that hasn’t escaped lawmakers. Not-for-profits are tax-exempt. In Indiana, there are hundreds of not-forprofits, including hospitals, universities, churches, fraternity organizations and others, that don’t pay property taxes. Lawmakers considered a bill this season that would repeal Indiana’s property-tax exemption and require not-for-profits to
pay a fee, something that other states are moving toward.

Called PILOTS-payments in lieu of taxes-this would be another revenue stream in which the tax burden could be shared by everyone, not just those of us who live in homes and own businesses.

There are other things lawmakers and local governments can do to help offset the increased tax bills.

If the state believes that commercial property tax revenues should fund an increasing share of the state’s services, then maybe it should make developing commercial property easier. There are many things governments could do to help grow their commercial property tax bases, like reduce the time that it takes for project approvals, increase the predictability and equitability of zoning outcomes, apply impact fees more rationally, etc.

The unfortunate news about the property-tax redo is that it will be paid for by consumers in the long run. As business owners struggle to stay afloat while facing increased competition, higher costs of goods and services, as well as a soft economy, they’ll now have to figure out how to pay a bigger-than-expected tax bill. As consumers, we should be prepared to pay more for everything from health club dues to starched shirt collars.

Mann is managing partner at Mann Properties, an Indianapolis-based development company with offices in Indianapolis and Charlotte, N.C. Views expressed here are the writer’s.

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