KETZENBERGER: Property tax quandary still in flux

December 11, 2010

John KetzenbergerHoosiers have fiddled, more or less, with the state’s property tax system for nearly 40 years. Have we learned anything between the 1973 reform pushed by former Gov. Otis Bowen and the property tax caps voters approved Nov. 2?

One thing is sure: We like to gripe about property taxes even though they’re a relative bargain in Indiana. Residents in just 10 states pay less in residential property taxes than Hoosiers, according to the Tax Foundation.

Another near-certainty: An initial drop in local property taxes overall is likely to increase over time. The questions are when and how?

For those answers, it’s useful to look at the years after 1973. The plan cut local property taxes and included three key components meant to hold the line on future increases:

• Creation of the Property Tax Replacement Fund, which was paid for by doubling the state sales tax to 4 cents on the dollar. The PTRF provided a 20-percent subsidy to local governments on property taxes.

• Allowing local governments to adopt a county adjusted gross income tax to offset revenue lost to property tax reform.

• A freeze on the county’s property tax levy for those that adopted CAGIT, or a freeze on the county’s property tax rate if the county did not adopt CAGIT.

The effect was immediate. Property tax collections in Indiana plummeted nearly 28 percent to $2.1 billion, adjusted for inflation, in 1974. Property taxes continued to fall an average of 2.5 percent a year until 1981.

“These policies helped reduce, at least temporarily, the impact of the property tax on taxpayers,” Earl Ryan wrote in the Indiana Fiscal Policy Institute’s report on property tax caps released last month. “But it did not address the underlying problems of determining the property tax base.”

For years, the Fiscal Policy Institute questioned the state’s assessment procedures. A 1991 report noted there were too many assessors with too little expertise to properly determine the basis for property taxes. The report also determined the wacky formula that evolved over decades, known as the true-tax value, led to inequity across the state.

It wasn’t long before the State Tax Court reached a landmark decision. In 1998, the court determined the true-tax value system wasn’t fair or based on actual value. It only took the General Assembly another decade to enact the laws necessary to implement a market-based system of assessing homes, reduce the number of assessors across the state, and ensure they had the ability to do their jobs.

Along the way, Hoosiers were asked to provide cover for a couple of laws unlikely to withstand constitutional challenge. In 2004, voters were asked to ensure a law that eliminated the inventory tax and provided a large exemption for homeowners met the state constitution’s “equal and uniform” property tax requirement. The amendment got 71-percent approval.

This year, the question was whether the property tax caps establishing three classifications of property passed constitutional muster. Hoosiers made the point moot with 72-percent approval.

Will the property tax caps work? Yes. Property taxpayers across Indiana paid $360 million less in the last year thanks to the caps.

Will the caps provide permanent relief? The answer is a qualified no. It’s much harder to remove the caps now, but lawmakers already face pressure from local officials who have lost revenue to the caps.

House Speaker Brian Bosma, R-Indianapolis, acknowledged the General Assembly may need to allow tweaks to the local option income taxes to make up lost property tax revenue.

The new wrinkle: referendums. Direct democracy has arrived and with it a cottage industry among political pros who advise local schools and governments how to get a referendum approved or help opponents kill it.

Increases approved by referendum fall outside the caps, so it’s conceivable taxpayers could allow growth that one day outstrips current property tax collections.•


Ketzenberger is president of the Indiana Fiscal Policy Institute, a not-for-profit dedicated to nonpartisan research into the state’s tax policies and budget practices. Ketzenberger previously followed state politics as an award-winning editor and writer at Indianapolis Business Journal, The Indianapolis Star, and The Journal Gazette of Fort Wayne.•


Recent Articles by John Ketzenberger / Special to IBJ

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