(H/t Blue Indiana ) Anita Munson, writing for the South Bend Tribune has an article entitled Indiana schools may face project cutbacks. It features Everybody’s Favorite Economist ™, Larry Deboer, and his explanation of how we got to where we are.
He’s been over it before, and this blog has pointed to his explanations before, but still they bear repeating lest the actual reasons get lost in the finger pointing:
1. In 1998, the Indiana Supreme Court issued a decision which took effect in 2003, holding that the old tax assessment system was not fair. (Thanks Town of St. Johns!) Basically, the old system was an artificial assessment system that undervalued old, residential homes (even, presumably, those on the nicer parts of Meridian Street). Meanwhile, business real estate was valued at something that was probably close to its actual value, resulting in a subsidy for owners of older residential properties.
2. Elimination of the inventory tax. The inventory tax was eliminated. The last year to get rid of inventory taxes was 2007, but county governments were permitted to do away with them earlier. County governments were also permitted to impose an income tax to make up for lost inventory tax revenue. Failure to impose such an income tax would result in the inventory tax burden being shifted onto property tax payers.
3. Trending. The 2003 reassessment was based on 1999 values. Recently, rules were imposed that required property values to be “trended” — meaning updated annually. The first step in trending was catching up property values – 1999 values were updated to 2005 values, meaning 6 years of appreciation having to be absorbed in one shot. Business owners weren’t hit as hard as residential properties. First, business equipment is supposed to be updated annually anyway, so there wasn’t a 6 year catch up on such equipment. Second, there was not a whole lot of data for assessors to go on to update values of big factories, for example. They just don’t get sold that often. If residential property gets updated while business property effectively is not, that results in a shift of the tax burden from business payers to residential payers.
4. Shift from State to Local Government. The State apparently reduced total tax credits by about 8% for property owners.
5. Increase in levies by local taxing units. This is the “increased spending” component of the equation. But, according to Mr. DeBoer, the property tax increase is a relatively small part of the equation. Only about 25% of the 24% average increase (6% then, I suppose) has to do with local tax levies. The remaining 18% of the average increase has to do with a shift in the tax burden (from State to Local and from Business to Residential).
The State is going to issue rebates of about $225 million once it gets paid licensing fees from two race tracks (Shelbyville and Anderson) that have been allowed to add slot machines to their facilities. Another $225 million in tax relief will be provided by the state from the gambling licensing fees in the form of an addition to the homestead credit next year. In addition, local governments have been given the option of raising income taxes to provide property tax relief.
First, a local income tax can be imposed if the property tax levy is frozen at its current level – normally, a locality is permitted by the State to raise its upcoming tax levy by a certain percentage of its current levy. Another local income tax can be imposed to provide relief from existing property taxes. The “relief” provided by this local income tax can be targeted at: a) all property owners; b) only homesteads; or c) all residential properties (including rental units). Finally, if income taxes #1 and #2 are imposed, then an additional income tax can be imposed to fund public safety. (Marion County was apparently given special dispensation to impose the public safety income tax without first imposing income taxes #1 and #2).
So, who or what exactly is responsible for raising property taxes?
The following account for 90 percent of the increase, DeBoer said:
Schools general fund, 25 percent; schools debt, 13 percent; cities/towns general fund, 12 percent; county general fund, 10 percent; schools’ capital projects, 9 percent; schools’ transportation, 6 percent; county welfare, 5 percent; special districts (such as solid waste), 4 percent; cities/towns, other funds, 3 percent; and libraries, general fund, 3 percent.
John Hill, superintendent of Plymouth Schools, has suggested that the State is increasingly putting more of the burden of funding schools on the backs of local government. In addition, the State apparently provides payments to schools in an untimely fashion, resulting in the Schools having to borrow money against the promised payments by the State, resulting in interest expenses.
Prof. DeBoer notes that, while the instability of Indiana’s property taxes are a problem, Indiana does not have high property taxes compared with the rest of the nation. In 2005, Indiana ranked 35th in the nation with “$1,079 as the median homeowner property tax payment.” Meanwhile, Michigan ranked 18th at $1,846 and Illinois ranked 7th at $2,904. Most of the states with lower property taxes than Indiana are in the South where “lawmakers have historically used sales taxes more than property taxes for funding.” (And, the article does not say this, but the South also tends to have the States that rank last in things like education.)