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Band-aid or surgery for Indiana property taxes

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Everybody’s favorite economist, Larry DeBoer, has column entitled Capital Comments which appeared in the Carroll County Comet. As always, he does a good job of explaining the implications of legislative tax policy.

Again, he explains why the increase in local taxes. First, property taxes on inventories will be eliminated in 51 counties this year. That means the tax burden shifts from taxpayers with inventories to other taxpayers. Another policy change is trending — updating assessed values each year to keep up with changing sales prices. Since they’re playing catch up this time around, 1999 sales prices are being “trended” to 2005 selling prices. In the future, this should make for more gradual assessment changes, but this year it can be rather jarring. Prof. DeBoer says that so far it looks like home assessments are being trended upward a lot more than business assessments, thereby shifting the tax burden toward homeowners.

He notes the legislative Band-aid solution this year — “racino” income. Race tracks are paying big bucks for the right to have slot machines. The racino licensing money is being used to subsidize property taxes, thereby lessening the increase. He pointed out a practical (in addition to the political) reason for the much maligned rebate strategy. Instead of just reducing tax bills with the race track subsidy, the legislature required that homeowners get a rebate in November or December. The practical reason for that is that the the State won’t have the casino money until then.

Prof. DeBoer goes on to look at who wins and who loses under various new taxing options given to municipalities by the legislature. First, local government can use an income tax of up to 1% that would be used as a dollar-for-dollar offset of property taxes. The local government has three options for distributing revenues from this tax: a) for all property owners; b) for homeowners only; or c) for homeowners and rental-housing owners.

Under option “a” – all property owners, all property taxes would go down about 20%. Renters and employed homeowners would see their income taxes rise more than their property taxes were lowered. Farmers, retired homeowners, and corporate businesses would pay less overall.

Under option “b” – just homeowners, homeowner property taxes would be cut by about 50%. Almost all homeowners would see their overall tax burden reduced. Other property owners who earn income in the county would pay more.

Under option “c” – homeowners and landlords, homeowner taxes would drop by 1/3 and most would see an overall reduction in taxes.

[tags]property taxes[/tags]

HB 1478 – Property taxes

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By a vote of 44 to 5, the Senate adopted House Bill 1478. Voting “no” were Senators Rogers, Simpson, Skinner, Smith, and Tallian. This is Senator Kenley’s bill designed to ease the property tax hit — expected to be a 15% increase if the legislature does nothing — and to shift local government’s reliance on property taxes to something else.

I have to admit, my brain seized up about half way through the digest. It’s been a long day, sure, but i’s also a pretty complicated bill. But, in general, it accomplishes this by having the state assume some of the expenses traditionally borne by local government — such as juvenile detention fees and department of child services fees. In exchange, the state will phase out the property tax replacement credit — currently the mechanism by which the state essentially subsidizes the county property tax burden. It also allows local government to reduce property taxes by replacing them with a county adjusted gross income tax or county option income tax.

That’s my dumbed down version, anyway.

Also, if you want a very readable explanation of why property taxes will probably go up this year, check out the March 22, 2007 edition of Capital Comments by everybody’s favorite economist, Larry DeBoer. His guess (absent action by the General Assembly): a 17.5% increase. He lists five major items that will affect your property tax bill. Among those, there is the issue of trending — currently property taxes are based on the value of the property on March 1, 1999. Assessors are now required to “trend” the property — basically use recent data to adjust the value every year. Year-to-year, that might not be a big thing, but this year, they’ll have to use the March 1, 2005 value — a 6 year jump. There is also the issue of the property tax replacement credit – that big subsidy the state used to pay to local government to reduce the need for property taxes. A lot of the 2004 budget was balanced by substantially reducing the amount of that replacement credit. The State shifted its burdens down onto the counties.

So, I expect legislators to be very motivated to protect their constituents against a 17.5% property tax increase and would, therefore, be surprised if some version of this bill does not pass.
[tags]HB1478-2007, taxes[/tags]

Property tax relief

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Curt Slyder, writing for the Lafayette Journal & Courier, has an article on property tax relief. At the moment, property tax relief proposals are mostly dead, but such things can generally be resurrected with enough legislative effort.

Everybody’s favorite economist, Larry DeBoer (follow “Capital Comments” link), explains why this is a big issue:

The reasons why property tax reform is on people’s minds go back a few years, said Larry DeBoer, a Purdue University professor of agricultural economics.

The Indiana Supreme Court decided in 1999 that the state’s property tax assessment methods were in need of reform.

“Since then, there have been many changes,” he said.

A reassessment in 2002 shifted property assessment to a market-value basis. In 2006, properties were assessed again to show market value changes since the initial Supreme Court decision.

This year, counties will complete elimination of the business inventory tax, which will shift taxes to homeowners. At a recent meeting of county treasurers, DeBoer predicted residential taxes will go up 15 percent on average this year compared to last.

Those tax bills are due out in the next few weeks and could increase pressure on legislators before the session ends April 29.

Senator Kenley has a plan that consists of three components:

The state would pick up local governments’ share of funding for juvenile incarceration, 100 percent of the child welfare expenses and 100 percent of general fund expenses for public schools.

The State would use money from the property tax replacement fund to pay for the state’s new obligations. So, on the one hand, counties would lose a significant amount of income, but on the other hand, they would lose a significant amount of liability. The state doesn’t necessarily need to rely on property taxes to meet its obligations. Counties are limited by the General Assembly as to their taxing authority and, therefore, they have less flexibility in how they can pay for their obligations.

Reliance on property taxes is problematic. The property has value, but it doesn’t necessarily generate the wealth needed to pay a tax. On the other hand, the taxes are going to come from somewhere. If we shift it to an income tax, are we unfairly adding to the burden of wage earners who own no property while unfairly benefiting owners of large amounts of property? I guess that’s for our elected representatives to decide.

It’s Costly to be Small

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An installment of Capital Comments written by everybody’s favorite economist, Larry DeBoer, ran in the July 26, Carroll County Comet. Professor DeBoer’s commentary concerns a report (PDF) by the Department of Local Government Finance on 2005 expenditures per capita by local governments. (Senator Kenley had a column in the Indy Star on the report, and I had a blog post.)

Professor DeBoer suggests that the legislature thought it would be a good idea to make comparisons of expenditures per capita by local jurisdiction available so that citizens might be able to ask questions about why some are spending more and others are spending less. However, he says, it’s difficult to know what to make of the reported numbers. First, DLGF says that there are inconsistencies in how jurisdictions report their numbers. Second, operating costs and infrastructure costs are combined. Third, the numbers reported by DLGF don’t seem to reflect patterns seen in previous research such as wealthy jurisdictions spending more per person and jurisdictions with more homeowner property spending less.

Prof. DeBoer notes that at least one pattern that shows up, however. Small jurisdictions spend more per person. Of the 11 counties in the state with fewer than 15,000 people, 9 of them spend more per person than the typical county. The smallest counties averaged $1,570 per person compared to a $1,090 average for all counties. He suggests that this might be a symptom of “economies of size” which I take to mean that there are certain fixed costs for a county which have to be incurred regardless of how many citizens the county has. The bigger counties get to spread these costs over more people.

Last year the General Assembly passed HEA 1362 which might provide some assistance for the smaller counties. It provides a mechanism by which political subdivisions, including the small counties with high overhead, can use cooperative agreements with cities, towns, other counties, or other jurisdictions to deliver services, share equipment and employees, or buy services from one another. Through such cooperative agreements, the small counties might generate the sorts of economies of size currently enjoyed by the larger counties.

Pi Day

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Today, 3-14, is Pi Day. I have missed the preferred time of celebration of the “mathematical mystery” – 1:59.

For Hoosiers, there is no better way to celebrate pi than to consider what might have been. In 1897, the House passed HB 246-1897:

A Bill for an act introducing a new mathematical truth and offered as a contribution to education to be used only by the State of Indiana free of cost by paying any royalties whatever on the same, provided it is accepted and adopted by the official action of the Legislature of 1897.

Basically, the House of Representatives was seeking to legislate the value of pi. Among other things, the bill specified that “the ratio of the diameter and circumference is as five-fourths to four” which is to say “5/4 divided by 4”, which is to say “3.2.” After the House passed the bill 67 to 0, it was referred to the Senate Committee on Temperance which reported it favorably to the full Senate. Fortunately, Purdue mathematics professor Clarence Abiathar Waldo was in town lobbying the the legislature and was able to explain the bill to members of the Senate and that it was incorrect. Like all truly fun bills, this one died in the Senate when Senator Hubbell moved to postpone consideration of the bill indefinitely. Senator Hubbell was quoted as saying, “the Senate might as well try to legislate water to run up hill as to establish mathematical truth by law.”

Of course, we should not laugh too much at the benighted souls of the 19th century. We have our own band of unreflective legislators and constituents who would seek to legislate medical truths (also see here) by law.

But I digress. For more information on Indiana’s Pi legislation, check out this page, from everybody’s favorite economist, Larry DeBoer.

J&C on LSA’s Property Tax Report

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The Lafayette Journal & Courier has an editorial referencing a property tax study done by the Legislative Services Agency and everybody’s favorite economist, Larry DeBoer. (Discussed here. Their take: so what. Taxes are going to have to go up this year because of the General Assembly’s budget. And, because the General Assembly passed the buck, the tax raises are going to have to be done at the local level.

That makes me think, if state and federal taxes had gone down some, I wouldn’t mind the county taxes going up. The more local the tax, the less I resent it. But, of course the federal income tax is still a huge part of our collective tax burden and the benefits we receive from it are usually the most indirect (or almost non-existent: see Iraq.)

LSA Report on Property Taxes

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There is an article by Niki Kelly in the Fort Wayne Journal Gazette entitled Tax credits eased pain of change and a similar article by Michele McNeil in the Indianapolis Star entitled, Surprise! Property Taxes Fell for Most. The stories are based on a report by the Legislative Services Agency and everybody’s favorite economist, Larry DeBoer.

The report – given by the Legislative Services Agency and Purdue University Professor Larry DeBoer – examined how tax bills shifted between classes of property as well as what the shift would have looked like if lawmakers had not added $800 million in property tax relief.

“People who see tax decreases don’t say much while people who see tax increases do,” said DeBoer, referring to angry citizens who decried the reassessment. “The reality is a majority of homeowners in Indiana got tax cuts after reassessment and restructuring.”

The 2002 reassessment saw the state move to a more market-based tax value system, as opposed to the former system that depreciated older homes while assessing business property much closer to the market value than residential.

That is why businesses saw little or no increase under the new system and residential homes felt the brunt of the shift.

Tax bills for agricultural land and rental properties went up pretty significantly, 5.7% and 11% respectively.

When studying comparable homesteads – or properties that did not change due to additions or major renovations – almost 58 percent of Indiana homeowners saw a decrease in their tax bill while 42.5 percent saw increases.

Overall, just 5.3 percent saw increases of 100 percent or more and the average change was a $4 savings statewide.

The news would have been far worse if legislators hadn’t passed a restructuring package in a 2002 special session that largely targeted residential homesteads.

According to DeBoer, if the General Assembly had done nothing, homeowners’ bills would have gone up an estimated 51.2 percent and agricultural bills would have jumped more than 20 percent.

“In case there are any homeowners who think tax restructuring didn’t matter, I think we can disabuse them of this notion,” DeBoer said.

Early predictions that average residential tax bills would go up 33 percent were fairly accurate when discounting an unusual 10.6 percent growth in tax levies that year.

Without that – and without restructuring – tax bills would have gone up 35.4 percent.

Fort Wayne Jounral Gazette: Tax Breaks for Farmers = Tax Increase for Residential Property

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Dan Stockman and Sarah Meisch have an article in the Fort Wayne Journal Gazette entitled Tax change a ‘balancing act’ — and, it has quotes from everyone’s favorite economist, Larry DeBoer.

As part of its whirlwind session this spring, the Indiana General Assembly changed how the value of farmland is calculated for taxes, a change that statewide will lower taxes on farmland an average of 14 percent. But that cut has to be made up with higher taxes on homes, factories and stores.

. . .

Salomon said property taxes are especially unfair because they stay the same – or go up – even when prices or crops are bad. They also punish farmers who keep up historic old barns, even though they are obsolete and can’t be used.

“The legislature knows farmers aren’t going to go delinquent,” Salomon said. “They scrimp and save and pay their taxes. So each year they just keep adding it on and adding it on.”

This year’s changes came about because farmland isn’t taxed like other land in Indiana.

There is a base rate for every acre, which is then subjected to a formula for what the land produces, so better land is taxed more. Last year, the base rate more than doubled to $1,050 an acre; this year the General Assembly lowered it to $880.

“Its base rate is adjusted by a factor of its productivity in growing corn, how fertile it is,” said Lawrence P. DeBoer Jr., a professor of agricultural economics at Purdue University.

Other factors also count.

“There’s a percentage reduction for special factors like if it floods often or is covered with trees,” DeBoer said. “If it’s covered in trees or rocks, it’s worth less.”

With the base rate dropping, farmer’s tax bills will be dropping, too.

“Every farmer ought to see a decrease in their tax bill,” DeBoer said. “Since nobody else had reassessment, the shift in the tax burden will be taken away from the farmland and to everybody else.”

. . .

What the situation really does, [Indiana Farm Bureau’s Kathleen Dutro] said, is show how unfair property taxes are for everyone. Just as a farmer facing low prices or tough weather still has to pay property taxes, a homeowner who gets laid off or is on a fixed income doesn’t get a break, either.

“Somebody’s going to win and someone’s going to lose,” Dutro said. “We really don’t think we’ve won. … We really just think it’s a way to (give farmers) the tax cut everyone else got.”

But that give-and-take is built into Indiana’s property tax system because local governments are allowed to raise only a certain amount of money, said Kurt Zorn, professor at Indiana University’s School of Public and Environmental Affairs.

“If you take away from the tax base, other tax bases will have to make up the difference,” Zorn said. “There’s no free lunch. The tax rate will be higher for everyone. Residents and corporations will see a higher tax rate than before.”

. . .

Benton County farmers will enjoy an 8.8 percent drop in taxes on farmland, but homeowners and businesses will see an 8.8 percent increase. Warren County homeowners, just south of Benton County, will see a 7.6 percent increase.

I also see from the article that counties in my general area will bear the highest residential tax increase: Benton will see an 8.8% increase, Warren will see a 7.6% increase, Pulaski will see a 5.7% increase, and Fountain will see a 5.4% increase.

I see this as being of a piece with Gov. Daniels’ decision to emphasize agriculture as its economic centerpiece and with the general condition of Indiana’s brain drain and difficulty keeping up with the rest of the country. Agriculture is important, don’t get me wrong — we all need to eat. But it might be better if we subjected agriculture to the same market forces as everything else. I’m thinking here more about agriculture subsidies at the federal level than state tax breaks particularly.

I don’t think subsidizing and emphasizing commodity production is going to do Indiana any long-term good. We need to be looking toward biotech, nanotech, and other industries which have not yet been commoditized.

Indy Star on Daniels & Indiana’s grim fiscal situation

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The Indy Star has an article on Indy’s grim fiscal situation entitled ‘No more gimmicks’ left to try

Budget experts say Daniels and the legislature have little room to maneuver during the four-month budget session that must end by April 29. They say swift action is needed if — before the next economic slump — state officials hope to close Indiana’s nearly $600 million deficit, make up more than $700 million in delayed payments to public schools, local governments and state universities and stabilize cash reserves. “We don’t have any cushion at all,” said Larry DeBoer, a professor of agricultural economics at Purdue University and an expert on state finances who works with the nonpartisan Legislative Services Agency.

. . .

The state only recently began to project significant revenue increases after nearly four years of growth in the national economy. Meanwhile, Indiana and other states are under economic and political pressure to boost funding for K-12 education, Medicaid and other programs.

“Business-as-usual budgeting won’t do the trick,” Purdue’s DeBoer said. “We cannot rely on revenue growth alone to get us ready for another recession.”

If Larry says it, I believe it.

Seems to me, though, that smaller tax increases and smaller cuts in services years ago could have made this whole adjustment a lot less painful. The Dems have to bear a lot of that blame since they held the Governor’s Office and the House. But, the Republicans anti-taxation jihad hasn’t helped matters. I like that it’s put some pressure against the expansion of government, but it has also made even necessary and reasonable tax increases impossible. In my mind, it’s federal taxation that’s really hurting the average citizen. State and local taxes seem relatively minor compared to what you get back.