By Howard Greninger, The Tribune-Star, CNHI News Service
howard.greninger@tribstar.com
TERRE HAUTE - Finding ways not only to reduce but also to reform property taxes, plus make changes in local government, is the primary challenge for legislators as the 115th Indiana General Assembly opens today.
With election season looming for many lawmakers, achieving major legislative reforms won't be easy. With only 30 session days to work with, time will also be a factor. Lawmakers have until March 14 to get things done.
The legislative table is full of proposals to consider, and discussion on the most contentious of them has already begun. At the center of the storm is how to replace lost revenue if measures are adopted to reduce reliance on the property tax.
Some lawmakers are concerned that property tax reform proposals, which rely on replacing property tax revenue with several different sources - including increasing sales tax, using state wagering taxes and creating a new homestead credit - will ultimately result in the need for higher local income taxes.
That could mean some Hoosiers will pay more overall in taxes than they do now.
"It will happen to some folks," said Larry DeBoer, professor of economics at Purdue University. DeBoer has testified before several legislative tax committees this year.
"It depends. You got a property tax relief, then you got income and sale tax increases. So what really matters is are you property rich and income poor or income rich and property poor. So, folks who have a high income relative to the house that they own will probably pay more, while folks who have high home values relative to their income, they probably pay less," DeBoer said.
Gov. Mitch Daniels' tax reform proposal would increase the state sales tax by 1 percent, raising about $928 million, all used for property tax relief.
Wagering taxes, expected to be about $100 million in 2009, already is earmarked for property tax relief. The governor's plan also uses more than $2 billion in money from the state's Property Tax Replacement Credit fund.
The most significant change, DeBoer said, is an additional 35 percent homestead credit. "Most of the tax relief comes from this 35 percent additional deduction. And what that will do is reduce homeowners' assessed values and end up funneling almost all of that $928 million in new sales tax money to homeowner property tax relief," DeBoer said.
"So homeowners, most of them, will probably end up with a net tax cut. Yes, they will pay more in sales tax, but they'll get property tax relief," DeBoer said.
The Indiana House has kept the governor's property tax reform plan in one bill, HB 1001, and the House Ways and Means Committee already has conducted public meetings on the bill.
The Indiana Senate has split the governor's plan into 11 bills and three constitutional amendments. The Senate also has conducted committee meetings on those bills.
"There are numerous aspects to property tax reform that are especially complex, and require extra scrutiny and dialogue," said Senate President Pro-Tem David C. Long, R-Fort Wayne.
"Among them are issues such as spending controls for local government; referendums vs. remonstrances for large capital projects; the proper debt ratio that should be allowed to exist in any one government unit; and the makeup of local tax control boards, as well as the extent of power that each such control board should wield," Long said.
The Senate, Long said, has several bills of its own that extend beyond the governor's proposal, including a constitutional amendment preventing property taxes from being assessed against churches; a bill that would create a clearinghouse for construction plans for school buildings; and a method to allow counties currently under reassessment to get a tax break to their property owners sooner.
"The Senate majority has publicly stated that the governor's proposal is a strong, dynamic tax reform concept, and is the foundation upon which a property tax reform package will be constructed," Long said. "However, the governor, himself, acknowledges that there will undoubtedly be changes to his proposal as the legislative process takes its course, and that these changes might very well improve what he has already proposed.
"What we all agree upon is that a property tax reform package must pass this next session, and that package must significantly cut and cap property taxes for all Hoosiers, and that those cuts must be made permanent through amendments to our Constitution. Anything less than this is unacceptable," Long said.
Finding a fair system
Rep. Clyde Kersey, D-Terre Haute, sits on the House Ways and Means Committee. Kersey said the House decided to keep the governor's plan as one bill.
"Usually when you break it up into 11 bills, it loses its impact. The chances of 10 or 11 bills passing is not nearly as good as one bill with amendments," Kersey said.
The governor's property tax reform bill is extensive, Kersey said, yet one area he thinks the General Assembly should concentrate on is assessments.
"Since only about 58 percent of the township trustee/assessors are certified, meaning they have passed level one or level two [certification courses], I think that is one area of reform we must look at. One reason that so many people are upset about their property taxes is the fact that they don't feel like their assessments have been done fairly, and I think they are right," Kersey said.
"One thing that we must look at in this legislative session is to try to come up with a system where everybody's house is assessed fairly. I know that is difficult, but it is one area of Daniel's property tax relief bill that we must look at," Kersey said.
In addition, Kersey said if the state assumes the financial responsibility for schools' general and transportation funds, as well as welfare, and enacts the governor's 1 percent cap on residential property, "there still is a shortage of $702 million.
"That is a statewide shortfall that the counties will have to come up with some way of paying. That is why there is a provision put in there for counties to adopt a new tax, called LOIT, the local option income tax, to make up the difference in what they lost in the cap on property tax," Kersey said.
"This is a real problem we need to look at in this bill. We have to look at it from the standpoint that people will save a few hundred dollars on their property tax. That is because about 55 percent of the people who pay property tax are near the 1 percent cap level now. But we have to look at what they are saving in property tax versus the additional money they will be paying out in sales tax and local option income tax," Kersey said.
"And if that money, the sales tax and local option income tax, is higher than what they would be saving on property tax, then this is kind of ridiculous to even look at," Kersey said.
"I think we need to have LSA [Legislative Services Agency] run some numbers for us to see if, in fact, people would save if we put this [governor's plan] bill into effect," Kersey said.
In addition, counties bordering Illinois could see an impact on retail business, Kersey said, as Illinois has a local option sales tax, which is now about 6.55 percent. If Indiana raises its sales tax to 7 percent, those shoppers may go elsewhere.
Farmers also are expressing concern to legislative committees, saying they will be treated as small business and have property taxes capped at the higher 3 percent. In addition, farm property, now assessed at $880 an acre, will increase to $1,140 an acre if the proposed bill passes.
Owners of apartment houses would see a 2 percent cap on property taxes, but that increase most likely would be passed onto renters.
New struggles
Ed Feigenbaum, a lawyer and publisher of Indiana Legislative Insight, said early committees in the Legislature have exposed some unforeseen issues.
"We have seen that some of the things that we thought were potentially no-brainer type issues are all of a sudden developing into a little bit more than people thought. Issue such as TIF districts, local assessors and some other issues that get wrapped up in everything," Feigenbaum said.
"You have not seen any of these discussed in committee in the month of December without some substantial questions and opposition being raised. Apartment owners who question some of the concession to only homeowners, you have the agricultural interest that questions why they are not receiving substantial relief, you have business interests suggesting that differential caps are unconstitutional and that they have given enough toward property tax relief," Feigenbaum said.
"All kinds of different issues have emerged, some of which were not anticipated when the package was advanced by the governor and others who have been involved in it," he said.
In the end, local governments will have to make cuts, which could leave some taxpayers asking "what happened to my trash pickup, what happened to my pothole repair and what happened to my police, fire and emergency medical services," Feigenbaum said.
"If you believe the governor, the tax end of this is not so much of a concern. He claims there will be a $1.95 reduction for every dollar of new sales tax, so it is not a revenue neutral, but a revenue positive proposition for the taxpayer," he said.
"The restructuring in 2002 was presented to taxpayers as a revenue neutral proposition, while property taxes were cut substantially back then and replaced by an increase in the state sales tax and individual income tax ... property taxes have also increased and have in many cases, exceeded where they were before restructuring, so that people are paying in the aggregate more in taxes despite that being presented as a revenue neutral proposition," Feigenbaum said.
"So voters are naturally skeptical of anything that is presented as a win-win proposition or as a revenue neutral kind of matter," he said.
Curbing tax breaks for businesses
Sen. Luke Kenley, R-Noblesville, chair of the Senate Tax and Fiscal Policy committee, is one legislator questioning the use of Tax Increment Finance districts, or TIFs. He has authored a bill that would restrict TIF districts, saying homeowners facing higher property tax bills are frustrated by tax breaks for businesses.
"TIFs are an important economic development tool for local government, but they have expanded the use of them in ways that might be considered detrimental to the taxpayer or are somewhat beyond the scope of what we originally conceived on those," Kenley said. "What we are trying to find are ways to control those.
"There is an element of what is the natural growth of a community without these kinds of incentives. For example, the schools and other taxing districts are missing out on the normal growth of an area that occurs from new businesses coming into an area," Kenley said.
Schools miss out "because that growth portion has been appropriated to be put into infrastructure and dedicated as a property tax use," Kenley said.
Kenley seeks more scrutiny on TIFs and suggests that any new TIF be reviewed by elected officials. Currently TIFs are approved by redevelopment commissioners, which are appointed boards. Existing TIFs would be grandfathered in under Kenley's proposal.
Kenley said with tax reform on the table, he wants to look at TIFs. "We are looking at the entire property tax system and sometimes if you improve the details of the system that may affect small parts here and there, you make the whole system be more fair," he said.
As with other legislators, Kenley said tax reform, largely using income taxes, will result in some paying more in taxes.
"That is clearly true, there will be some winners and some losers. The distinction I would make is that if you do have income, at least you do have the ability to pay the tax. Whether that is a good idea to assess that on you or not is another question," Kenley said. "Sometimes when you have property, you may or may not have the current ability to pay the property tax being levied against you. That points out the disconnect between the assessed value and your true ability to pay. Your true ability to pay depends on your cash position and your income.
"We may not like the income tax, but we do know that you don't pay unless you made income," Kenley said. In addition, he said Indiana has a provision that exempts certain low-income people from the state's income tax.
Eliminating township assessors
One provision under Gov. Daniels' plan is to eliminate Indiana's 1,008 township assessors. It's a plan Rep. Bruce Borders, R-Jasonville, a member of the House Local Government Committee, can't support.
"I have been the lead dog in fighting that proposition," Borders said. "I want someone who is elected I can kick out of office if they are doing a lousy job rather than someone appointed. If we hire a bureaucrat, what are the odds of a resolution if I disagree with my assessment?
"Counties already have the option to privatize [assessments] if they prefer. Where is the savings involved in this [eliminating local assessors]? It will probably end up being even more expensive," he said.
Borders said he does appreciate the effort by Gov. Daniels and the Indiana Commission on Local Government Reform in trying to find ways to reduce government expenses.
That commission in December made 27 recommendations that, if enacted, would reduce the number of local government units by 37 percent and the number of elected officials by more than half. That means up to 5,843 fewer elected officials and 1,155 fewer units of government. Among those recommendations was the elimination of township government.
The commission was co-chaired by Randall T. Shepard, chief justice of the Indiana Supreme Court, and former Gov. Joseph Kernan.
House Speaker Pat Bauer, D-South Bend, said he thinks the "elimination of township government may be to the extreme and probably impossible. But I also say it [the commission] gives a boost to streamlining and reducing the number of assessors in the reassessment kitchen. I think that is an important thing to do for greater efficiency and better assessments.
"I think the timing of this wasn't meant for this year, or it [the commission study] would have been out at least in midsummer. Overall, I think the bulk of this will be discussed in future gubernatorial elections, including the one coming right up. The bulk will be in future legislatures and future elections," Bauer said.