By Peter Schnitzler, The IBJ
pschnitzler@ibj.com
Indiana's property tax woes are already a headache for Marion County homeowners. Now the cure is becoming a migraine for area businesses, local elected officials and regional economic developers, too.
"You just can't find any other word to describe property tax assessment in the state of Indiana than a failure," said Pat Barkey, a research economist for Ball State University. "My gosh, look at the results. It's been horrible from A to Z."
Marion County homeowners are still shaking their heads with disbelief at the 35-percent average increase that arrived with their property tax bills last month. Some unlucky outliers saw their taxes double or more. Faced with the ire of organized protesters, local officials begged for immediate help.
Gov. Mitch Daniels, a Republican, delivered on July 18, when he ordered all Marion County property tax bills to be frozen at 2006 levels until a reassessment of every property in Marion County can be done.
The response was a collective "thank you" from both sides of the political aisle.
But now reality is starting to sink in. And it's not pretty. Daniels has expanded the reassessment into Gibson, Porter and Delaware counties. Observers speculate it ultimately may spread far wider. The process is expected to take six to eight months.
In the meantime, uncertainty abounds, especially in Marion County. Local schools and agencies had been expecting to receive $1.42 billion in property taxes this year. Instead, for now, they'll receive the same $1.29 billion they got in 2006. That's $132 million less than they had planned for.
"The governor, bless his heart, did what he felt he had to do, but without having the time to fully analyze the impact of it," said City-County Councilor Jackie Nytes, a Democrat and chairwoman of the Council's Economic Development Committee.
"Politicians want to be responsive to a very frustrated electorate. That's what the governor did, and I appreciate his quick response. But unfortunately, like so many things, without enough time to dot all the I's and cross the T's, we've left a lot of important questions on the table."
"We've got to find a way here to not do more damage while we're looking for fixes," she added.
Local government shortfalls
Local schools were hardest hit-led by Indianapolis Public Schools, which had increased its property tax levy $37 million from 2006. Together, schools accounted for $63 million of the 2007 property tax increase.
They'll get the money-eventually. After the reassessment is finished, reconciled property tax bills will be distributed. But in the meantime, schools are calling off or delaying capital projects and bond issues. And to make up for operating shortfalls, they're selling tax-anticipation warrants to raise cash.
Jim Merten, vice chairman of Indianapolis-based investment banking firm City Securities Corp., pointed out that the unexpected borrowing isn't free.
The cost of interest will affect classrooms, libraries and other government services underwritten by property tax.
"It's not huge dollars, but it's lost dollars that could have gone to normal budgetary items," he said.
What's more, the longer Indiana's property tax system remains unsettled, the more likely debt-rating agencies will grow uneasy and issue downgrades-a move that forces borrowers to pay more in interest.
"If [school and agency] cash balances are drawn down because they have to pay more on short-term borrowings, it's not good for their credit rating. Eventually, it will cost everybody. That's why this really needs to be fixed."
Countywide reassessment
Tax shocks are in motion for businesses, too.
The reassessment of all Marion County properties is based on the suspicion that commercial and industrial properties were not properly valued at their market rates by assessors.
According to Daniels and the Indiana Department of Local Government Finance, which oversees property taxes, assessments for 16,000 of Marion County's 22,100 commercial and industrial properties did not change during the last six years.
Determining real market values for commercial and industrial properties is inherently more difficult than it is for homes. Unlike houses, businesses change hands infrequently, so there's less true market data available.
Additionally, many industrial or commercial properties are dedicated to a niche use. That makes them harder to assess than homes in a neighborhood, which can be compared to their neighbors.
If the reassessment ultimately shows that commercial and industrial properties have been undervalued, a significant portion of Marion County's $132 million property tax increase will shift from homeowners to businesses.
"The beautiful thing about numbers, a four is a four is a four. It's not subjective," said Marion County Treasurer Mike Rodman. "If you've got business and residential, and together they're going to make up the $1.4 billion we need and one goes up, the other is going to come down accordingly. This is not rocket science."
On the other hand, Marion County's commercial and industrial assessments may not be as far off as expected-at least in the aggregate.
Nytes said the reassessment may show significant increases in market value for certain properties over the last six years. But that could be offset by the loss of other large businesses. Shuttered auto plants for example, which once produced a large share of the area's industrial property tax, are now off the rolls.
"I have to believe there will be some gain in the net value of commercial property. But I will be surprised if it's as great as some people have assumed it will be," she said. "I'm not holding my breath for huge increases."
Economic development liability
Business managers attempt to eliminate uncertainty wherever possible. So Indiana's property tax problems make economic developers' jobs more difficult.
When businesses consider expansion or relocation, they try to project the relative costs of competing locations. Until Indiana's property tax problems are settled, economic developers can't answer a number of prospects' basic questions, which Indianapolis Economic Development Executive Director Jeb Conrad said often start with "cost, cost, cost."
"How do we effectively tell a company what its liability is going to be without knowing where it's going?" Conrad said.
Barkey agreed that's a challenge. But he noted that, however the tab ends up being divided, Indiana's property taxes remain low compared with many other parts of the country.
Other issues-such as the cost of land, the rising price of energy, the relative reliability of infrastructure and many others-weigh just as much on managers' minds when they consider a business expansion or relocation.