I just turned 50, and it's past time for a mid-life crisis. I feel the need to take a risk, to do something dangerous. Hang gliding? Running with the bulls at Pamplona? No, I mean really dangerous. I'm going to say something nice about the property tax to an audience with strong ties to agriculture.
The property tax raises more than $5 billion a year for Indiana governments. It is a stable and predictable revenue source. It works for local government. And we're improving its administration.
Lots of revenue
Agriculture has a counter answer for all of these points, of course. The property tax is a big revenue raiser for counties, cities, school corporations and other local governments. But the state sales tax raises about as much as property tax, and so do the individual and corporate income taxes combined. We could eliminate property taxes and replace the revenue with those taxes.
We could, but we won't. Back in 2004, an Indiana General Assembly commission studied what it would take to eliminate the property tax. A sales tax rate of 13 percent would do it. So would an income tax rate of 8 percent. Legislators gasped. This past session, the House passed a bill to eliminate property taxes but didn't say how the money would be replaced. The Senate ignored the idea. We could reduce our reliance on the property tax—and we have—but elimination seems unlikely.
Predictability a plus
It's a stable, predictable tax. Assessed value, the base of the property tax, does not swing up and down as much as income and sales. When it does change, local governments adjust tax rates to guarantee the revenue they've budgeted.
That's the problem, says agriculture. Government sends the farmer a tax bill based on the assessed value of land, regardless of whether the farmer made money that year. The tax is stable because it ignores fluctuations in ability to pay.
Property stays put
The property tax works for local government. Local government has a problem with “mobility” of tax bases. These governments are small in land area, which means people can easily shift their activities to a nearby jurisdiction. For example, if one county taxes sales more than another, people shop in the low-tax county, or if one county taxes income more than another, people move to the low-tax county.
While some parts of the property tax base are mobile, such as business location and housing construction, land is not mobile at all. A farmer could sell his land to escape high property taxes, but the land stays put, and the new owner pays the taxes.
That's not equitable, says agriculture. Businesses and individuals can adjust their behavior to escape high taxes. Farmers can't. Even if a farmer sells because of a tax hike, the price he gets will be lower, because the higher taxes make the land less profitable.
Property tax administration has been chaotic lately, mostly because of the move to market value assessment. The switch to this new method of measuring property values delayed tax bills in a lot of counties and caused big changes in tax bills for most taxpayers.
We expect this chaos to end. Market value assessment should improve administration. Assessments are now rough predictions of selling prices. If a property is assessed too high, the owner will know it and can appeal. The taxpayer can audit the assessor.
This may tempt assessors to underassess property. Another problem, says agriculture. Farmland assessments are based on a simple use-value formula, so it doesn't get underassessed. If other property is assessed low, farmers will pay a bigger share of the tax levy.
Indiana has just finished a statewide study comparing assessments and sales prices. Now the state's Department of Local Government Finance needs to use this information to fix assessment problems. Property owners press assessors from above, so the state must press from below. Squeezed between the two, assessments should become more accurate.
So that's what's nice about the property tax. It raises a lot of money, it's stable, its tax base isn't very mobile, and we've got a chance to improve its administration. But despite my mid-life crisis, “danger” is not my middle name. I don't intend to persuade farmers to support the property tax, because just about every property tax “pro” is a “con” from agriculture's point of view. It makes sense for agriculture to oppose property taxes and to work to see them reduced.
An expert on state and local public policy, Larry DeBoer has created computer models for analyzing tax structures and revenue, which have been used by the Indiana General Assembly, particularly during reassessment and property-tax restructuring. He created the Indiana Local Government Web site to help citizens understand tax and budget issues.