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Knotty Problems in Property Taxation
I did a lot of reading about baseball when I was a kid -- being a big fan but a mediocre player -- and one of the books I remember was called "Knotty Problems in Baseball." It was full of rulings on strange situations, for example: A fly ball knocks a pigeon out of the sky. The left fielder catches the ball; the center fielder catches the bird. Is the batter out?
Now I spend more time on property taxes than baseball, but I'm still finding knotty problems. The new two-percent credit, also called a "circuit breaker," has created a bunch of them.
The two-percent credit is a new kind of property tax relief that has only been used in Lake County so far. It takes effect across the state for residential property owners in 2008 and for all property owners in 2010. The credit limits each taxpayer's property tax payments to a maximum of 2 percent of assessed value, before deductions. Local units that are affected will have to make due with less money. The state will not reimburse them.
Here's a knotty problem. Each taxpayer's tax bill is the sum of payments to a county, township, school corporation, and (usually) a town or city, library district, and other special districts. If these payments exceed 2 percent of the property's assessed value, each jurisdiction will lose part of what it would have collected.
This means that each government's budget depends on the actions of the other governments who share its taxpayers. If a school corporation builds a new high school, which pushes the tax bill above 2 percent, the county, township, city and library all lose revenue. More than that, under our usual budget procedures, the total tax rate isn't known until after budgets are set. Governments will have to set their budgets without knowing how much property tax revenue they'll receive.
Perhaps we'll have to create a new budget process, one that requires governments that share taxpayers to consult with each other before passing their budgets. Some governments will have to do a lot of consulting: Culver Community Schools, to name one, is located in four different counties.
Here's another knotty problem. Some jurisdictions will lose a very large part of their budgets, once all taxpayers are eligible for the credit in 2010. Recent estimates by the Legislative Services Agency show, for example, that the cities of Gary and East Chicago could lose 30 percent of their budgets; South Bend and Mishawaka 15 percent; and Logansport and Muncie 10 percent. Even people who think these governments spend too much might agree that cuts this big, all at once, could create trouble.
Perhaps we'll have to create other revenue sources for local governments. For example, the Indiana Association of Cities and Towns has suggested a new local income tax in their Hometown Matters proposal.
Here's one more knotty problem. Local governments borrow money to build infrastructure and to fill in temporary revenue shortfalls. Bond buyers lend their money to local governments for the interest they can earn. Bond buyers really, really want to be repaid. Before, Indiana local governments could pledge all their property taxing power to debt repayment. The tax rate was set as high as needed to make the debt payment for the year.
The two-percent credit puts a new limit on how much the property tax can raise. Bond buyers might decide that lending to Indiana local governments is riskier than it used to be. Riskier loans require higher interest rates, and that makes borrowing more expensive. I saw one news report that said the town of Munster is already facing higher borrowing costs.
The state's Department of Local Government Finance has issued a memo to try to reassure bond buyers that they have first call on local taxes. Perhaps that will be good enough, but it's more likely that bond buyers will want to be reassured with a law, not a memo.
Resolving these knotty problems may take a lot of thinking and much debate in the General Assembly next year. In the baseball knotty problem, the batter is safe. Local government officials must be wondering, come 2010, will their budgets be safe, too?