Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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A Non-binding Recommendation

The big new tax reform law passed by the General Assembly in March adds a new feature to the process of setting local taxes. At least 15 days before budgets are adopted, all the non-school governments in a county must submit their proposed budgets, tax levies and tax rates to the county council.

This is Section 148 of House Enrolled Act 1001. You can find it on the General Assembly's Web site, at www.in.gov/legislative/bills/2008/HE/HE1001.1.html.

The county council is supposed to review each government's budget, comparing them to each other and to statewide and county incomes. Then, the council makes a non-binding recommendation to the other local governments about the tax rates, levies and budgets.

This may be the legislature's effort to give someone oversight of all local government in a county. The county council is elected by all of the county's voters, so the review responsibility was given to them, instead of creating a whole new level of government. The Local Government Reform Commission report from last December had several recommendations about such oversight.

What will county councils make of this new responsibility? It might take some nerve to recommend cuts to a city's budget based on a review of a few days, after the city has worked on it for months. Perhaps some councils will issue long reports justifying their opinions. Others may issue one-liners that say, "Nice job, everyone." In any case, the recommendations can't be enforced. That's the non-binding part. They may only be effective if they influence public opinion.

And yet, this part of the tax reform law may play an important role in the budget process.

The new circuit breakers limit tax bills to a fixed percentage of a property's assessed value. Taxpayers will get a credit if their tax bill exceeds this limit, and the amount that they don't pay is revenue that local governments won't collect. The tax rate that sets this tax bill is the sum of the tax rates of the county, township, city, school corporation, library district and other special districts. Circuit breaker revenue losses are divided among the local units, based on their shares in the overall tax rate.

That means that local governments can't know how much they'll receive in revenue, until the other local governments set their tax rates. No one can budget until everyone budgets.

The new requirement that tax and budget proposals be submitted to county councils may provide a way out of this budget quandary. The council could sponsor an analysis of the levies and rates -- essentially a simulated tax billing – that would produce estimates of circuit breaker credits for each taxpayer. Add up the credits and divvy them up among local governments, and they'll have some idea of how much of their property tax levy they'll actually collect. They could then revise their budgets.

This analysis is easy to describe, but it's actually a major (major!) bit of number crunching, beyond anything we've asked of county officials before. Some problems with it:

* School corporations aren't required to participate. Circuit breaker credits can't be estimated without school tax rates. Maybe school officials will want to participate in the process, since they need circuit breaker estimates for their budgets too.

* Assessed values won't be available in time to do the analysis. Assessments have been delayed in most counties. The analysis may have to use estimated assessed values.

* Fifteen days is too short a time before budgets are set. Local governments may have to start meeting together sooner.

* County auditors and treasurers don't have the software to do this kind of number crunching. It's a simulated tax billing, which they do every year anyway. But, in some counties, the tax billing software isn't set up for simulations, and county officials don't want to risk creating bogus tax bills.

Counties may decide to turn the problem over to their consultants, at least this year.

Or perhaps, this year, the analysis won't get done. What then? Local governments will know that they'll be collecting less than their full property tax levy. They just won't know by how much.

And that means they'll have to pass some pretty conservative budgets.



Writer: Larry DeBoer
Editor: Cindie Gosnell