Tax-cap amendment means change for local government

The likely passage of a measure to make property tax caps part of the state constitution will mean changes for local government.

Cuts in services, higher fees and consolidation of government units are among the developments some experts are forecasting should Public Question No. 1 on Tuesday’s ballot pass.

“These are real possibilities—they’re not scare tactics,” said David Bottorff, executive director of the Association of Indiana Counties. “It’s definitely forcing all units of government to look at services they provide.”

Advocates for the constitutional amendment say Indiana residents need long-term certainty about their property tax rates.

The caps of 1 percent of assessed value for homestead property, 2 percent for farm and other residential property, and 3 percent for business property went into full effect this year. Putting them in the constitution would make it difficult for future lawmakers to reverse the policy.

Before Tuesday’s election, the measure appeared poised to pass. The Associated Press reported a recent poll found 60 percent of likely voters supported the caps being in the constitution.

According to the Legislative Services Agency, property owners got about $365 million in breaks under the caps this year, about half of which went to owners of rental properties and second homes. That number excludes Lake and LaPorte counties, for which data is not available.

That also means a hit to local government units. Most counties lost at least some percentage of their property tax revenue under the cap—with some losing as much as 23 percent this year.

To cope, at least initially, cities and counties have looked for ways to be more efficient—for example, by jointly purchasing supplies such as road salt or by moving certain services online.

Others have focused on efforts such as reducing employee health care costs by opening clinics where workers can seek preventive treatment.

In some places, there have been service cuts. The Indianapolis-Marion County Public Library, for instance, is reducing hours by 26 percent across the system to help head off a $2.5 shortfall this year due to property tax losses.

But some say those moves are only part of the solution.

“There are things that will be done initially to find some money,” Bottorff said. “But over the long term, clearly other alternative revenue sources are going to have to be found.”

In some areas, that likely will include raising local income taxes, as about 23 counties have done to offset the need for property tax revenue, Bottorff said.

Governments also could start collecting fees for more kinds of services, such as restaurant inspections or the use of parks.

“I think we’ll see every year from now on local government organizations coming forward and asking the legislature for additional revenue options,” said Larry DeBoer, a Purdue University professor who has studied the caps’ impact in detail.

DeBoer said it’s likely that governments also will more stringently monitor homeowner deductions to make sure all assessed value that should be taxed is on the rolls. And it’s possible they could consider whether some tax-exempt properties should receive those exemptions.

“For years, there was pressure to reduce the assessed value,” DeBoer said. "Now there is pressure to increase it."

He added he thinks it’s unlikely assessors would unfairly hike property values simply to collect more revenue. Controls such as oversight from the Department of Local Government Finance would prevent that.

There also could be pressure to consolidate more government services. Some experts have said a push to eliminate township government could get more headway this year because of the limitations imposed by the caps.

Merging other units, such as small school districts, also could occur.

“You can only cut so much. There’s a level of service the public expects,” said John Ketzenberger, president of the Indiana Fiscal Policy Institute, which is expected to release a report on the caps later this month. “(Governments) have to deal with the new reality of property tax revenue to meet the same expectations.”

Some experts don't expect the caps to be a long-term problem for the state's economy. The Center for Business and Economic Research at Ball State University conducted an in-depth study this year that concluded that the caps "are expected to have a positive effect on the Indiana economy in the long run, increasing employment, income and investment."