Property tax crisis deals Indiana a blow

Many called it "the perfect storm." But in retrospect, the dark clouds of Indiana's 2007 property tax crisis had been forming for years.

Legislators caught wind early that something was amiss and spent all spring preparing to weather the impact. Alarm sirens rang in April, when the Legislative Services Agency estimated that Hoosier homeowners faced an average 24-percent spike in their property tax bills.

Fearing voter wrath, lawmakers approved a plan to allow slot machines at Indiana's horse tracks. The resulting $550 million in licensing fees was supposed to underwrite property tax rebates.

It wasn't enough.

When homeowners began receiving their bills, increases actually averaged closer to 35 percent. And some tax bills–particularly in older, urban neighborhoods–were far higher. Shocked and angry, homeowners staged massive public protests. Gadflies called for complete elimination of the property tax. In response, Gov. Mitch Daniels froze bills July 18.

Opinions about the crisis' origins were varied, as there were plenty of culprits. Some pointed to the state's poorly handled attempts over the last decade to move Indiana to a market-based property assessment system. Others cited the abolition of the business inventory tax. It became clear there were systemic problems, too, such as an antiquated information technology system, wildly inconsistent tax abatement policies and poor oversight of local government spending.

Investigations ensued. State Sen. Luke Kenley spearheaded a special legislative commission that listened to public testimony about every aspect of the property tax system throughout the fall. Meanwhile, former Gov. Joe Kernan and Indiana Supreme Court Chief Justice Randall Shepard studied the structure of Indiana's local government and recommended it should be streamlined to cut costs.

In late October, Daniels proposed his solution, a "cut and cap" plan that would establish separate property-tax ceilings for residential property, rental property and business property. Homeowners would pay no more than 1 percent of their properties' assessed value, rentals 2 percent, and businesses 3 percent. Others–including Kenley, State Rep. David Orentlicher and the Indiana Farm Bureau–proposed plans of their own.

At year-end, it was clear legislators will have their hands full during the 2008 General Assembly as they reform Indiana's property taxes.

But there also was concern about unintended consequences. Local leaders are especially worried about the tax and service disparity between Marion County and its surrounding "doughnut" counties. Proposed changes to the tax system could make urban properties even less attractive and spur migration from the city.