Tax caps: Savings for taxpayers, but mixed bag for cities

Yorktown Community Schools and Delaware Community Schools—both in Delaware County near Muncie—have similar enrollments, budgets, assessed values and tax rates.

But, last year, Delaware Community Schools received $293 per student more in property tax revenue than Yorktown Community Schools.

How did two nearly identical school districts in the same Indiana county fare so differently?

Simple: Property tax caps.

Since Delaware Community Schools covers a wider area that is more rural, and Yorktown Community Schools is located in a smaller area that includes a larger town, each school district fell into different taxing units with different rates—and was taxed accordingly.

The differences meant Delaware lost just 3.8 percent of its levy—the amount it is allowed to collect in property tax dollars—to property tax cap credits. Meanwhile, Yorktown lost 14.9 percent of its levy.

That’s just one example of unintended consequences from property tax caps, arguably the biggest state policy change in recent history.

“Because one district overlapped with a town, they’ve got different amounts of revenue to work with,” said Larry DeBoer, a Purdue University economist. “The tax cap credit system is just a few hundred words [in law]. But once you start overlaying that on the whole rest of the budgeting and taxing system, then you get these sometimes strange and unexpected results.”

New analysis from the Indiana Fiscal Policy Institute shows property tax caps, which were first applied in 2009, are having drastically different effects on Indiana cities.

"The short story: Taxpayers have benefited from the caps, but the lost revenue has had a dramatic effect on local governments, especially in parts of the state that are not experiencing growth,” said John Ketzenberger, president of the institute.

New reports, authored by DeBoer and retired Community Research Institute director John Stafford, found that property tax caps have hit harder older, industrial cities while the growing Indianapolis suburbs and thriving college towns are faring quite well.

One study looked at 18 of Indiana’s biggest communities, from Gary to Lafayette to South Bend to Terre Haute. Indianapolis was not included in the study because of the complexities of its consolidated city-county system.

Overall, the 18 municipalities experienced a 21 percent reduction in their combined certified levies.

But here’s how big the spread is: The impact of the property tax caps reduced Muncie’s verified property tax levy by 45 percent in 2015. But it had little impact on Bloomington, with a 0.8 percent reduction to the city’s levy.

The suburban cities surrounding Indianapolis have fared much better in the property-tax cap world than some of the more industrial cities like Gary, South Bend and Anderson. (Lafayette and Bloomington, the homes of Purdue University and Indiana University, also have made out pretty well under these circumstances.)

Carmel had a 2.5 percent circuit breaker loss as a percentage of 2015 its property tax levy. Fishers had a 4 percent loss. Greenwood had a 7 percent loss. Noblesville had an approximately 18 percent loss, which was closer to average.

“They were very different, in some respects, than most of the municipalities which tended to be historically industrial-based tax bases,” Stafford said. "Many of them had circuit breaker losses in excess of 25 percent.”

Some of the suburbs are also in a better position because of the growth in income tax.

"The growth in personal income in Hamilton County has enabled them to receive income tax distributions that have grown substantially over the study period,” Stafford said. "Not all have faced that luxury."

Moving forward, the researchers said local option income taxes will likely become an even more important source of a community's revenue—and Stafford said localities will likely fight for more autonomy from the state government.

“The tax caps are here to stay,” Stafford said. “It means for urban areas a greater and greater reliance on income taxes. You’re going to see local units continue to try to diversify their revenue streams and they’re going to look to the General Assembly, where it’s necessary, for more local authority in being able to make those decisions."

And DeBoer said there is still more studying that needs to be done on a central question: Did the real-world effects of property-tax caps match up to what the people wanted out of them?

"I think we’re still working on just what the voters meant when they voted in the constitutional amendment,” DeBoer said. "Did they mean that our local governments were too big and providing services they didn’t want? Or maybe they meant we like our local government services and we think they could be provided more efficiently. Or did they mean we like the services or we’d rather pay for them with some other tax?

“We’re just beginning to work out the consequences."