Property Tax Rebate Not Placating Hoosier Homeowners

More than a month after Indiana lawmakers passed legislation providing temporary property tax rebates to help offset rapidly rising home values, people are apparently not buying it. The Indianapolis Star notes that several property assessors in Marion County have requested police protection against irate homeowners when their tax bills arrive.

In a sense, these homeowners are right. When your property tax bill goes up 20 percent over a period when you haven't gotten 20 percent richer, the property tax can seem pretty unfair.

But Indiana faces special circumstances. The state has been notoriously bad at accurately assessing property values-- and much of what's happening now is simply rectifying past wrongs.

That doesn't make the tax hikes any more painful for Indiana homeowners-- but it's important to understand that one underlying factor here is that the property tax system is finally working right.

What angry homeowners should know is that even with the improvements in assessment practices, it didn't have to be this way. Lawmakers could have enacted tax changes that shift Indiana's tax system away from the property tax towards some other source. But instead, they chose to leave property tax bills alone and provide highly visible "tax rebates" that won't arrive until weeks, or months, after homeowners have paid their property tax bills.

Lawmakers are probably patting themselves on the back for their PR ploy of sending a check in the mail to aggrieved homeowners-- but the self-congratulation may end soon if this (preventable) voter outrage over rising property taxes continues.

Great New Health Care Program-- Funded by a Puff of Smoke

The good news: low-income Indiana families will have better access to health insurance as a result of new legislation signed into law by Governor Mitch Daniels.
The bad news: it's being paid for with a cigarette tax increase.

Why is this bad news? A history lesson may help explain.
Back in 1987, Indiana lawmakers increased the cigarette tax from 10.5 cents to 15.5 cents per pack. In the first full year after implementing the higher rate, the cigarette tax brought in $116 million. Fourteen years later, in fiscal year 2002, the tax was still being collected at the same 15.5 cent rate-- and tax collections had increased only a tiny bit, to $123 million. That works out to a growth rate of about half of one percent each year.

To put this in context, a good indicator for the cost of any public service is inflation. The cost of most things that government (or any private firm, for that matter) produces tends to go up at least with inflation each year. If the Indiana cigarette tax had grown just at the rate of inflation during this same period, cig tax collections would have been $176 million in 2002, far above the $123 million actually collected.

Put another way, whatever public services the cig tax was paying for in 1987, it was paying for about 2/3 of those services in 2002.

The lesson for today? It's great that Indiana is demonstrating a commitment to funding low-income health insurance. But to the extent the cigarette tax is where the money is supposed to come from, they've tapped a dry(ing) well. As if to drive this point home, here's a quote from a Courier Press article on the cig tax hike:

During a speech Thursday in Evansville, Rep. Suzanne Crouch emphasized the cigarette-tax health care plan is not an entitlement program.
"The number of individuals who can participate (in the plan) is dependent upon the amount of funds that are available," said Crouch, R-Evansville.

D'oh! And here's Gov. Mitch Daniels on what needs to happen next:

Now we must go about the difficult business — harder than you may think — of reaching those who would like to stop smoking with help...

In other words, now that we've hiked the cigarette tax to pay for health care, we're going to use the cigarette tax to get people to stop smoking- -which means less health care.

The funding picture is more complicated than this, of course. There are federal matching dollars involved, which will presumably help the state to adequately fund this important health policy goal:

Increasing the cigarette tax is expected to bring in $206 million more revenue annually. If the federal government approves the plan, money from the tax increase could leverage more federal dollars and generate a combined $750 million to $800 million a year, officials said.

But it's important to remember that the state's own contribution to this pot is going to be a shrinking share of the total-- and that low-income families will bear the brunt of it. Wouldn't it be nice if Indiana could signal its commitment to funding low-income health care by coming up with a reliable funding source?

A "Perfect Storm" for Indiana Homeowners?

Having allocated more than half a billion dollars of state revenue to cutting local property taxes over the next two years, Indiana lawmakers are understandably hoping that the property tax problem has gone away. But a former local government finance officer thinks the state's property tax woes could get worse before they get better. Here's Peter Schnitzler's lede in today's Indianapolis Business Journal:

Indiana’s property-tax “perfect storm” is brewing again. A former head of the Indiana Department of Local Government Finance says some Marion County homeowners soon could see property-tax increases of as much as 50 percent—far higher than government officials previously estimated.

Schnitzler points the finger at two causes of this "perfect storm": the narrowing of the Indiana property tax base by eliminating the "inventory tax" a few years back, and the continuing process of assessment reform.

Both are straightforward, although one of them is unavoidable and, I would argue, desirable. The elimination of the inventory tax means that every local taxing district's property tax base is now smaller-- which in turn means that the tax rate on everything remaining in the reduced tax base (including residential property) has to increase in order to continue to fund education adequately.

Assessment reform absolutely is a driver in the property tax hikes some homes will face, as well: but that mostly just means the system is working as it should. Like many other states, Indiana has a long history of inadequately measuring home value. Property wealth isn't always a great indicator of how "rich" you are, but it's still a measure of wealth that carries some useful information. And if you're going to base a tax on this measure, it would be nice to measure it properly. But Indiana assessors face some real difficulties:

Some older properties haven’t changed hands in decades. As a result, hard data on their true market value is unavailable...The last reassessment was based on property values as of Jan. 1, 1999. This year’s will attempt to update those values to their market worth on Jan. 1, 2005—without physically analyzing every property. The economy went from red hot to ice cold and back to lukewarm during that time. Six years creates a large opportunity for assessment error. It’s compounded by the fact that assessors estimate home values by comparing them with similar properties nearby. In neighborhoods where few houses changed hands, there’s not much data to work with.

There's a lot of room for improvement in this system, and an inevitable result is that some people whose houses were dramatically undervalued for tax purposes will see a tax hike. But in the long run, that's the right answer from a tax fairness perspective. This will come as no comfort to Indiana homeowners facing huge tax hikes, but from an impartial perspective it's the right thing to do.

Schnitzler quotes Marion County Assessor Greg Bowes pointing out, sensibly, that neither of these two elements in Indiana's "perfect storm" must lead inexorably to tax hikes:

Marion County Assessor Greg Bowes pointed out that higher assessments aren’t the
only cause of increases in property-tax bills. Just as important is the amount of spending that local governments approve. If local officials can keep their costs in check, Bowes said, there’s less need to increase property-tax payers’ bills. “It’s not the assessment process that’s the source of your burden. It’s the increase in the appropriations,” Bowes said. “If you want to change the property-tax process, your recourse is voting for legislators and councilors.”

This is true. But the bigger picture is that other parts of the local governments' revenue pie are probably shrinking. State aid to local governments are a big part of this pie, and when state aid shrinks, something else has to make up the money. There are two possible explanations for rapid growth in local property taxes: either locals are getting greedy, or the state is starving them of financial aid. Having allowed Bowes to assert that locals are spending like drunken sailors, it would have been nice to see other local government officials' perspective on the extent to which state cuts in local aid have been responsible for the growth of local revenues and spending.