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.