CHICAGO — Indiana voters in November are expected to approve a ballot measure to make the state’s property-tax caps permanent — a move some local officials say could deepen the chill on local government borrowing that’s settled over the state since the caps were enacted in 2008.
Gov. Mitch Daniels last week kicked off a campaign urging Hoosiers to approve the constitutional amendment.
With the Republican governor as the architect, the General Assembly in 2008 enacted the caps as part of a sweeping overhaul of property taxes.
The new law featured a number of provisions affecting debt issuance, including a requirement that local governments win voter approval for all major capital projects.
“When local spending units want to raise more money, they have to get the people’s permission to do it,” Daniels said at a press conference last week. “It’s no longer the case that they can raise it at their own discretion, and that’s the way it should be.”
Local governments that depend on property tax revenue for about half of their operating budgets are struggling with major revenue losses under the law, and critics say making it permanent would mean service cuts and reduced financial flexibility.
The issue of property tax caps has taken on a higher profile recently, with Indiana, Minnesota, New Jersey, and Colorado all eyeing similar proposals. Polls in Indiana show the measure is overwhelmingly popular.
“If it passes it puts a hard cap on the use of property tax by local governments. It could make them a lot more efficient, and there could be a big debate on how to finance local government,” said Larry DeBoer, a professor of agricultural economics at Purdue University who has followed property tax issues for 25 years.
Indiana’s constitutional amendment process is considered more restrictive than many states, as a proposed amendment needs to win approval by two successive legislative sessions followed by voter approval.
At the heart of the 2008 overhaul are the property tax ceilings that cap a homeowner’s tax bill at 1% of the home’s assessed value, 2% for rental property bills, and 3% for commercial property bills.
To help offset the expected revenue losses, state lawmakers gave counties the authority to impose a local income tax, which 24 of Indiana’s 92 counties have done.
The state also agreed to take over several local levies, including local schools’ general and transportation funds, child welfare funds, and pre-1977 police and firefighter pensions.
Indiana’s sales tax rate was raised to 7% from 6% to help cover the new costs.
The law also features a number of new borrowing restrictions on issuers, such as a 20-year cap on final maturities, level principal, and interest payments over the life of the bonds.
Voter approval is required for capital projects that cost $12 million or more, or 1% or more of a unit’s assessed value, as well as for high school projects that cost more than $20 million and elementary school projects that cost more than $10 million.
The former petition-and-remonstrance process remains in place for less-expensive projects.
The combination of revenue declines, the new referendum requirement, and the national economic downturn has led to a slowdown in government borrowing, officials said.
“The revenue drops, the tax caps, and the referendum requirements are having a profound effect on capital projects,” said Matt Greller, executive director of the Indiana Association of Cities and Towns.
Since 2008, 23 capital spending proposals have appeared on ballots, of which nine have passed, according to Purdue’s DeBoer.
Only four will appear on the November ballot. But 12 school districts will ask voters to approve property tax hikes for their general funds, a proposal that has become increasingly frequent since the state took over general funds as part of the new law, DeBoer said.
“I’ve been surprised that there are so few capital projects going forward, because it doesn’t seem like enough construction for 293 school corporations and all the other local units,” he said. “My perception is that this has really inhibited capital spending. But we won’t really know until we get an economic expansion.”
Local units of government have lost an average of 6.3% of property tax revenue between 2010 and 2009 due to the caps, according to Indiana’s Legislative Services Agency.
Statewide, local governments are expected to lose a total of $489 million next year, the LSA said.
The agency has not yet tabulated the losses of Lake County, which is expected to be so hard-hit that it will drive up the 6.3% state average.
“It’s the local units that are in the cities and towns that are getting hit the hardest,” DeBoer said. Cities on average are losing 10% of revenue from the caps, he added.
“Then you’ve got places like Madison County, which includes [the town of] Anderson, they’re losing in the 30% to 40% range,” he said. “If you’ve got a tax rate above 4%, and all of sudden your rental housing is cut back to 2% and your business property to 3%, you can lose a lot.”
Urban school districts have been among the hardest hit by the measure. Indianapolis Public Schools, for example, saw a 44% drop in revenue from 2008 to 2009. In 2010, however, IPS saw an 11.5% increase in revenue, as a result of a capital spending proposal that voters approved in 2009.
“I personally believe we’ve become a referendum state, which I think is a good thing,” said Chuck Little, executive director of the Indiana Urban Schools Association, which represents 37 districts.
“But there’s going to be a lot of competition among levels of government to have referendums to go beyond the caps,” he said. “We’re already faced with stark reductions in the amount of money available, as well as the erosion of local control. Why the rush?”
The requirement that voters sign off on all new spending means that all future debt service will fall outside the caps.
Now, only Lake County and St. Joseph County are allowed to exempt existing debt service, an amendment that legislators added to soften the blow to the two struggling local governments.
The amendment is included in the ballot question.
Opponents like state Rep. Vernon Smith, a Democrat who represents an area of northwest Indiana that includes Gary, said making the caps permanent could mean serious fiscal problems down the road.
“The full story will not be told until a year or so from now, when we see all levels of government hurting,” he said. “It’s a problem now for the counties, the cities, and the school corporations. And it’s eventually going to be a problem for state government.”
While predicting the ballot measure will win easy passage in November, Smith added that any effort to undo the amendment will be laborious.
“I think the legislature should start the process of removing the amendment now,” he said with a laugh.
