Property Taxes: Avoid the Quick Fix

December 4, 2005

by Andrea Neal

INDIANAPOLIS — Indiana's always had tax protesters, including some who consider the property tax confiscatory under Article 1, Section 21, of the state constitution. Until now, that's been a small if vocal group of nutballs. Not anymore.

With some residents' tax bills rising by 300 percent in a single fell, mild-mannered Hoosiers have become raucous activists. Politicians are seeking cover.

In Indianapolis, center city homeowners formed an Indiana Tea Party. In Evansville, incumbent Republican Mayor Russ Lloyd Jr. renamed his Democratic opponent, state Rep. Jonathan Weinzapfel, "Taxzapfel."

Rep. Jim Buck, R-Kokomo, who's repeatedly tried to abolish the property tax since he became a legislator in 1994, is the talk of town meetings. Under his plan, counties could replace lost tax revenues with a sales tax, income tax, service or user fees. To date, Buck's been granted one committee hearing and never been able to bring a bill to a vote.

The 2004 session could be different if enough communities experience what happened in Indianapolis where local taxing units took advantage of court-ordered reassessment to pad their budgets, in essence hiding hefty tax hikes. (As of Sept. 2, only 15 counties had mailed out their new tax bills).

Before we all jump on the abolition bandwagon, there are three benefits to the property tax worth remembering:

1. Property taxes are the best way for communities to retain "local control" of services. When California voters demanded property taxes be cut by $5 billion in 1978, state lawmakers responded by raising the state sales tax and tax rates on beer, wine, gasoline, cigarettes and other items. With money comes power. As a result of Proposition 13, power to call the shots in California shifted from local governments to state officials.

2. Property taxes are the most stable source of funding for community needs. Sales and income taxes fluctuate with the economy, but property taxes guarantee that teachers will be paid, fires will be fought and police patrols will occur in times of economic downturn.

3. Property taxes are a reliable indicator of a neighborhood's vibrancy. For example, economists have found a relationship between school test scores and land values on which taxes are based. The Manhattan Institute has documented that families will willingly pay higher property taxes — in essence, extra tuition — as the price for good schools. The exception to the rule is in downtrodden urban areas, where schools are inadequate yet tax rates are high to compensate for the draining effects of suburban flight.

Even Marion County's most visible tax protester, Carl E. Moldthan, says abolishing property taxes would be dangerous. "Property taxes are the last true gauge of the cost of local government," he says.

With 2004 a short session of the legislature, it's unlikely House Ways and Means Chairman William Crawford, D-Indianapolis, would put an abolition bill on the agenda anyway. So what should the General Assembly do?

Spend a year in careful, comprehensive study. Then enact fair and equitable relief for those harmed by reassessment, including retroactive refunds if appropriate.

Last month, the Indiana Fiscal Policy Institute launched a study of the effects of reassessment, which will analyze how the tax burden has shifted between classes of taxpayers and suggest improvements in assessment methodology.

It could take more than a year to complete. In the meantime, Joseph Gomeztagle, the guy who got us into this mess in the first place, suggests that "a helluva good dialogue" begin.

Gomeztagle is a professor at the business school at Indiana University Northwest who instigated the lawsuit alleging Indiana's property tax system was unconstitutional.. The lawsuit led to a state supreme court ruling requiring Indiana to move to a more market-based valuation of property, which has most hurt older owners of older homes.

"There is no good reason to abolish the property tax," says Gomeztagle. Nor does it make sense to replace it with a local option income or sales tax. "God forbid if the economy went downhill and the sales receipts dropped and all of a sudden you have to cut teachers."

This is an occasion when a scalpel is needed instead of an ax. Lawmakers planning 2004 re-election campaigns must resist the urge for a quick fix that could make matters worse.

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Andrea Neal, formerly editorial page editor of the Indianapolis Star, is an adjunct scholar and columnist for the Indiana Policy Review Foundation. Write her at aneal@inpolicy.org.



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