Mixed views on tax caps

Expect to see property tax caps on the ballot in November.

Also expect to see some nervous members of local government.

Both the Indiana House and Senate approved bills this week pushing toward a November referendum that will ask people whether to insert those tax caps into the Indiana Constitution, where it will be more difficult for future legislatures to undo.

The caps, which are currently in effect in the state, limit property taxes to a percentage of assessed value - 1 percent on homes, 2 percent on rental properties and 3 percent on business.

State Rep. Bill Davis (R-Portland), a proponent of the caps, hailed the passing in the House on Monday as "a big week in the House for taxpayers and taxpayer protection," in a video interview posted on his legislative Web site.

"It's going to allow voters, taxpayers to decide whether or not they want to put into our constitution a permanent cap on their property taxes," he said in a Wednesday interview. "It would not say that your property taxes are never going to go up. Your property taxes will never be more than (a percentage) of your assessed value. As your assessed value goes up, if your rate doesn't go down, you may see an increase.

"But you'll never pay more than 1 percent on a homestead," he said. "It gives people a feeling that there is some control, that they're not going to wake up next year and find out next year that their property taxes have gone up $1,500 or $2,000."

The bills, which passed the House 75-23 and the Senate 35-15, saw some resistance from some legislators who felt it's not the time to add the caps to the constitution without knowing the full effect it will have on revenue for local government.

With 2010 being the first year that the 1-2-3 caps have set in, the full effects of whether properties will hit the limit are yet to be seen. By adding it to the constitution, the ability to change or repeal the caps would become more difficult.

That is a fear that some local government officials have expressed regarding the caps.

If tax revenues see a shockwave from properties hitting the ceiling, it could affect future budgets and therefore affect local government services.

"These tax caps, as well intended as they are, are causing us grief," said Jay County Council president Gerald Kirby at the board's meeting on Wednesday.

"Any of us that believe it's going to be defeated is fooling themselves," he added later. "(Council members will) have to make the tough decisions."

The county council does have a few tools in place to help aid its general fund if the tax caps do cause revenue problems. The county has in place a Local Option Income Tax (LOIT), which could be adjusted if the caps have a stark effect on the budget. Although raising taxes is hardly popular, the alternative to raising LOIT would be cutting services within the county.

"It's going to be our decision on cuts," said councilwoman Marilyn Coleman. "We hope it doesn't come to that."

"If you're cutting services, no one's going to like that," said Jay County commissioners' president Milo Miller Jr. "But the revenue's got to come from someplace."

Local officials stressed, however, that they're not opposed to the idea of the tax caps, but rather think it's a good idea.

Their concerns instead stem from the uncertainty of how the caps may affect cash flow, something that they may not have a handle on for months until the county auditor begins prepping for the next tax cycle. By rushing the caps into the constitution, the state could be pinning local governments into a corner if the cap effects are profound.

"I think it sounds good to the average property owner," said commissioner Jim Zimmerman. "Nobody sees the effect it may have down the road."

"It sells good because it sounds good, but nobody knows the depth," agreed commissioner Faron Parr. Speculating on the problems it could cause if there are revenue issues, he added, "Once you get it in (the constitution), how are you going to correct it?"

"We need to see what it does in the future," said Coleman.

Davis, however, said there was consideration put into the effect on local governments, but there are other places that revenue can be made and options to make up for caused shortfalls, such as LOIT.

"We've seen a drop in local income taxes. We've seen a drop in spending. We've seen a drop in all those things," Davis said, referencing the effect of the poor economy on the state. "They have other sources of income and property tax only makes up a part of it. ... I think what the 1, 2, and 3 cap does is spread that out. It gives taxpayers the knowledge that there are some limits.

"Local units of government can't spend no matter the conditions or no matter what the needs are," Davis said. "The way our taxing system has worked, we decided how much we want to spend then levy for that. You can continue to do that with the levies, but only to the point."

The effects of the caps won't become apparent until the next tax billing cycle and into the 2011 budget season, but county officials are being cautious. There may be some tough decisions on the horizon for local politicians.

"I think the property caps will be a heartache for us," Kirby said. "But it's giving us what we wanted all along - local control."[[In-content Ad]]