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September 8, 2013

EDITORIAL: The tax-cap crisis

Funding shortfalls put cities in dire straits

TERRE HAUTE — Consider every plausible consequence before acting.

That maxim fuels the current foreign policy debates in Washington, D.C., but it applies to decisions back home in Indiana, too.

In the past 10 days, the mayor of Terre Haute and a member of the city Sanitary Board of Commissioners described the deep impact of Indiana’s property tax-rate caps on the local government entities they manage. The Indiana Legislature adopted the caps in 2008, and they took effect two years later. The caps imposed limits on property tax rates — 1 percent of gross assessed value on homesteads, 2 percent on rentals and farm land, and 3 percent on businesses. It also aimed to limit local government spending, and reform property assessments.

A significant number in that historical recap is “2008.” That was the year the Indiana Legislature adopted the property tax caps, urged by then-Gov. Mitch Daniels. Two years later, a newly elected General Assembly — dominated by supporters of Daniels’ plan to etch the reforms into the state constitution — took the required step of passing the tax-cap resolution again. In November 2010, Hoosiers approved the addition of the tax caps to the constitution.

Meanwhile, another historic situation unfolded in 2008 — the Great Recession. As the downturn deepened in the next two years, the American economy shed 8 million jobs in the worst recession since the 1930s. With so many residents suddenly jobless or hit with pay cuts and unpaid furloughs, consumers stopped spending. Revenue sources for local government units began constricting, too.

The caps did standardize property taxes. And indeed, local government spending has been curbed.

Those changes did not occur in a vacuum or a best-case scenario, though. Instead, the recession compounded the restrictions imposed on communities. With more than half of municipalities’ budgets paying for public safety (in Terre Haute, it’s 72 percent of the general fund), little remains for street maintenance, sewer and infrastructure improvements, upgrades of parks and development of quality-of-life amenities needed to keep residents of Hoosier cities from moving out of state.

Terre Haute Mayor Duke Bennett told Lt. Gov. Sue Ellspermann, a fellow Republican, the property tax caps have cut the city’s revenue by $35 million since they took effect in 2010. That amount equals one-fourth of the city’s pre-tax-cap income.

“The concept of the caps was fine; I supported that,” Bennett told Ellspermann on her Aug. 30 visit to Terre Haute. “But what has happened, it has really put a stranglehold on communities. Some communities are doing OK because they have growth. In our case, our assessed value dropped 7.5 percent last year.”

Vigo County has seen the fourth largest revenue reduction among Indiana’s 92 counties, according to a study this summer by Ball State University’s Center for Business and Economic Research. “I don’t think anyone would’ve predicted 20- or 30-percent declines in local revenues,” Matthew Greller, executive director of the Indiana Association of Cities and Towns, told the Tribune-Star on Thursday.

The Terre Haute Sanitary District is dipping into the city’s sewer fee revenue to cover its outstanding bond debt, while the district’s property tax revenue has decreased beyond expectations. “The tax caps are absolutely killing us,” said Chuck Ennis, a Sanitary Board member and the city engineer.

The property tax caps are permanent, thanks to their insertion into the constitution. Given that reality, municipalities need state legislators to restore some of their local flexibility. “We have to take the handcuffs off city and county government,” Greller said. His organization wants the 2014 General Assembly to allow a statewide local option tax on food and beverages, and to remove the hoops cities must jump through to adopt the new local option income tax for public safety.

Cities need resources to remain vital. Like it or not, more than half of college graduates — the key demographic Indiana towns are losing — choose where they will live before they land a job, Greller pointed out. Towns just scraping by to patch potholes and mow parks will have a hard time competing. “That’s where we’re headed, and that’s a very, very scary proposition,” Greller said.

That’s a long-run consequence legislators should consider and address next time.

 

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