'Mitch the Knife' Meets 'Joe the Property Owner'

The following article is reproduced from the Indiana Policy Review. It is a little long, but is well worth the read.


'Mitch the Knife' Meets 'Joe the Property Owner'

The author, an adjunct scholar of the Indiana Policy Review Foundation, is a professor of economics at Indiana University (New Albany). An abbreviated version of this article appeared in the Wall Street Journal weekend edition of July 28, 2007.

by Eric Schansberg, Ph.D.

On July 4th, hundreds of protestors showed up in front of the governor's mansion in Indianapolis. They've been back in the streets several times since. As a result, Gov. Mitch Daniels has been scrambling, the city's mayor has ordered a hiring freeze and a 10 percent cut in his budget and there have been calls for a special session for the legislature and even a state constitutional convention.

Runaway property taxes are an issue wherever property values have shot up in recent years. But now Indiana may be at the forefront of a homeowner rebellion against a tax system that has come to be seen as arbitrary, unfair and unpredictable. What's driving this angst is the first reassessment of property values in six years and the resulting property tax bills. In Marion County (the city of Indianapolis), average property taxes increased sharply-by 34 percent. Across the state, the average increase is 24 percent. And these are only averages. Many homeowners are facing much larger increases.

As always, there is no shortage of short-run prescriptions. One thing that is really stirring anger: Marion County businesses mostly avoided an increase this year, while almost all homeowners saw higher tax bills. To cool tempers, Mr. Daniels, a Republican, ordered another reassessment and a freeze on property taxes in the meantime in Marion County — delaying increases for at least six months. He has also given counties a few months to rethink whether they'd like to increase local income taxes to offset the need for higher property tax revenues. And taxpayers will now be able to pay their property taxes on an installment plan.

All of this is a nice start. But none of it addresses the underlying problem: taxing property at a value that periodically increases can stick homeowners with a surprisingly high bill. The system punishes those who made smart (or lucky) home purchases and can force people out of the neighborhoods they've built a family in.

Property taxes also, at the margin, lower property values. Retired Indiana University economist Morton Marcus calculates that for every $1,000 increase in property taxes, the value of a home falls by almost $12,000. Moreover, high and uncertain property taxes make it difficult to attract workers and capital investment to the state.

The governor isn't alone in hoping that a quick fix will do the trick. House Speaker Patrick Bauer, a Democrat from South Bend, wants to use some of the state's budget surplus to issue qualified homeowners a tax rebate. But the state is already scheduled to implement another band-aid (through Mr. Bauer's leadership last year): to pay out some $300 million in property tax abatement. Indy Mayor Bart Peterson, also a Democrat, wants to borrow $75 million to pay for cutting property tax increases. And he has proposed to hike local income taxes by 65 percent.

Perhaps the most promising short-term fix being considered would accelerate a "circuit breaker" to cap a total tax bill at 2 percent of a property's assessed value. The legislature passed this last year, but it isn’t scheduled to go into effect until next year. Implementing it ayear early could mitigate the current crisis.

But politicians may not be able to finesse their way out this time. They've been tinkering with the system since 1973, when lawmakers faced similar problems with property taxes and tried to fix them by allowing for local income taxes, doubling the state's sales tax and allowing public school teachers to collectively bargain. Indiana's property tax may be so flawed-and the public sufficiently cynical-that changes to the system may not gain necessary public support. The best option might be to toss the property tax out the window and replace it with higher income, sales or a "fair" consumption tax.

This would dismantle an unwieldy system where some 1,008 town assessors evaluate property values and pass their assessments onto 92 county assessors, who then pass their assessments to state officials. With so many assessors involved, it's no wonder the system can produce arbitrary results-residents in similar homes in similar areas paying very different tax bills.

Property taxes are, of course, useful in that they provide a stable and independent revenue source for local governments-which cause them to be more responsive to the people. It's also a highly visible form of taxation. Property taxes seem to take a bigger bite out of homeowners than other taxes because they are paid only once or twice a year — unlike income taxes, which are automatically deducted from regular paychecks. As we see now, greater visibility makes it difficult to increase taxes without fearing a public backlash.

And the fear of the lash is producing some interesting political results. Mayor Peterson faces voters in the fall, which may explain why he has reacted so swiftly. Speaker Bauer wants to protect a slim majority in the House after next year's elections, which may explain why he's eager to put his name on tax rebates for homeowners.

For his part, Mr. Daniels has called on his staff to brainstorm for ideas, has encouraged them to meet with affected people and is weighing whether to call the legislature back into town to enact reforms. He has expressed interest in eliminating the property tax. And he seems quite interested in another significant issue-reducing the number of local governments in the state. Beyond its high number of counties and townships, Indiana has 2,730 local taxing authorities. Eliminating some of these may help with tax reform.

Mr. Daniels is favored to win a second term as governor next year. But if he's not careful, he could yet stumble in his bid. Eric Miller, Mr. Daniels's 2004 primary opponent and a vociferous property-tax opponent, might be tempted to challenge him again. And a set of seemingly weak Democratic challengers could suddenly become competitive against a governor unable to handle such a thorny issue.

Reforming local government has been a top priority for the governor. But that was before homeowners took to the streets to protest their property tax bills. At times, Mr. Daniels has shown a willingness and to go outside the box-in particular, with "Major Moves" (his road privatization initiative for the I-69 extension). Will he play it safe here or work for significant change? Now that the public has spoken, will Mr. Daniels listen?

Dr. Schansberg is a professor of economics at Indiana University (New Albany), an adjunct scholar for the Indiana Policy Review and the author of "Turn Neither to the Right nor to the Left: A Thinking Christian's Guide to Politics and Public Policy" (Alertness Books, 2003).