At least two key facts seem to have been lost in the 2007 "tax crisis". First, the crisis didn't reach all taxpayers (or even all counties) in Indiana. Second, studies have shown that the large property tax increases for many homeowners were not caused primarily by local government or school spending, but by a combination of state government decisions, such as (1) reductions in state property tax replacement credits provided in state budgets, (2) increases in state child welfare costs, (3) business inventory tax reductions, and (4) assessed value trending requirements (compounded by mistakes made by some local assessors).
Many believe there is at least some room for reductions in local government spending through belt-tightening. And others propose local government structural reform, as can be seen in the sweeping recommendations of the Indiana Commission on Local Government Reform (Kernan-Shepard Commission) which may receive attention in future years. But for the 2008 legislative session, there can be little doubt that school and local government spending is the focus.
The intensity of that focus is demonstrated in the bills and debate in the session thus far. (See attached list of tax reform bills under consideration.) For example, under the 3%-2%-1% circuit breaker plan featured in HB 1001, 2008 (Governor Daniels' proposal that now has been amended in the House), there may be as much as $690 million in lost revenues to local units. (See attached chart showing the total projected loss for local units in each county for the next three years). Recognizing the significant impact on local government, Senator Kenley has suggested phasing in the circuit breaker more gradually, cutting in half the revenue losses for local government for the first year.
Regardless of the final circuit breaker specifications, the likely outcome of the 2008 legislative session is pressure on local governments to modernize and cut spending. In addition, economic development is likely to be affected through amendments to Tax Increment Financing laws. Thus, local government units may need to expand revenue options, trim costs and restructure or reorganize operations and/or governance. (See attached outline of local government options and resources for additional information.)
Property Tax Reform
In summary, HB 1001 as proposed (and as amended on the House floor on January 22) would do the following:
1. Provide circuit breakers (beginning in pay '09)
- Residential homesteads: 1%
- Residential rental property and agricultural property: 2%
- Business property: 3%
- "Qualified homesteads" (i.e., residential homesteads of persons 65 years or older earning under $35,000 (or $50,000 for joint filers) where the homestead has assessed value of less than $200,000) would have property taxes frozen at 2008 levels
- Note: Under the original bill, agricultural property would be subject to 3% circuit breaker credit, and the circuit breaker concept for "qualified homesteads" was not present
2. Increase residential homestead exemption by providing an additional 35 percent homestead on top of current maximum of $45,000 adjusted on a sliding scale, with owners of lower-priced homes receiving the greatest amount of relief.
3. Require application of tax revenues to debt service before operating costs
4. Require a referendum for property tax supported bond issues for major school building projects related to sports or recreation (or otherwise not related to classroom learning)
1 Note: The original bill required a referendum for all bond issues if:
1. Principal amount exceeds the lesser of (a) 1% of assessed value or (b) $10 million; and
2. Bonds supported or backed by either property taxes or income taxes.
5. Amend 2007 legislation for County Boards of Tax and Capital Review by:
- Granting the Boards greater power to alter budgets of taxing units;
- Transferring certain duties of the Board to the County Council; and
- Eliminating power of county council to deny Board its powers relating to budget oversight.
6. Abolish the office of township assessors; require county councils to appoint a county assessor from three nominations made by county commissioners.
7. Place caps (beginning with the 2010 budget year) on property tax levies and expenditures (both budgeted and spent in a particular year).
- Cap on expenditures applies to all taxes and fees (including income taxes) except TIF, utility revenues, and revenues dedicated to a specific purpose
- Limits can be exceeded if approved by referendum
- Caps grow annually based on the county's personal income
- Eliminates all levy appeals not based on claims of math errors
- Note: The original proposed bill provided for caps on property tax levies only, but required the unit to consider all revenues in determining the property tax levy. The original bill did not exclude TIF revenues from this analysis.
8. Eliminate certain local property tax levies and/or shift local costs to state, including:
- School tuition support fund
- Transportation fund
- County child welfare funds
- Certain state levies
- Juvenile incarceration costs (state would pick up the half currently funded by local governments)
- These reductions would be financed by
- eliminating PTRC and state-funded homestead credit, and
- increasing state sales tax from 6% to 7%
9. Amend 2007 legislation regarding LOIT
- Caps total LOIT rate at 1% (rather than 2.25%)
- Eliminates feature permitting additional public safety rate of .25%
- Eliminates feature allowing LOIT rate for property tax replacement
- Modifies feature allowing LOIT rate for property tax levy growth
- Would permit use for property tax relief; and
- Would allow use to make up revenue loss from circuit breaker.
10. Amend TIF replacement levy to:
- Limit the levy to the extent necessary to pay debt service on TIF bonds or to maintain agreed-upon coverage ratios; and
- Require review by County Board of Tax and Capital Review (as opposed to legislative body approval)
11. Require approval of a unit's fiscal body for property tax-backed bonds or lease by a special taxing district
12. Require school corporations to utilize standardized plans developed by the Department of Education for the construction or expansion of school facilities after June 30, 2009
13. Provide for
- Expansion of earned income tax credit for working poor from 6% to 9%.
- Doubling of the renter's deduction from $2500 to $5000.
Tax Increment Financing
- Redevelopment Commissions across Indiana face the serious possibility that the Indiana General Assembly is about to make a major overhaul to the laws governing tax increment financing ("TIF") districts. The Committee on Tax and Fiscal Policy have passed bills (in particular, Senate Bills 17 and 18), as amended, with the following principal provisions (proposed to be effective July 1, 2008):
- Senate Bill 17 appears to be intended to subject bond issues authorized after July 1, 2008 for projects costing over $2,000,000 payable from TIF revenues to the petition/remonstrance process, unless the issuer obtains a waiver from the Indiana Economic Development Corporation. Senate Bill 18 appears to be intended to subject bond issues authorized after July 1, 2008 for projects costing over 0.5% of the total taxable property within the political subdivision (but no lower than $200,000 and no higher than $7,000,000) payable from property taxes to a voter referendum process. Even apart from the policies these bills seem intended to effect, we believe that the current language of Senate Bills 17 and 18, taken in conjunction, may lead to inconsistent or unintended results.
- For use of TIF revenues for projects outside an allocation area, the current law "in or serving" rule would be replaced with a requirement that such projects be physically connected to the TIF allocation area.
- Expanding an existing TIF allocation area would in all cases require all procedures applicable to the initial creation of the TIF allocation area and would also require a finding that the existing area does not generate sufficient revenue to meet the financial obligations of the original project. In addition, any amendment to an existing declaratory resolution or an existing plan would require all procedures applicable to the initial creation of the redevelopment project area or economic development area.
- TIF bonds and TIF allocation areas would be limited to a maximum term of 25 years.
- Redevelopment district bonds in any principal amount would not be permitted to be issued without legislative body approval. (Under current law, only bonds over $3,000,000 require legislative body approval.)
- Note: Depending on the provisions of the final versions of these and other bills affecting TIF, there may be a disincentive for units to utilize TIF in certain circumstances.
WHAT CAN LOCAL GOVERNMENTS BE PLANNING FOR NOW?
- Measures that some local governments are taking and that others can consider
- Tax and fiscal policy
- Provide greater property tax oversight
- Enact Local Option Income Tax
- Consider additional local fees and charges
- Reduce expenses through efficiency measures
- Refinance existing debt to preserve operating revenues (Visit this link to see additional fiscal options/alternative revenue sources http://www.bakerdstreamingvid.com/etimages/AIC07_Maximize_Local_Alt_Rev.pdf)
- Tax and fiscal policy
- Consolidation and collaboration
- Effect the merger of township assessors into a county assessor if that legislative provision passes
- Utilize HEA 1362, 2006 to consolidate units or functions
- Use interlocal agreement statute to combine functions of various local government units or create purchasing cooperatives
- Outsourcing, privatization, and procurement
- Public-private partnerships to operate large assets such as utilities, wastewater treatment, solid waste disposal, transportation, revenue collections
- Greater use of competitive operating/service contracts
- Sale or lease of certain assets
- Public Safety
- Review pension liabilities
- Consolidate emergency communications
- Maximize grant opportunities
Baker & Daniels LLP Public Finance Group Page http://www.bakerdaniels.com/services/servicedetail.aspx?service=493
Baker & Daniels LLP Government Affairs Group Page http://www.bakerdaniels.com/services/servicedetail.aspx?service=478
Baker & Daniels LLP 2007-08 Funding Sources Guide http://www.bakerdstreamingvid.com/etimages/2007-2008GovtFundingSrc1.pdf
Indiana Commission on Local Government Reform (Kernan-Shepard Commission) Report http://www.indianalocalgovreform.iu.edu/assets/docs/Report_12-10-07.pdf
Commission on State Tax and Financing Policy Final Report www.dlgf.in.gov/taxpayer
Indiana General Assembly 2008 Session Bill Information http://www.in.gov/apps/lsa/session/billwatch/billinfo
Governor Daniels' 2008 State of the State Speech http://www.in.gov/gov/files/2008stateofstate.pdf
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