Struggle isn't state's alone
Expert: Daniels' plan may come closer than most to fixing problem

By Mary Beth Schneider and Bill Ruthhart

November 19, 2007

Indiana legislators return to the Statehouse on Tuesday to find a way to permanently cut property taxes without strangling essential government services.

If they're successful, Indiana could be the first state to come up with an answer to the problem of rising property taxes and the rising costs facing government -- issues every state is struggling to address.

The issue is expected to take center stage on the General Assembly's Organization Day on Tuesday and during the next legislative session, which starts in early January.

No state has found a perfect solution.

Gerald Prante, a property tax expert with the nonpartisan National Tax Foundation, has examined the plan laid out by Gov. Mitch Daniels in October. The governor's plan isn't perfect, but it may come closer than plans being debated in other states, he said.

Prante likes that the plan seeks to control future local spending but wishes it also put restrictions on state spending into law.

With the state assuming the responsibility of paying for some areas -- including schools' operating and transportation costs -- there will be pressure on the state to raise taxes in the future beyond the 1 percent sales tax increase Daniels is calling for, Prante said.

Daniels' plan promises to cut the average homeowner's bill by a third. It calls for a constitutional amendment that would limit a homeowner's property tax bill to no more than 1 percent of its assessed valuation. Rental property would be capped at 2 percent and business property at 3 percent. Local government spending, in turn, could not go up more than a county's average personal income growth over six years, unless voters were to override that cap in a referendum.

The Daniels administration looked at what other states are attempting before laying out its property tax plan in October.

"We looked . . . for both positive and negative lessons," Daniels said last week. "Arizona, I recall, was a state that has a permanent 1 percent cap for homeowners. The more I looked at that, the more fairness and permanence I saw in that.

"On the other side, Florida has been wrangling with this problem lately. I thought I saw some lessons there about complexity. They made it more and more complicated as it went along."

Arizona

Kevin McCarthy, president of the Arizona Tax Research Association, an independent watchdog, laughed at the thought of his state being cited as a bright spot in property tax reform.

"Very few people in Arizona view our system as the one model that, nationally, people would want to adhere to," he said.

In fact, it's a system so complex that McCarthy's group puts out a 13-page pamphlet trying to explain it.

Among the problems, he said, is that businesses are taxed differently from owner-occupied residences -- a feature Daniels has in his plan. That's resulted in Arizona having some of the highest business taxes in the nation, McCarthy said.

Now, at the same time some Arizona reformers want to even out the disparity between business and residential property taxes, some homeowners want more cuts in the face of skyrocketing property values that have resulted in significant tax increases, he said.

"There's a brewing tax revolt," McCarthy said.

Florida

The Sunshine State, as Daniels pointed out, is in the midst of a property tax fight far uglier than what Indiana has experienced.

A plan cobbled together in its Legislature is so complicated that voters in January will confront a referendum question that is three pages long.

Rene Flowers, a board member for the National League of Cities who serves on the St. Petersburg City Council, said Florida needs to reduce its reliance on property taxes, but no one can settle on what taxes to increase. Everyone fears that raising the sales tax would hurt tourism.

"It's just been a fiasco, and every time we do something, it seems like it gets worse," she said.

Colorado

Indiana's bipartisan State Tax and Financing Policy Commission, which last week came out with its plan to cut property taxes in half for homeowners, also examined actions in other states.

One lesson in what not to do came from Colorado, said Sen. Luke Kenley, R-Noblesville, who is chairman of the commission.

"They pretty much had a disaster out there," he said.

Coloradoans voted to adopt a Taxpayer Bill of Rights -- known as TABOR -- in 1992 that included the nation's tightest limits on spending. It required voters to approve all tax increases and debt through referendums.

Critics say TABOR went too far and was too restrictive. Tom Clark, executive vice president of the Denver Metro Chamber of Commerce, said the measure was shaped by the philosophy of anti-tax activist Grover Norquist, who once said he wanted to reduce government to the size where, "I can drag it into the bathroom and drown it in the bathtub."

"Do I think tax and spending limitations on government are good? You bet," Clark said. "Was TABOR the answer? Hell, no."

Since the late 1990s, state and education services have suffered the most under TABOR, Clark said, with net revenue for education decreasing by 25 percent and the percentage of roads in good condition dropping to 45 percent from 60 percent.

Local government, he said, hasn't suffered as much, because 92 percent of local referendums asking for tax increases or projects have passed.

But an economic downturn has sharply cut tax revenue, and in 2005, Colorado voters approved a five-year reprieve from TABOR's spending restrictions. The "TABOR timeout" will allow spending levels to return to and surpass where they were prior to the recession.

Penn Pfiffner, president of the Colorado Union of Taxpayers, said that was a mistake.

"TABOR didn't cause the recession or the reduction in revenues," said Pfiffner, who also serves as the director of the fiscal policy center at the conservative Colorado-based Independence Institute. "For the time it was truly in effect, it allowed for our economy to grow and forced governments to be well-disciplined."

Pfiffner criticized Daniels' proposal to tie local spending to the growth in an area's personal income, saying it would have no teeth compared with Colorado's method of tying spending to inflation.

Clark disagreed and said using income as a guide is more fair than inflation.

"If you're going to craft a spending limitation, the governor (Daniels) is absolutely at the right place," he said. "That defines the amount government can take out of the economy. I'd be voting for that if I was in Indiana."

California

While Kenley points to Colorado's TABOR experience as a case study of what's wrong with referendums on tax issues, Daniels suggested that critics of referendums don't trust the voters to make good decisions.

The granddaddy of all property tax referendums is Proposition 13 in California, which passed in 1978. Under it, the property tax rate is 1 percent statewide, and property tax increases are limited to no more than 2 percent each year so long as the property is not sold.

The Howard Jarvis Taxpayers Association, named for the businessman who started the tax revolt in that state, says the measure has saved Californians $28 billion.

Peter Schrag, a former editorial page editor at the Sacramento Bee and an author who has written extensively about California's experience, said voters would overwhelmingly approve Proposition 13 again today.

But, he said, it has come with a cost. Local governments can raise local sales taxes, a fact that has driven economic development toward retail and away from manufacturing. Other fees have jumped as well. And, he said, spending per pupil has dropped to $600 below the national average in 2000 from $600 above it in 1978.

Many schools, though not all, were forced to cut programs, he said.
Parents in wealthier communities simply raise money privately to pay for the extras they want, such as music, art and foreign language teachers. Low-income parents can't match that, and the inequity between school districts in California has grown.

Massachusetts

Prante, the economist with the National Tax Foundation, said one state that has been "fairly successful" in slashing property taxes is Massachusetts, which passed property tax reform in a ballot proposition in 1980.

"Tax-achusetts is actually gone," Prante said, using the nickname that has long haunted the state.
Still, Prante said, "there is no such thing as a free lunch."

Massachusetts cities and towns have seen services suffer as revenues shrank and state aid dropped, said Joel Barrera, project director of the Metropolitan Area Planning Council in Boston.

A 2005 report by that council documented some of the problems: One town of 5,000, Hampden, had to close its town library, shut down its senior center and recreation department, lay off a couple of highway employees and even shut off all 150 of its streetlights temporarily.

Barrera said that as the state's economy has improved in the past couple of years, state aid has picked up, relieving some of the problems. But, he said, property taxes and how to fund local government "is still a political football here. . . . People are paying more in taxes and getting less in services. It's caused a great deal of frustration."