Controversial taxes Featured

8:00pm EDT October 26, 2007

Property taxes affect everyone from business owners to homeowners. So, when they increase, there’s rarely a positive response from those parties.

Take Indiana, for instance. Recently, there were unprecedented property tax increases in areas across the state, including a high-profile neighborhood in Indianapolis. After shouts of protest from taxpayers, one solution was to increase business taxes. But, not everyone sees that as a solution, including Mark Palmer, chair of Sommer Barnard’s Governmental Affairs Group, and Gretchen Gutman, a member of the firm’s Government Services Practice Group. They believe increased business taxes could seriously impede Indiana’s economic development.

Smart Business spoke with Palmer and Gutman about the property tax dilemma in Indiana and possible viable solutions for it.

What has caused all the controversy over property taxes?

Property taxes have been a continuing concern of homeowners, business owners and local and state government officials for years. This year, we’ve seen unprecedented property tax increases. Irritated property owners, who in most cases are also voters, demanded that government take action to reduce property taxes. The resulting anger resonated with the media and elected officials.

How have government officials responded?

Initially, there were calls for a special session of the Indiana General Assembly to address concerns. Some suggested replacing property taxes with increased sales or income taxes, consolidating or abolishing certain governmental services or units, and having state government assume certain local expenditures. It became evident there was no clear or immediate path toward property tax relief. Government officials responded by initiating fundamental tasks, such as reviewing assessment methods, collecting data and re-examining budgets.

Who’s to blame for the property tax problem?

Everyone and no one are to blame. Citizens demand services. Voters demand that budgets be trimmed or programs eliminated, but they only seem willing to cut the programs that are important to someone else.

On the other side of the coin, candidates for public office are more inclined to say ‘yes’ to voters demanding additional services. Have the budgets of our government units grown disproportionately to the demands placed on them by the citizens? This ongoing tension reflects the delicate balancing act that occurs during every budget cycle of every government unit. Some claim the property tax dilemma is caused by too many units of government performing the same tasks. In some areas of our state, one can reasonably argue that’s the case. Others assert government waste is the problem, and services can be provided more effectively and efficiently. No one can deny that continuous improvement should be the goal of every government official and every government unit. These issues will be examined very closing during the next session of the Legislature.

What has caused the property tax increase and the subsequent calls for reform?

There are several contributing causes. One of the most important factors was the 1998 Supreme Court decision in the Town of St. John case that, in essence, directed Indiana assessors to measure property values based on their potential selling prices — a system called market value — rather than using their previous subjective method. The Supreme Court decision also required trending, or the annual adjustment of assessed values for changes in market values. These modifications were adopted in 2001 resulting in a six-year price adjustment, which means we are just now seeing the results.

Indiana’s recent run-up of housing values is another factor that caused assessments to increase significantly. Plus, Indiana is suffering from a somewhat stagnant business tax base. We obviously have many bright spots, but overall, the state’s business tax base hasn’t grown in the past several years. Moreover, in a concerted and bipartisan effort to attract business to the state, some business taxes were lowered or eliminated.

Finally, the 2005 General Assembly capped the growth of property tax relief in the state budget at just over $2 billion a year, which became effective in 2007. In an effort to provide relief to the homeowner, the Legislature in 2006 increased the homestead deduction from $35,000 to $45,000, which knocked many residential parcels, admittedly at the lower end of the spectrum, out of paying any tax at all. The net result is that there’s been a shift, with more reliance on middle and upper residential property tax payers and less reliance on business taxes.

What does this mean for businesses?

Neither of us would be surprised to see the General Assembly eliminate residential property taxes altogether but keep property taxes on businesses. You may also see an increase in both sales and income taxes to make up the difference. Some people are also calling for businesses to pay increased taxes overall. However, increased business taxes could make Indiana less attractive for businesses already in the state as well as companies looking to locate or relocate and seriously impede Indiana’s economic development environment. We hope the General Assembly recognizes the risk to the state’s economy should it attempt to solve the property tax problem by solely looking to Indiana businesses to pay increased taxes.

MARK PALMER is chair of Sommer Barnard’s Governmental Affairs Group. GRETCHEN GUTMAN, counsel to the firm, is a member of Sommer Barnard’s Government Services Practice Group. Reach both at (317) 713-3500.