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.
