TAX NEWS - JUNE 2010

Indiana Tax: Caps cut services along with taxes

Government agencies look for ways to fund what people want

by Francesca Jarosz, 01 June 2010 -- Libraries closing. Bus routes shutting down. Schools shuttering. Students paying for their rides to school.

Those are some of the possibilities being considered as this reality sinks in: Property tax caps stripped $79 million from government agencies in Marion County this year -- leaving about 9 percent less than they budgeted from property tax revenue.

The caps, passed by state lawmakers in 2008, were designed to relieve taxpayers struggling to pay skyrocketing bills and rein in local government spending.

They've done both, but in the process, they've forced local agencies to contemplate cutting what some believe are essential government services:

» IndyGo, facing a $3.2 million property tax shortfall due in part to caps, has considered closing routes and raising fares.

» Indianapolis' public library system has looked at closing six branches to offset the squeeze from property tax caps, projected to be $8.8 million over the next three years.

» Franklin Township Schools could be forced to close two elementary schools, lay off teachers and virtually eliminate free student transportation in light of losing an estimated $12.5 million to caps for this year and in 2011 combined.

The city has stepped in to help the libraries and bus system find alternatives to those drastic measures, and a voter referendum next spring could save Franklin Township from its hardship.

But the current challenges are just the first signs that the way local government works in Indiana will change under the caps.

The property tax revenue lost this year isn't coming back anytime soon, and sources that help supplement it, such as income taxes, also are dwindling.

For residents in Marion County, that could signal the dawn of an era of drastically leaner government. Not only will services be more limited, but, experts say, the revenue lost to caps and other forces will push more government units to consolidate. And the cost of providing government services, increasingly, will shift to those who use them -- often in the form of fees.

"We're almost getting to where it's government a la carte -- I just want to pay for the government that I use," said David Bottorff, executive director of the Association of Indiana Counties. "Governments are re-evaluating the services that they offer."


Economy takes a toll

Every county in Indiana lost some revenue from property tax caps this year, according to state figures. But the hardest-hit were urban areas such as Marion County, where the need for more services creates a demand for more money to provide them than in rural and some suburban counties.

But the caps aren't the only factor driving property tax revenues lower.

Collection numbers decreased last year in a tough economy that brought more foreclosures and made it harder for people to pay, said Cindy Land, administrative deputy for the Marion County treasurer. Refunds and bill corrections from a tsunami of property tax appeals dating to 2007 also deduct from property tax revenue.

All told, the county lost $140 million in property tax revenue between last year's collections and this year's caps.

Some expect collections will improve in the next few years, but that won't mean a full rebound in revenue. The $79 million tax cap shortfall that Marion County experienced this year is expected to increase to about $93 million in 2011.

That has a drastic impact on agencies such as libraries, which rely on property taxes for almost all of their funding, and IndyGo, whose sole source of local money is property taxes.

Even for city government, which relies on property taxes for about a third of its budget, money will be tight.

That's because another significant source of revenue for the city also is taking a hit. In 2011, the city's share of income taxes will drop by $22 million, or 16 percent, as revenues reflect the rough economic year in 2009.

City Controller David Reynolds said the city will handle those trims with minimal impact to services by looking for services such as information technology and human resources to consolidate and possibly pushing departments to reduce their energy use.

The city also will use non-property tax revenue, such as insurance money from a retired bond and sewer rate payments, to invest in things such as infrastructure and vehicles to cut operating costs.