Saturday, October 9, 2010

Putting a bad idea in the Constitution is a bad idea

Don Wheeler

When the push for limits on property tax rates was in full swing, the promised benefits sounded too good to be true.   It was hard for any of our representatives to vote “no”. 

The state of Indiana assumed responsibility of public school funding; thus, it would no longer be subject to the vagaries of the property tax income stream - and citizens hard-pressed to pay these taxes would be given some relief of their burdens.  So we were told.

Turns out, they got us both coming and going. 

School funding was cut when revenue from state tax collections fell.  And the people who got tax relief weren’t typically the low and middle income folks most of us hoped would get it.  Here’s why.

Most Hoosiers who own homes live in them and owe money on them.  This entitles them to two discounts on their property tax fees.  Exemptions are available for Homestead (living in them) and Mortgages (owing money on them) – which typically cut the bill by over half.  There are maximums on these exemptions, however.

Estimates vary by tax rates and other factors, but in general for owner occupants with mortgages, home value would need to exceed the $250,000 – 300,000 range to experience any reduction in their tax bill due to the 1% of value cap.  While it’s true that homes without debt would experience a discount at a somewhat lower threshold, the major discount comes from the Homestead exemption.   What is certain is that owners of pricey homes do benefit. 

You might think folks offering quality rental units in working class or struggling neighborhoods will benefit from the 1.5% cap.  After all, these homes often have fairly low market values.  Let take the example of a house my wife and I own in just such a neighborhood. 

After conducting a search of sales of comparable properties, I discovered the highest price paid in the applicable year was $34,000.  Some sold for substantially less.  Yet our taxing authority insists the value is $65,000.  How, you wonder?

Good question.  Turns out for rental property, these folks can ignore the market value in favor of some little-known rental value formula.  This makes appeals pretty difficult.  More to the point, our tenant’s rent has to cover nearly $200 per month in real estate taxes on a home worth around $40,000 tops.  This effectively shifts the tax burden to those of lesser means again.

Now we’re asked to enshrine this program into the Constitution of the State of Indiana.  And polls suggest it will happen.

Ask Californians how that worked out for them.  Public education in California used to be a model for the world.  Now it lags behind national averages.  Locking in tax rates in this manner allows no opportunity for legislatures to address changing circumstances.

It’s not as though passage of the proposal will create anything new.  What it will do is make a program, which shifts the taxation burden proportionally to those who need relief from those who don’t, next to impossible to fix.  

Fool me once – shame on you.  Fool me twice… you know the rest.

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