SOUTH BEND, Ind. -- The general concept of property tax caps may sound simple: To limit the cost to property owners, property taxes can be no more than a fixed percentage of the property's assessed value.
But the impact to communities and property owners — like taxes themselves — is anything but simple.
As officials in St. Joseph County go through their budgeting processes, they've picked up a few indicators of how the caps are working. Studying those, says tax economist Justin Ross, an associate professor in the School of Public and Environmental Affairs at Indiana University Bloomington, can give residents a good idea of what the impact will be five years from now when the caps are fully in effect here.
Tax caps, also known as the property tax circuit breaker, were implemented in 2008. Then-Gov. Mitch Daniels proposed the cuts, while raising the sales tax 1 percent. In a public forum in 2008 in Plymouth, Daniels argued the plan wouldn't cut funding to local government; it just wouldn't let it grow as much as it had in the past, encouraging frugality.
"When people say that they are going to lose this money, that is not correct," Daniels said. "For local governments, there will be more money as they move forward, just not as much as they expected."
Now, the numbers reflect that the process is working as it was intended, according to Indiana Department of Local Government Finance Commissioner Micah Vincent.
"The property tax caps are delivering the intended outcome of providing stability and predictability to taxpayers while also contributing to the overall positive tax climate in Indiana," he told the South Bend Tribune (http://bit.ly/UL61Sc ) in an email.
There was, and still is, some backlash from local government leaders because they say the reform falls short of supporting their efforts to provide the services their taxpayers need.
Ross said the amount of money that goes uncollected because of tax caps is felt throughout the state, but the impact has been especially great in St. Joseph and Lake counties. And, because the two counties had a disproportionately high amount of debt when the changes were enacted, both were exempted from the full impact of the tax caps for 10 years; the halfway point is this year.
South Bend City Controller John Murphy notes that property tax revenue fell significantly when the caps were first introduced, but the decline has leveled off and is projected to stay about the same for the next few years — somewhere between $45 million and $50 million.
Still, it would be nice to capture the ever-growing portion of taxes that goes uncollected because of the circuit breaker, he said.
According to state data, South Bend forfeited $28.71 million to tax caps this year. For all of St. Joseph County, including the cities, county government, libraries, schools and townships, it's more than $72 million.
Five years ago, just after the tax caps were first implemented, South Bend took a $16.6 million downturn in revenue; the county as a whole saw $28.54 million.
That loss — which has doubled to tripled over five years — is a challenge when it comes to keeping services at the standard residents expect, according to St. Joseph County Commissioner Andy Kostielney.
"We were fortunate enough to see it coming," Kostielney said of the tax caps. "We had the foresight to begin addressing the budget, and we're better off than some other communities."
But the St. Joseph County government recently sent a memo to department heads telling them to cut their current budgets by 3 percent, and next year's budgets by an additional 5 percent. Kostielney said the county had hoped to avoid those cuts, but they were needed to prevent more drastic measures down the road.
Mishawaka City Controller Rebecca Miller said Mishawaka's tax cap limitation was greater than anticipated in 2014. Coupled with a winter that cost much more in city services than expected, it's a recipe for a possible shortfall by the end of the year.
"We've asked departments to focus on necessities right now," Miller said by phone.
Miller said Mishawaka has always been on the conservative side when it comes to the budget process, but that she expects the city to have to "tighten the belt" a bit more in the coming years.
"We're hoping we won't see any loss in services," Miller said. "We're looking at new revenue sources."
For example, the Mishawaka Police Department and redevelopment commissioner have begun looking at more grant sources, she said.
Nothing's off the table, according to St. Joseph County Council President Rafael Morton.
When the tax caps were implemented, the state government increased the sales tax to 7 percent, generating an estimated additional $1 billion the first year, and assumed some of the financial burdens of the cities, counties and other taxing bodies. Even so, a gap remains, Kostielney said. For St. Joseph County government, that gap this year is about $7 million, a shortage commissioners will have to address before this year is over, as well as for the next budget, according to Kostielney.
Ross said there's also a new phenomenon because of the tax caps that has taxing bodies competing for the limited funds.
Ross used $1,000 as an example. If a taxpayer has met the caps, and pays $1,000 in taxes, then the taxing bodies must split that limited pot. The split is determined by their taxing rates — if they all tax at the same rate, the pot is split evenly. However, if one taxing body has a higher tax rate than the others, that body gets a larger cut of the pot. This situation means that increases in tax rates might not change what the taxpayers pay, but will change how taxes are split, he said.
"Just because you raise a rate doesn't mean you're going to get more money, if everyone else is raising rates, too," Ross said.
Because property tax rates have generally increased, a taxpayer whose bill has not yet reached the cap is probably paying more than in the past, Ross said.
South Bend resident Dick Matteson suspects he is one of those. His property taxes have tripled in recent years.
That was enough to motivate him to go into county offices to try to find out why. He said he was never given a complete answer. He did learn, however, that his tax rate has increased and so has the assessed value of his property.
Considering what he receives in city services, though, he said he feels the taxes are fair.
"But I do hope they don't keep increasing," he added.
Still, the property tax formula, tax caps included, is confusing, Matteson said.
"We've owned this property for 15 years," he said. "The annual taxes have been all over the board, up and down. It has varied quite a bit."
On the other hand, property owners already at the cap who are seeing their taxes hold steady, may be less engaged in the big picture.
Ross says, in his hometown, residents were upset when budget cuts necessitated eliminating a librarian at their library. Their taxes wouldn't change if she was kept on or let go, but those same residents might have been more understanding if their taxes fluctuated based on the budgets of local taxing bodies.
Among the options the reform provided local municipalities to mitigate their revenue woes is the additional revenue a Local Option Income Tax can generate. When officials enacted a LOIT here, they projected it would cancel out the circuit breaker. For South Bend this year, there's still about $5 million less from the caps than total revenue captured, including the LOIT.
Morton said he didn't like the idea then, or now, of using the tax as a tool to make up the difference from the caps. Kostielney said it was something of a "replacement" or "shift" of a tax burden, from property taxes to income, that was "unfortunate."
Kostielney said the impact of the caps is forefront in his mind, having met with other county officials over two months to find a way to deal with the $7 million gap in their budget from the tax caps. They have to cut budgets for this year, as well as budget projections for next year to make up the difference.
"We have certain responsibilities," Kostielney said. "We've got the keep the roads functioning, the streets plowed and policed. We must find a way to be more economical."
Kostielney said he hopes to deal with the lower property tax funds without more income taxes.
"It's a constant struggle not just for the government, but the schools and libraries, too," Kostielney said.
Another significant help would be increases in assessed valuation of property, according to Murphy, Miller and Kostielney. Property tax is derived from the net assessed value of a property. In 2014, the net assessed value for all of the property in St. Joseph County was $7.514 billion — down from just five years ago, when it was valued at $8.417 billion. A smaller tax base means less property tax revenue, regardless of the tax caps.
"The assessed value is what's killed us, quite frankly," he said. "It's a much bigger impact now than in the past. We need to put ourselves in a position to bring more assessed value to the area — it takes a long time for that it run its course."
Going forward, South Bend officials have hired consultants to project fund estimates for the next five years. Each budget cycle from here forward also will include not only the next years' budgets, but each department's estimates for four years beyond that, Murphy said.
Kostielney is particularly concerned that projections show the tax cap impact doubling by the time the caps are fully implemented in 2019-2020.
"We need to make systemic changes in the way county government is run," Kostielney said.
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Information from: South Bend Tribune, http://bit.ly/1jLrr97
This is an AP Member Exchange shared by the South Bend Tribune.
