Some say new property tax caps will cost taxpayers more than they save

INDIANAPOLIS — In his sixth state of the state address, Governor Mitch Daniels applauded State Senators for passing a bill Tuesday that will put a referendum before voters, asking them whether Indiana's new property tax caps should be put in the state constitution. But, some say that move would actually cost taxpayers more than it would save. A Call To Action During the speech before a joint session of the General Assembly Tuesday night, Daniels (R) acknowledged Indiana is facing tough times, but said the problems in other neighboring states are much worse. He also called on lawmakers to pass several bills, including one allowing the state's two pension funds to be overseen by one entity. He estimates that would save up to $50 million. "Life is difficult tonight for far too many Hoosiers," Daniels said. "An economy booming at full employment a year and a half ago has taken several steps back." Daniels also wants to pass bills to help collect delinquent child support payments, tighten ethics rules for lawmakers, streamline local government and make new reforms in Indiana schools. "Sending an illiterate child on to higher grades is unfair to the next teacher, damaging to our state's future, but cruelest of all, disastrous to the young life being blighted by that failure," Daniels said. "If, after four years, the system has failed in this most fundamental duty, then it will simply have to try again until it gets it right. I ask you to pass our bill to stop social promotion, and to say to the world that Indiana never gives up on its children, not one single kid," he continued. Daniels went on to say--when the dust settles--he thinks Indiana will have a larger share of America's auto, RV and steel jobs than it had before the recession. "Heartfelt Congratulations Daniels wrapped up the 30 minute address by thanking lawmakers for their work to make Indiana's new property tax caps more permanent, by placing them in the state constitution. "Just eight days into session, this Assembly has already made history by completing and safeguarding some excellent work you began two years ago. In 2008, you passed the largest tax cut in state history, and reduced Indiana's property taxes to some of the lowest in the nation," Daniels said. "At a time when every penny counts, and home foreclosures are a national epidemic, you lowered the annual cost of owning the average Hoosier home by more than $500. The American dream of home ownership is more affordable in Indiana tonight than in virtually any other place in our country," Daniels continued. The new caps took full effect on January 1, 2010, and cap property taxes at one percent for residential properties, two percent for rental properties and three percent for commercial properties. But, the Governor said those caps will always be vulnerable to either legislative or judicial repeal unless protected by the constitution. "At 2:31 this afternoon, the "people's branch" of government lived up to its name. You gave the people the chance to decide, as I believe they will, that lower property taxes are here to stay. Thank you for this latest bold move to show the world that in Indiana, we trust our fellow citizens and we truly put the interests of taxpayers first," Daniels told the General Assembly. But, some lawmakers aren't so sure this move to put the current caps into the state constitution--making them much harder to alter or remove--would really put taxpayer's first. "One study shows the "average" Hoosier earning $40,000 a year with a $70,000 home--because that's the average Hoosier--that person is a loser under this bill," said State Senator John Broden (D-South Bend) who voted against the bill Tuesday. "If you have a $500,000 home with a high assessed valuation, you're going to benefit from the property tax caps. So, there are winners and loser. But, I think there's more losers than winners," Broden continued. Furthermore, Broden said, there hasn't been ample time to study the affects the new caps might have on local governments. "They've only been in effect now for a period of 19 days. They haven't been fully implemented, so we don't know what their full impacts are going to be. No one has any idea what their full impact is going to be," Broden said. Why the Increase? The problem isn't the caps themselves, experts say, but so-called "replacement taxes" used to make up revenue lost from lower property taxes to local governments. That now includes a one percent higher sales tax across the state and higher local option income taxes in many counties--including St. Joseph--where LOIT rates recently more than doubled. "From an economic point of view, there are two principles upon levying taxes: the ability to pay and the benefit principle. Property taxes are based more on the ability to pay," said Indiana University-South Bend Economics Professor Dr. Douglas Agbetsiafa. "Using a system like sales taxes, it's not equitable. It's regressive. Say I go to the store and I make $100,000 a year and I buy an item. Then, someone comes along that makes $50,000 a year and we both pay seven percent or eight percent sales tax. One of us is paying more of our income, even though it's the same price. That's regressive, because it's taking more from the lower income person," Agbetsiafa said. The result, Agbetsiafa said, is almost inevitable. "Individuals will not be effected equally. We can't say it's good or bad for all. Because it will save some people money. But, some individuals will end up paying more," he said. Indiana House Speaker B. Pat Bauer (D-South Bend) agreed. "They're more show than go," he told WSBT by phone following the Governor's address. "I think it will help the rental properties and the landlords, but not [the average Hoosier homeowner]." A Step in the Right Direction Supporters aren't arguing that the caps will reduce bills for every taxpayer, but many say they are a step in the right direction. "This bill isn't perfect, but it's a good start. It's a step in a positive direction. And the most important part is, it allows people to have a say in it," said Rep. Tim Neese (R-Elkhart). Supporters argue that the caps help clear up a complicated tax structure, and placing them in the state constitution will allow homeowners and businesses to better plan for a more stable financial future. "That is a valid point, because it allows long term planning. It allows consistency. Taxpayers will know that by law, localities cannot raise property taxes," Agbetsiafa said. Many also point out that the caps will mean real savings for many Hoosiers, and that they won't be placed into the constitution unless voters approve. Debate Ahead The issue will appear on ballots across the state this November, and by all indications, it will get lots more study before then. "That debate is healthy, and I think we should strive for as much coherence to the Indiana tax system as we can," Agbetsiafa said. But, lawmakers will likely be striving for many other things during the remaining six weeks of this year's "short" spring session. Reaction and Pro-action Some Democrats applauded Daniels' call for increased government efficiency and streamlining to help weather the current economic storm. But, they also felt his address Tuesday lacked one key component. "The Governor mentioned one out of 11 Hoosiers are out of work. If I were one of those out of work, I'd be a little disappointed that I didn't hear any reason for optimism going forward--no plans to create jobs this coming year and coming session," Broden said. "I'm disappointed by the lack of vision for the future of Indiana as the state recovers from the recession," agreed Senate Democrat Leader Vi Simpson (D-Elletsville). "He had none," said Bauer, when asked about the Governor's job creation plans unveiled in the speech. "There were none. He did talk about other states being worse off. But, that doesn't help us." But, Republicans argued that's exactly what it does. "We have avoided the tax hikes, massive layoffs and tricky accounting sometimes used to weather these storms. By being mindful of our fiscal health, Gov. Daniels has kept Indiana in the black, thereby making us even more attractive to businesses looking to relocate and create jobs," wrote Indiana GOP Chairman Murray Clark in reaction to the address. "Thanks to his leadership, we will come out of the recession more quickly and in better shape than almost any other state in the country," the statement continued. It's no surprise that jobs are the number one priority in Indiana and Gov. Daniels focused on this issue,” Neese agreed. “[His] ideas will continue making Indiana an environment where employers can grow and retain Hoosier jobs.” "It’s without question this recession is affecting us all," said Rep. Wes Culver, (R-Goshen). "I know times are tough for Hoosiers. But together we can overcome these difficulties and be a better Indiana on the other side.” To read a full transcript of Governor Daniels' 2010 State of the State address, click here.