Thursday, February 7, 2008


Indiana’s tax revolution coming to education

INDIANAPOLIS - I heard the news today, oh boy. Michigan City Schools could lose $1.4 million in 2009 if Gov. Mitch Daniels’ cap’n'cut tax reforms pass. Indianapolis schools could lose $14 million. South Bend could lose $6.84 million, Hammond $13 million, Gary $8.2 million. Wayne County schools could lose $1.2 million in 2010.

Centerville Supt. Phil Stevenson told the Richmond Palladium-Item, "It’s a killer." It knocked the wind out of me. It’s just another blow for education."

And yet this plan passed the Indiana Senate. It voted 41-7 for Senate Joint Resolution 1 on the constitutional caps for property taxes. It voted 47-1 on SB12 on the circuit breakers. Similar legislation passed the Indiana House 93-1. So is the governor and the legislature sticking the shiv into public education?

What I didn’t understand is how public schools could be losing all this money when the House legislation, for instance, calls for the state to fund 100 percent of school operation and transportation costs. Currently, the state funds 85 percent and your local property taxes pay for the remaining 15 percent. If the state is paying 100 percent of the operational costs, how come we are hearing about teacher layoffs?

"The governor’s plan provides that the remainder of school operating and transportation costs are picked up by the state," said Daniels spokeswoman Jane Jankowski. "The figures the school corporations are discussing are the effects of the circuit breakers on remaining spending from property taxes once the plan is implemented. The latest Legislative Services Agency report on the Governor’s plan as introduced shows collectively that the impact to school corporations is about $153 million less statewide once the circuit breakers are fully implemented in 2010.

"The shortfalls come in places like debt service and capital projects," Jankowski adds, "Even with that circuit breaker impact, schools will still have 7 percent more in 2010 than in 2007." The governor’s plan does not include an offset to the cap for schools. Limiting local government and school spending is one of his core plan elements. Or as he described it to the Association of Indiana Counties, taxpayers don’t need to be funding "exploding scoreboards and edgeless swimming pools."

"The plan includes the ability for schools to move money among funds, so school corporations will be able to use operating and transportation dollars to manage the circuit breaker," Jankowski explained. Budget Director Ryan Kitchell told HPI, "The governor has been pretty clear that what he wants to try and achieve is a tax cut. We want to take care of schools. We’re going to pay for all the school costs, the bus drivers, the fuel. One thing we think is real important is in all these different funds, you’re locked in. There might be $10 million in one fund and we wanted to reduce some of the barriers. There will be a lot more flexibility there. We think it will help them manage and not just squeeze."

Andrew Norris, policy analyst for Senate Republicans, explained, "School districts must continue to pay their debt service obligations, which means any loss in funding due to implementation of the circuit breakers will force school districts to make cuts to their capital projects fund. The superintendents do not want to see their ability to build new schools impaired by a lack of funding due to the circuit breakers. They are also not in favor of the governor’s plan to offset any losses by transferring monies from other funds, namely the operating and capital projects funds."

The Indiana State Teachers Association opposes the state assuming 100 percent of the general fund. It says that property taxes have been a stable funding source, economic forecasts are predicting an economic slowdown, and 950 schools have not made the Adequate Yearly Progress mandated by the Bush administration’s No Child Left Behind. "Demanding more of students while providing less instructional support is unfair, especially for students most in need of additional assistance," said ISTA Executive Director Warren Williams.

"School general fund property taxes are not the cause of the current property tax issues," said the ISTA’s Nathan Shnellenberger.

There are points where the ISTA appears to approach the governor’s perspective. It advocates separating school construction projects into "learning facility" and "auxiliary facility" components, and urges "local units of government to collaborate on the construction and use of auxiliary school and community facilities.

"In my school district, taxpayers are paying for a $14 million swimming pool (it was originally proposed at $20 million) while there is a YMCA across the street that just went through major renovation. Daniels is asking school districts to start sharing football and basketball stadiums. He is urging districts to consolidate, as did the Kernan-Shepard Commission. There is legislation, for instance, that would pool school construction blueprints so that each new school project doesn’t start from scratch. A middle school in Lawrenceburg might just look like one in Auburn. "I understand the logic behind having a common set of blueprints to use, and I think that would save money, and in many cases that would be reasonable," ISTA’s Schnellenberger said.

Derek Redelman of the Indiana Chamber of Commerce explains that the ISTA wants to control the general fund rates. "That hits right at the problem with property taxes," he said.. "They’ve seen the property tax as the guarantee for the amount of money. They could get whatever money they needed. Taxpayers are saying, ‘We’re not going to take that any more."

Redelman predicts that when the caps pass (and they almost certainly will), "the immediate focus will be on cutting teachers." When Daniels was asked recently about teacher cuts, he responded by asking why would teacher cuts be the first option?

"Everyone focuses on teachers," Redelman said, adding that half of school employees in Indiana are not teachers. "Why not the janitorial staff or assistant superintendents? If schools end up facing cuts, we’ll see story after story about teacher cuts," he said.

There’s a revolution underway in Indiana and it’s about to hit the schools.

From Howey Politics Indiana
Thursday, February 7, 2008

Blunt Proof of the Feasibility to Permanently Abolish Property Tax

Media Contacts:
Melyssa Donaghy 317-938-8913
Max Katz 765-409-6669

Hoosiers For Fair Taxation, Senator Delph, Representative Noe, Representative Elrod and many other legislators along with Stop Indiana, attorney John Price, Eric Miller's Advance America, and the Statewide Taxpayer Alliance know that property tax abolishment, without substantial increases in sales tax and income tax, is realistic and possible. The economist Dr. Bill Styring's 2/2/2 Plan demonstrates that the state of Indiana can completely replace property tax without changing the state's current spending habits.

Dr. Styring's plan does not account for positive changes in Indiana's economy that will undoubtedly follow the elimination of property tax such as heavy real estate investment and increased consumer spending due to increased statewide disposable income. The real estate investment in Indiana alone would cause such an economic boom that it could likely end our abandoned property and foreclosure crisis. Property tax elimination would also likely cause a surge in Indiana's population as more people locate to Indiana to take advantage of real estate purchase opportunities without the burden of property tax. With the population surge would come more sales and income taxes.

The General Assembly does not have to adopt a specific plan until the year 2011. In the meantime, we recommend that the General Assembly approves the 27steps outlined in the report prepared by the Sheperd Kernan commission. While the Governor's commission cannot forecast the savings to the state once the plan is implemented, there is no doubt that the savings would be substantial--perhaps equivalent to the the entire property tax burden currently placed on Indiana's homeowners because our legislators have not had the political will to liberate Indiana's governing structure and her taxpayers from the 19th century.

Our citizen networks will work to replace all legislators who do not support property tax repeal in the November 2008 election.

The 2/2/2 Plan, to replace property taxes in Indiana based upon the latest revenue forecast (07/08 fiscal, estimate):

1) Current IN sales tax (state level rate of 6%): $5.601 billion2% increase would yield an additional $1.867 billion

2) Current corporate profits tax: ~$2 billion

2% increase would yield an additional $.286 billion ($286M)

3) A 2% statewide average of the COIT would yield $2.705 billion to cover local civil units of gov.

By adding these three together ($1.867 billion + $.286 billion + $2.705 billion), a total of $4.858 billion is realized; enough revenue to replace property taxes.

Indiana has a 70-plus year history of attempts to lower property taxes by raising other, non-property taxes. In every case these have failed miserably. The new taxes, or higher rates on old taxes, remain in place. And, in short order, property taxes rise back to their old levels, poised to roar even higher.

--1933. General Assembly imposes two new taxes: an individual gross income tax and a corporate gross income tax. The morgue of the Indianapolis Star indicates that the political leadership at the time said this was for property tax relief (1933 was the pits of the Great Depression, and people were losing their homes. Home prices declined by over 40% in the 1929-1933 period). Property tax relief was nonexistent. The state used the money to bail out the state's own finances.

--1963. General Assembly imposes a new sales tax at a rate of 2% and changes the 1933 individual gross income tax (from 1933) to an adjusted gross income tax (the one we have now) at a rate of 2%. Again, the ostensible reason was for property tax relief and again little PTR was forthcoming.

--1967. Those 1963 tax changes were raising more money than projected. The GA decides to give back 8% of sales and income tax revenue to local government for property tax relief. Local units spent the money. No PTR.

--1973. Gov. Otis Bowen launches the most determined PTR offensive yet. The sales tax goes to 4% and a new corporate supplemental net income (profits) tax is imposed. Strict property tax levy controls are imposed. It works... for a time. By 1980, property taxes adjusted for inflation are some 30% lower than in 1973. When Bowen leaves office the levy controls are relaxed. By the end of the decade, property taxes (adjusted for inflation) are back to 1973 levels. The doubling of the sales tax rate from 2% to 4% remains in place, along with the new corporate SNIT.

--2002. More fiddling with the sales tax in the hope of property tax relief. The results of this are obvious, or we wouldn't be debating the current property tax mess. All of this suggests that unless the property tax is totally ripped up by constitutional amendment, the assessment and collection mechanism dismantled, it will grow back. The PTR-inspired hikes in other taxes remain. That is our history. It is a terrible deal for taxpayers.

2. A vote in the 2008 legislative session for a constitutional amendment to repeal property taxes does not amend the constitution. It merely starts the amendment process. Amendments must be passed by two consecutively elected General Assemblies, then submitted to a referendum. Thus any amendment passed by the '08 Assembly must be passed by either the 2009 or 2010 legislatures, then submitted to the voters at the 2010 general election. The General Assembly does not need to decide on a "replacement revenue" package until the 2011 session.

3. What might such a "replacement revenue" package look like? The particular answer will come from the 2011 General Assembly and cannot be determined now (if for no other reason than forecasting state level taxes and property taxes out that far would be a most unreliable exercise. No one need be locked into any particular plan just yet. However, as an illustration that a replacement plan is feasible and less scary than many fear (we don't need to be talking about a 12% or 13% sales tax ... in fact, we should not be), consider just this one possibility.

Local sales taxes are generally very bad policy, for a whole host of reasons too numerous to mention in this short sketch. Sales and corporate taxes are best levied at the state level. It happens that roughly a 2% increase in the sales tax and a 2% increase in the corporate profits tax roughly take care of school propertytaxes. The loss of local control by the state assuming school property taxes is minimal. About the onlylocal control left is on building projects.

For local civil units, a statewide average increase in the individual adjusted gross income tax of about 2% suffices to replace local civil government property taxes, higher than 2% in some units, less than 2% in others.

Thus, a "2-2-2" plan~2% sales and 2% corporate profits at the state level for schools and a 2% average on personal income taxes for civil units—is about what would be needed. This is merely a ballpark projection to 2011.

There may be better plans, it's really a policy question for the General Assembly: do you want to make the trade of something like this in exchange for no-property-taxes-forever-on-anything? Everyone understands "zero."

4. Are there "practical problems? Of course. The two identified are how to make the civil government transition from a property tax base to an income tax base, and how to handle debt backed by property taxes. Without elaborating, the former can be handled using locator software (Map quest-type programs). The debt problem might be handled by treating the current state paid PTRC's as in lieu of property taxes (which they are) and paying PT-backed debt service from each unit's own PTRC.

Conclusion: Total elimination of the property tax via constitutional amendment is the only way to give property tax relief that will stick. The other tax action necessary to achieve this goal—in 2011-are large but not so scary as "a 13% sales tax." They are feasible. The question is for the General Assembly. Are we going to once again go down that 70-odd year path of failed PTR policies or are we going to rip the property tax up by the roots?

Posted by Hoosiers For Fair Taxation on Friday, January 4, 2008.