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State tax caps trap local governments

David A. Lieb, Hasan Dudar
Associated Press

Brandon Mundell, owner of Toys Forever, Models and Hobbies, stands outside a closed downtown fire station March 18 in Muncie, Ind. Mundell says he is disappointed the property tax cap has led to the city closing the downtown fire station. (AP photo by Michael Conroy)

Muncie, IN — First, the state of Indiana put a limit on how much money Mark Burkhart and his colleagues in the state’s school districts could raise with local taxes. Then the state informed them they’d be getting a smaller check from the state.

Now the chief financial officer for the Muncie schools, with more than a dozen buildings and 8,000 students, has less money to spend and a limited ability to raise more.

“We’re not going to fix parts of our buildings that need repair unless it’s a life-safety issue,” Burkhart said. “Probably there’ll be some drippy faucets, there’ll be some leaking roofs, there’ll be some broken window panes we may put tape over.”

It’s a challenge for local officials such as Burkhart. In the past year, at least 10 states have imposed or called for new limits on the ability of local governments to raise taxes. At the same time, faced with budget gaps measured in the billions, many of those states have reduced aid to cities, counties and schools.

The combination has left mayors and school administrators grasping for options and wondering what happened to “local control” — a tenet of small-government conservatives. It’s an idea being swept to the side in favor of a new focus on cost-cutting and fiscal restraint following the resounding Republican victories in the 2010 elections.

In Wisconsin, Gov. Scott Walker has proposed slashing aid to public schools while simultaneously restricting schools from raising property taxes.

In Minnesota, a plan backed by the Republican-led House would cut state aid by $250 million over the next two years to Minneapolis, St. Paul and Duluth while simultaneously reinstating a local property tax cap that had expired.

“There’s a lot of controversy surrounding the timing of some of these measures,” said Pete Sepp, executive vice president of the National Taxpayers Union, which supports the efforts. “Maybe this is the way to send a clear set of instructions to local government that we want to see more emphasis put on spending restraint.”

Property taxes, in particular, have long been derided because they don’t necessarily reflect a person’s economic circumstances. Spend more, and you pay more in sales taxes. Earn more, and you pay more in income taxes. But people who have retired or lost their job can still get hit with higher property taxes if their homes have risen in value.

It is also often easier for local officials to tweak property tax rates to make up for other revenue losses. From 2008 to 2010, for example, state and local sales tax revenues plunged nearly $13 billion, a decline of about 3 percent, as the recession cut into consumers’ spending. But property tax revenues rose 6 percent, up almost $25 billion, according to the federal Bureau of Economic Analysis.

In Indiana, state lawmakers set property tax caps that took full effect in January 2010. Indiana taxpayers saved $478 million last year, money that didn’t go to schools and local governments, according to the Indiana Legislative Services Agency. At the same time, schools got $450 million less in state aid.

Communities inherited the state’s budget problems but were denied options for solutions, said James Borgmann, director of the Muncie Downtown Development Partnership. The central Indiana city about 50 miles northeast of Indianapolis has closed fire stations, laid off police and even contemplated shutting off some streetlights to deal with the loss of $8 million in property taxes since 2009.

Brandon Mundell, 32, said he fears that his toy and hobby store in Muncie’s historic district is at risk now since the only fire station within a mile has been closed. The two nearest fire stations now are on the other side of a railroad track.

“If there was a potential train,” Mundell said, “your response time goes dramatically up, and that’s something you can’t predict.”

Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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