Friday, August 29, 2014

Leib: A hypothetical built on an assumption

Thoughts on Elkhart County’s CBR LOIT “Disappearing Tax,” and why it doesn’t have to ever disappear.

Posted on Feb. 21, 2014 at 4:22 p.m.

Thoughts on Elkhart County’s CBR LOIT “Disappearing Tax,” and why it doesn’t have to ever disappear:

CBR LOIT stands for Circuit Breaker Relief Local Option Income Tax. It’s an idea for a new tax that might be temporary. Some skeptics say it’s a hypothetical built on an assumption.

Here’s why:

I’d like to start with a useful definition of “tax cap” or “circuit breaker” (essentially, they’re different terms for the same thing.) The oft-referred-to cap seems to monopolize commentary from pro-tax activists who are trying to simplify and sanitize the loss of government income from taxpayers.

In a recent article about taxation ("Elkhart County leaders say the state should 'pony up' funds to offset losses to any business property tax," Feb. 16 Elkhart Truth), the term “tax caps” was used six times as the blame for the shortages in budget funds. But it is falling property values for the most part, not tax caps, per se, that best explain the reason tax income has dropped.

The point is, almost everyone is struggling. And it is not just those who can’t find work or those who are working at lower paying jobs. Many retired people are especially hard hit.

One retired person told me he and his wife were living on half of their previous income. Another couple said they’d lost 80 percent of the income they were getting from savings because CD interest had dropped to almost nothing. They were thankful their property taxes hadn’t gone up to pinch them even more.

Before caps were passed, local money requests were created and presented to taxing authorities. If the authorities were convinced those requests were reasonable, much of the money could be demanded from property owners. There was no limit as to how much could be taken from property owners.

Property taxes kept increasing to satisfy increasing demand until state lawmakers created and passed legislation meant to establish a ceiling over which taxes could not be raised. In 2008, taxation was capped at 1 percent, 2 percent, or 3 percent of gross assessed value depending on the type of property.

“Tax cap” is simply a term that means, “You’ve reached the limit of how much you can take from me.”

People who are taxed over the cap receive relief in the form of a “circuit breaker credit” to reduce the property tax bill to the capped amount.

The new law was not a tax-saving proposition. It was a shifting of who pays what. At the same time this ceiling was established, a higher sales tax was imposed. And fueled in part with the increased sales tax, the state began to pay a larger share of local school funding than it had before.

It might have worked just fine if there had not been a recession. But there was, and property values dropped. A home valued at $100,000 theoretically could be taxed up to $1000.. But if that home’s valuation dropped to $70,000 it could only be taxed up to $700.

So municipalities’ budgets are now hurting. And either a new source of income must be created, or budgets will have to be cut. Or, realistically, both of these things will have to happen.

The promise of the new “disappearing” tax is that when property values grow, circuit breaker credits will disappear and then the CBR LOIT tax will go to zero. But it’s an assumption that as property values grow, budgets won’t grow, too.

As long as more money is asked for than capped values will allow, the circuit breaker credits will not disappear. And the new tax will live on.

The CBR LOIT is a better idea than other local option income taxes, and those who came up with it should be congratulated. But I am skeptical about the disappearing part. I’d like it more if it had a sunset clause or a budget cap.

And I’d like it if everything wasn’t blamed on so-called “tax caps.” That is clouding the issues.

Former Elkhart furniture store owner Richard Leib has served on planning committees in several industries. An avid auto fan, he raced in the 1972 coast-to-coast Cannonball Run. He has written on a wide range of subjects.

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