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Great Recession and tax caps continue to chip away at property tax funding in Elkhart County

Now some are talking once again about increasing the income tax rate to offset the losses.

Posted on July 13, 2014 at 5:00 a.m.

Jobs weren’t the only casualties of the recession that clobbered Elkhart County and much of the rest of the nation.

Limits went into effect in Indiana in 2009 on how much homeowners and others pay on property taxes and, compounded with the recession, turned a dip in funding into a giant plunge for schools, cities and other Elkhart County entities. Consequently, three school districts asked voters’ help through local tax increases

Property taxes are tied to the assessed valuation of homes, businesses and other property, as determined by the county assessor’s office. The down economy and the parallel hit to the real estate market pushed the assessed valuation of property down (see the sidebar to find out more about the tax caps). That, in combination with tax caps, resulted in reduced property tax funding.

The losses, at least of for the largest units, have gradually increased each year since the new tax caps were phased in starting in 2009. Since, there has been plenty of hand-wringing and debate among many elected leaders, faced with trimming and slashing operations as a result.

Five years after the end of the Great Recession, the situation doesn’t appear to be letting up. Officials worry the losses will mount in 2015. And it’s renewed on-and-off discussion among some leaders about creating a new local option income tax — basically hiking the income tax rate here to offset the shortfall.

"If we don’t get extra revenue, we’re going to have to start cutting some services,” Goshen Mayor Allan Kauffman said.

Most germane, perhaps, is the level of property tax funding actually received after factoring tax cap losses. Property tax funding is the single biggest source of revenue for many taxing entities.

Elkhart Community Schools, judging by that parameter, saw the biggest loss in dollar terms. The system generated $32.78 million in property taxes in 2009 and that fell to $28.07 million a year later — a decline of $4.71 million.

Cumulative losses due to caps to county government and the cities, towns, townships, library systems and schools in Elkhart County totaled $42.63 million in 2014, up from $2.58 million in 2009.

More details: Losses to property tax caps mount in Elkhart Co., property tax funding dips

Steep tax hikes prompted tax cap legislation

Homeowners rose up in anger in response to steep hikes in their property tax bills — 23.6 percent on average statewide —  and, in 2008, Indiana lawmakers approved legislation that created tax caps and they were gradually implemented in 2009 and 2010.
  • There’s a 1 percent cap on gross assessed valuation for homeowner-occupied homes. A $100,000 home can only be taxed as much as $1,000.
  • The limit is 2 percent on homes used as rental properties.
  • The limit is 3 percent for commercial and industrial properties.
Property taxes on a particular piece of property are a function of the net assessed valuation multiplied by the tax rate. The lower the assessed valuation, the lower the maximum tax load will be.

The dip in tax funds that happened in Elkhart County as the recession took hold caused property values to go southward. On the flip side, as the economy and real estate market improve, assessed valuations should increase. That should boost the maximum tax load on individual properties and bring in more property tax funds for local governments.

INCOME TAX HIKE ‘ESSENTIAL’

As the economy grows and the real estate market continues to rebound, the collective assessed valuation will presumably go up, and taxing units will be able to generate more revenue. But the anticipated rate of increase won’t be enough to counter the losses racked up in recent years, many say, hence the talk of an income tax hike.

“We have state legislators who say we can grow out of it. That’s factually not going to happen,“ said Elkhart County Commissioner Mike Yoder. “There isn’t any model that shows we can grow out of this.”

That is, left without changes, the economy cannot heal itself quickly or extensively enough to counter the losses brought on during the recession and by tax caps.

Kauffman has crunched the numbers. If property values grow by 2 percent a year, he calculates, it would take until 2026 for the assessed valuation to get back to the pre-recession level — back to the starting point. And that’s assuming major variables stay the same. There are still inevitable inflationary price increases in the time frame to consider.

The question remains — can governments in Elkhart County manage without a new income tax? The answer “continues to be, no, we can’t,” said commissioner Yoder. He worries more layoffs of government workers — and presumably cuts to services — could result without relief from new funding that would come from an income tax hike.

Elkhart Mayor Dick Moore echoed Yoder and Kauffman. An income tax hike, he said, “it’s essential.”

He further noted that the down economy and job losses resulted in a loss of income tax revenue in addition to lost property tax revenue.

City staffers have so far done a great job of doing more with less, but there’s a fear of an approaching cliff. Continually cinching funding for services eventually impacts the livability of a city — its power to draw business and new residents. If push came to shove, city officials could, of course, convert roads to gravel to save money and close the parks.  

"But then, who wants to live there? Who wants to come there?” Moore said.

Follow reporter Tim Vandenack on Twitter at @timvandenack or visit him on Facebook.

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