More thoughts on the 2% cap

We have written about the 2% property tax cap here before (see this post), but a recent piece by RiShawn Biddle of the Indianapolis Star posted on the paper's "Expresso" blog section reminded us of another unintended (or possibly intended?) consequence of the cap. Biddle writes:

“Another factor lies with the state's antiquated -- and oft-tinkered -- property tax system under which a property tax increase by one of the local governments pulling off the tax rolls can slam the finances of other governments. At the heart of this is the so-called circuit breaker under which total tax increases are limited to 2 percent of assessed value. Since no one completely understands how this will play out over the next couple of years, an IPS tax increase would likely not be appreciated by the city-county government or other agencies, whose efforts to pay for projects may be hamstrung as a result.”

Biddle doesn't quite have the specifics correct-- it is not increases that are limited but the dollar amount that each property owner must pay. The 2% cap was conceived mostly as a simple limit on the level of property taxes. But beyond that, the concept has resulted in giving each taxing unit in Indiana a greater interest in the actions of any taxing unit whose tax base overlaps its own.

In this sense, Biddle is absolutely correct that the borrowing by IPS could directly reduce revenue for other taxing units that overlap its base, such as Indianapolis, township governments, and others.

To illustrate this, let's fast-forward to 2008 when the 2% cap becomes effective for homeowners. In one hypothetical county, no homeowner pays any more than 1.99% of their gross assessed value in annual property taxes. However, if a school plans a major project that would increase the effective tax rate for some homeowners over 2%, then other elected officials will be highly motivated to enter any debate over the project since their own budgets will be impacted.

The future for the 2% cap is uncertain, and some legislators have already called for modifications. IAR hopes that no matter what develops, this element of making taxing units more accountable to one another remains in place.