[r72] A Clere view of the Statehouse: Where would you prefer to live? (4/27/2010)

Tuesday, April 27, 2010

Start Date: 4/27/2010 All Day
End Date: 4/27/2010

This is a tale of two cities.

But first, a little introduction.

As usual, controversial topics dominated news coverage of this year's legislative session. Controversy sells. Sound bites don't come from accord.

House Enrolled Act 1086 is a good example of the sort of important legislation that doesn't get much attention. It's a shame.

HEA 1086 started out addressing several property tax issues. In the end, it became a lifeboat for measures from at least a dozen other bills that ran into trouble on their own; that's a story by itself.

The final version was nearly 200 pages of language on which nearly everyone agreed; it passed the House 89-7 and the Senate 50-0. It was long and complex and lacked controversy. As a result, it received very little media attention, yet its dozens of provisions will affect every Hoosier.

I'm going to highlight what I consider to be one of its most important provisions, which brings us to the cities of Saver and Spendthrift, two similar communities with very different approaches to paying for government. Before HEA 1086, Spendthrift's approach was encouraged; now Saver will be rewarded for its ways.

Until HEA 1086, there was a strong disincentive for local governments to control spending. State law punished local governments that chose to spend down cash balances instead of raising property taxes.

Each year, local units of government (cities, towns, counties, etc.) are allowed to increase their property tax levy - the total amount they collect in property taxes - by no more than the six-year rolling average of the growth in Indiana nonfarm personal income. In recent years, that average has been around 4 percent. (With incomes down, the figure is certain to decrease in coming years, but I'll use it for this illustration.)

Before HEA 1086, the amount a local government could collect in property taxes - its levy - was calculated based on how much it actually levied the previous year. There was always an incentive to levy the maximum, because the following year's maximum would be equal to the previous year's levy plus the 4 percent increase explained in the previous paragraph. If a local government didn't take every cent of its maximum allowable levy - regardless of whether it actually needed it - it could never get it back.

The experience of Saver and Spendthrift illustrates the situation under the old law.

In Year 1, both cities had a budget of $10 million and a maximum allowable levy of $10 million. All was in balance. It seemed like the best of times. But for taxpayers, it was the worst of times.

Because it had $1 million in cash reserves, Saver decided not to levy the maximum. Instead, it chose to levy $9.5 million and fund the remainder of its budget with half of its cash reserves, thereby reducing property taxes.

Saver lived within its means and ended the year with its remaining $500,000 cash reserve intact. It wasn't able to accumulate any more, but neither did it overspend its budget. Utility costs and other expenses were going up, however, so Saver needed to increase its budget for Year 2. The city determined a 3 percent increase was needed. That would mean a budget of $10.3 million - an increase of $300,000 from Year 1.

Unfortunately, officials from the state informed Saver it was limited to an increase of 4 percent over its Year 1 levy of $9.5 million. That would give it a levy of $9.88 million, leaving it short $420,000. With only $500,000 in the bank, Saver was forced to choose between maintaining a prudent reserve and cutting services.

Meanwhile, officials over in Spendthrift were snickering.

Even though they didn't need it, they took their maximum $10 million levy in Year 1. And even though it was hard, they managed to find a way to spend it! For Year 2, they were entitled to the same 4 percent increase (remember, it's a statewide number) as Saver. Saver's increase, however, was 4 percent of $9.5 million; Spendthrift's was 4 percent of $10 million. Spendthrift officials were excited to learn they could levy $10.4 million in Year 2, and, without hesitation, they rushed to do it. After all, they understood how the game was played. They knew they had to use it or lose it.

In Year 2, Spendthrift ended up ahead of Saver by $520,000, all because Spendthrift chose to tax and spend while Saver chose to conserve. Under the old law, Spendthrift was rewarded and Saver was punished. That was wrong.

HEA 1086 gets it right. Now the levy calculation will be based on the previous year's levy plus the amount of cash reserves a unit of local government used to fund the difference between what it actually took and what it could have taken. That puts Saver on equal footing with Spendthrift. Now Saver can keep taxes low when it doesn't need its maximum allowable levy, without having to worry about being at a disadvantage when it needs to raise more revenue.

If taxpayers demand accountability, it could be the best of times.