Goshen News, Goshen, IN

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April 14, 2013

The outer limits

Impact of property tax caps puts city in a spot with growth

GOSHEN — When a community member approached Goshen Mayor Allan Kauffman recently to inquire about possible annexation southwest of the city limits, Kauffman got out his calculator. The numbers, he explains, just didn’t add up the way many might think because of Indiana’s property tax caps, and that has him thinking long and hard about the pros and cons of annexing residential properties into the city.

Kauffman said there is an emerging challenge to the age-old belief that it is cheaper — regarding property taxes — to live in the county than it is in the city.

Traditionally, owning a home in the county has resulted in lower property taxes compared to homes of a similar assessed value in the city due to the fact that the city has a slightly higher tax rate and requires tax payers to pay into five taxing units — city, county, township, school and library — while those in the county only pay into four taxing units — county, township, school and library.

However, with the arrival of Indiana’s Circuit Breaker law in 2008 capping property tax bills at 1 percent of a home’s assessed value, 2 percent for farmland and rental property and 3 percent for business property, that fairly black-and-white calculation has become a little more complex.

“For a long time, people have talked about living outside the city to escape the higher property tax inside the city,” Kauffman said. “But now, with the 1 percent cap on homeowners’ property taxes, that’s become less and less of an issue.”

The reason, he said, stems from what he calls the “break-even” point of a home’s assessed value — the point when a home’s assessed value is high enough that living in the city becomes no more expensive than living in the county due to the 1 percent tax cap.

Kauffman said he first became aware of the break-even point after being approached by someone from The Orchard subdivision on the city’s south side about how much more it would cost residents in property taxes if they were annexed into the city.

“I did some calculations,” Kauffman said, “and found that for homes with a high enough assessed value, it costs no more to be in the city than outside, as both hit their 1 percent caps.”

As an example, Kauffman provided an up-to-date calculation of the amount of property taxes that would need to be paid for a home assessed at $155,000 located in the city, $1,560, and the amount for a similarly assessed home located in Elkhart Township, $1,550 — a difference of just $10.

“When looking at a $100,000 home with a mortgage outside of the city, they’re paying about $715 in property taxes and they’d pay about $1,000 in the city,” Kauffman said. “But once you get up to a home assessed at $155,000, that’s where you hit the break-even point, because they’ve both hit their 1 percent caps. So at that point, if they’re annexed into the city, they really pay no more than someone outside the city.”

The Pros

In discussing how this situation can be a good thing for the city, Kauffman pointed first to what he sees as the potential for reduced sprawl due to reduced property tax anxiety connected to annexation.

“People aren’t going to think that they need to live outside the city to save money,” Kauffman said. “So whether you’re talking about farmland preservation or just smart growth, people for a long time have wanted to save money, but they’ve also wanted to live close to the city so they don’t have to go far to go to the grocery store, or the library, etc. Now they don’t have to worry about that so much.”

Once someone’s home reaches the property tax cap, Kauffman said it actually becomes more beneficial for them to live in the city because they get access to city services such as free trash pickup, leaf and brush pickup, quicker snow plowing, better police coverage, a lower fire insurance, etc., all while paying the same amount in taxes as someone outside the city with a home of the same assessed value.

“Also, when you talk about sprawl, you talk about these pockets of houses that pop up out in the unincorporated areas like Jefferson Township or Foraker,” Kauffman said. “After a number of years they start to have septic problems and they need sewer and it’s miles to run sewer lines out to these places. They’re creating all these urban needs out in suburbia with no way to pay for it. But if growth happens closer to the city, it’s a lot easier and more efficient to provide services. So I think long term this is a good thing.”

The Cons

Kauffman was quick to note there are plenty of concerns that go along with the annexation/tax cap relationship, perhaps the biggest of which is his recent discovery that as more tax capped residences are annexed into the city, less money ends up going to Goshen Community schools and public libraries.

“If you live outside the city you pay county, township, school and library taxes,” Kauffman said. “So generally you have four entities you’re paying taxes to, and when the city annexes you in you pay five, because now you’re paying a tax to the city as well. The problem is, if you’re tax capped when you’re annexed in, the amount you’re paying in taxes stays the same, but now you’re spreading it out between five entities instead of four. And because of that, the schools and library end up getting less money.”

Kauffman offered the example of a home assessed at $150,000 that pays $1,550 in property taxes. If located outside the city, the city gets none of the property taxes, leaving the county to receive $322, the township $103, the schools $1,036 and the library $89. Once inside the city, however, the city gets $648, the county drops to $196, the township to $7, the schools to $644 and the library to $55.

“Everybody drops, but you can justify the county and the township dropping because the city is taking over services,” Kauffman said. “But how can you justify the drop to schools and libraries? And I’m not even sure you can justify the township going from $103 to $7, because the township is still responsible for poor relief. Each home by itself isn’t a big deal, but if you annex an entire subdivision, that’s a big chunk of money that they lose out on. But that’s the way the formula works, so there’s an unfairness about it when it comes to annexing.”

Local Perspective

According to Goshen Public Library Director Andy Waters, revenue at the Goshen library has declined for the past five years because of the state’s property tax cap law.

“The trend has been downward in our revenues since 2008,” Waters said. “At least 60 percent of our revenue comes from property taxes. Last year and the year before, the impact of the caps caused us to cut back library open hours. We’ve cut back on efficiencies. We’ve cut back on some programing. We’ve cut quite a bit of staff through attrition, and pay has been frozen at the library for four or five years now. And even so, property taxes and the caps are still hurting us.”

How much are they hurting? Try $330,000. That’s how much Waters expects the library to lose in property tax revenue this year alone due to the caps. And when you add the potential for additional loss due to annexation of tax capped properties into the city, that number becomes even greater.

“It’s a sizable amount of our levy, over 20 percent at least,” Waters said. “The latest round of property tax caps are just coming through the system now, so the library board will be looking at the impact this spring. But it has definitely affected us, and is still affecting us.”

Patrick Wheeler, a frequent patron of the Goshen Library, said he isn’t sure anyone really understood just how far-reaching the impact of the tax caps would be when they were voted into the constitution in 2010. Even so, Wheeler said he remains on the fence as to whether the property tax caps in general have done more harm than good for the area.

“I think either way, there are going to be problems with the economy no matter what they do with the caps,” Wheeler said. “There are negatives and positives to both sides, so I’m still a little undecided on it. I do think though that there’s a general problem in how a lot of governments run their budgets. They need better budget plans and to learn to spend within their means, even if it’s hard.”

Moving Forward

Given all the pros and cons connected to the tax cap/annexation relationship, Kauffman said his biggest concern remains the detrimental effect continued annexation of tax-capped properties could have on city schools and libraries. Kauffman said he believes some in the state Legislature are taking notice of the issue.

“It’s not like everybody in the Legislature is unaware of this situation,” Kauffman said. “They’re waking up to the fact that schools are losing out, and I have to believe that this is an unintended consequence of tax caps. I can’t believe anybody thought this was going to happen.”

As for what can be done to remedy the situation, Kauffman said that’s still anyone’s guess.

“I think the state’s going to have to try to figure out how to replace the revenue that’s being lost by the schools and libraries,” Kauffman said. “As for how that might happen, I don’t know. They could adjust the caps, but that’s not going to be easy with them being in the Constitution, not to mention it’s basically saying ‘please raise my taxes.’ At the same time, they also have to figure out how to resolve it without saying cities can’t grow, because if you don’t annex, you’re basically setting up a barrier to future growth.”

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