Tax

Tax caps creating new hurdles for towns, schools

AP News
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Posted: Apr 06, 2011 5:03 PM
Tax caps creating new hurdles for towns, schools

First, the state of Indiana put a limit on how much money Mark Burkhart and his colleagues in the state's school districts could raise with local taxes. Then the state informed them all they'd be getting a smaller check from the state.

Now the chief financial officer for the Muncie schools, with more than a dozen buildings and 8,000 students, has less money to spend and a limited ability to raise more. The consequence?

"We're not going to fix parts of our buildings that need repair unless it's a life-safety issue," Burkhart said. "Probably there'll be some drippy faucets, there'll be some leaking roofs, there'll be some broken window panes we may put tape over."

It's a challenge for local officials such as Burkhart that's growing. In the past year, at least 10 states have imposed or called for new limits on the ability of local governments to raise taxes, including a least a half dozen plans currently pending in state legislatures. At the same time, faced with budgets gaps measured in the billions, many of those states also have reduced aid to cities, counties and schools.

The combination has left mayors and school administrators grasping for options and wondering what happened to "local control" _ a tenet of small-government conservatives. It's an idea being swept to the side in favor of a new focus on cost-cutting and fiscal restraint following the resounding Republican victories in the 2010 elections.

"The Senate, the Assembly, the governor, they all look like heroes because they've capped property taxes," said Republican Anthony Picente, the Oneida County executive in New York. "Then I'm the one who's in the hot seat. (The perception is) you've got to cut, or you're not managing right."

New York's Republican-led Senate already has passed a proposal by Democratic Gov. Andrew Cuomo that would cap local property tax increases at 2 percent or the rate of inflation, whichever is less, and the legislation awaits an Assembly vote. In Wisconsin, Gov. Scott Walker has proposed slashing aid to public schools while simultaneously restricting schools from raising property taxes.

Nebraska Gov. Dave Heineman signed a pair of bills last month _ one cutting aid to cities by $44 million over two years, the other curtailing cities' ability to tax the vehicles of people who commute to work from the suburbs. Also poised for passage is a bill restricting city taxes on telecommunications. Heineman's office said the cuts account for less than 2 percent of local budgets, and the taxes would be unjustified.

"The commuter tax would have created unnecessary tension between Omaha and surrounding communities," said Heineman spokeswoman Jen Rae Hein.

In Minnesota, a plan backed by the Republican-led House would cut state aid by $250 million over the next two years to Minneapolis, St. Paul and Duluth while simultaneously reinstating a local property tax cap that had expired.

"There's a lot of controversy surrounding the timing of some of these measures," said Pete Sepp, executive vice president of the National Taxpayers Union, which supports the efforts. "Maybe this is the way to send a clear set of instructions to local government that we want to see more emphasis put on spending restraint."

The moves by state officials to cap local taxes, or the rate at which they can rise, marks a Great Recession resurgence of an idea that has deep roots in many parts of the county.

More than 40 states have some kind of property tax limit, the first of which was imposed in Florida in 1855. That passion was still burning this past month when voters in Miami-Dade County ousted Mayor Carlos Alvarez by an overwhelming 88 percent in a recall election. Alvarez, among other things, had backed a property tax increase to help fill a $444 million budget gap.

"Life itself is very expensive," said bus driver Francisco Rodriguez, 58, who voted against the mayor. "If we can just cut down on the property taxes a little bit that would be very helpful."

Property taxes in particular have long been derided because they don't necessarily reflect a person's economic circumstances. Spend more, and you pay more in sales taxes. Earn more, and you pay more in income taxes. But people who have retired or lost their job can still get hit with higher property taxes if their homes have risen in value.

It is also often easier for local officials to tweak property tax rates to make up for other revenue losses. From 2008 to 2010, for example, state and local sales tax revenues plunged nearly $13 billion, a decline of about 3 percent, as the recession cut into consumers' spending. But property tax revenues rose 6 percent, up almost $25 billion, according to the federal Bureau of Economic Analysis.

Anti-tax groups in Florida are trying to revive a plan for a lower property tax cap that was struck down by the courts last year. Florida lawmakers, meanwhile, have proposed a more than 6 percent cut in school funding. New Hampshire state lawmakers are advancing a bill that would restore the ability of local governments to adopt property tax and spending limits that had run into legal problems.

In Indiana, state lawmakers set property tax caps that took full effect in January 2010. Indiana taxpayers saved $478 million last year _ money that didn't go to schools and local governments, according to the Indiana Legislative Services Agency. At the same time, schools got $450 million less in state aid.

Communities inherited the state's budget problems but were denied options for solutions, said James Borgmann, director of the Muncie Downtown Development Partnership. The central Indiana city about 50 miles northeast of Indianapolis has closed fire stations, laid off police and even contemplated shutting off some streetlights to address the loss of $8 million in property taxes since 2009.

Brandon Mundell, 32, said he fears that his toy and hobby store in Muncie's historic district is at risk now since the only fire station within a mile has been closed. The two nearest fire stations now are on the other side of a railroad track.

"If there was a potential train, your response time goes dramatically up, and that's something you can't predict," Mundell said.

Frustration over state funding cuts recently led parents in a wealthy suburban Kansas City school district to challenge a Kansas law limiting the amount of local property tax revenues that schools can raise. They said they wanted to pay more to maintain their schools' high quality. A federal judge recently rejected their attempt for a local tax hike.

Tax-cap advocates have praised the efforts of Republican Gov. Chris Christie of New Jersey, who signed legislation last year capping local spending and property tax growth at 2 percent per year, with some exceptions. To exceed the limit requires a vote of the people, and thirty New Jersey communities have published notices indicating they may hold local referendums in April.

Bordentown Township, for example, may ask voters for an additional $540,000 _ nearly five times what the property tax cap otherwise would allow. Should the ballot measure fail, Mayor Mike Dauber says the community may have to lay off clerks, police and public works personnel, which could reduce maintenance on parks and roads.

Dauber, a Republican, says he's not so sure state officials fully understand the impact on local government.

"In Bordentown, where we were very conservative and had a very lean budget, it hurts," he said.

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Associated Press writers Christine Armario in Miami and Grant Schulte in Lincoln, Neb., contributed to this report. Lieb reported from Jefferson City, Mo.