Friday, July 06, 2007

The property tax increase

So, Laura and I got our new, improved property tax bill. Ours was about a 50% increase, which is in the typical range for the stories I've heard. The rate increase hit us hardest; the reassessment wasn't bad. It's possibly the only perk of living in a crappy neighborhood: your property values don't increase so fast that you can't afford your property tax.

I'm still unsure how I feel about the property tax increase. On the one hand, I'm fairly convinced that Americans don't pay enough in taxes. Our government owes more than it can ever expect to pay back, and I'd be happier paying for the debt now than in thirty years when the only option is total insolvency and financial collapse. I think one of the root causes of the problem is that the people who make the decisions tend to be old and wealthy. They're fairly certain that the long-term costs won't ever affect them personally; they'll be dead or out of office by the time calamity strikes, and their children will have money, which tends to insulate people from problems. On the other hand, the political cost of doing what's necessary to fix the problem now will definitely fall in their laps. Wise spending would help, but it's not enough to solve the problem; we need to pay more in taxes.

That being said, the reason we're experiencing such a harsh property tax increase in Indy has nothing to do with reducing deficit spending. A tiny fraction of the tax is going to pay for public safety issues; apparently crime in Indy has gotten bad enough that even people in nicer neighborhoods are feeling the bite. This is also spending I support; hopefully some of the steps taken to reduce crime will trickle down to the 'hood.

The greatest part of the tax increase isn't a revenue increase at all. The increase in property tax mostly balances out the fact that Indiana eliminated the business inventory tax. With all that lost revenue, the state had to balance its budget from another source, and politicians apparently believed that a property tax increase was more palatable than a sales tax or income tax increase. And only part of the bite is from the tax rate increasing; the townships also reassessed properties so their assessed value bears more resemblance to their actual value. In principle, I'm not opposed to this either; a lot of the $750k homes on North Meridian Street had assessed values that dated to the 1950s, and property owners in some of the city's nicest neighborhoods have been underpaying their portion of property tax for decades because of the huge gap between assessed value and actual value.

What I am opposed to is the fact that the state decided to shift the tax burden from corporations to individuals. The theory is that ditching the property tax will help entice businesses to relocate here. I don't see why this is expected to make a difference; most of our larger companies were given sweet tax-abatement deals when they agreed to relocate here, and don't pay much in taxes anyway. I'm generally opposed to this shift in taxes wherein companies pay less, and homeowners and renters (that is, everyone not a business) pay more to make up the difference. And I'm shocked that anyone in office thought it was a good idea to drop the rate increase and the reassessment on property owners at the same time. Ideally, this kind of tax increase should be phased in over a few years anyway; I can only imagine the political thought behind handling the increase this way.

The Indianapolis Star has been running a series of stories about how the tax increase is affecting individuals. Some of them generate quite a bit of sympathy; we've seen a few tales of retirees on fixed incomes whose property tax bills are now greater than their income. On the other hand, I have a hard time dredging up empathy for the two-lawyer family who, until the tax increase, were paying the same property tax on their half-million-dollar home as we are on our little house in the 'hood. Theirs is a tale of woe, to be sure: the property tax increase hit them so hard that they'll probably have to trade in one of their Mercedes for a Volvo or a Saab (you might think I'm making this up, but I'm not). They might even consider moving out of the county, God forbid!

But good luck with that. The negative that I haven't heard anyone talking about is that, in an already stagnant real-estate market, it's going to drive home prices down and make it even more difficult to sell a home. Here's some rough math. Say you bought a $200,000 house five years ago. You now owe $185,000 on the mortgage, and you were paying $1200 a month. With your property tax increase, your odds of selling your home for even what you paid for it just went way down; the anticipated monthly payment of your house is now $1330 a month. This is the payment you'd expect to make on a $225,000 house, before the tax increase took effect Worse, refinancing for the amount you now owe won't even get your payment back to the break-even point. The new buyer's going to get a lot less house for his mortgage dollar, and he knows it. And, with taxes increasing, and more people wanting to sell, the home market turns into even more of a buyer's market. Add to this that a lot of people were barely managing to afford their homes anyway when their ARM mortgages adjusted, and we're looking at the potential for massive foreclosures. Not good, and also not talked about at all, as far as I can tell.

And, I feel the need to mention that, to add insult to injury, there were print ads tucked in the envelope with our tax bill. One was -- no kidding -- a Discover Card application.

UPDATE: The morning after I posted this, the Indianapolis Star ran a front-page article about the tax hike is damaging home sales and property values. I didn't think of it first; a reporter thought of it and had time to research and write an entire story about it....

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