EDITORS: A complete copy of the report will be available from the National Association of Realtors after June 15. Call Robert Leavitt of NAR at 202-383-7563. A chart for Indiana is attached.

IU REPORT: REDUCING PROPERTY TAXES PRESENTS A CHALLENGE WITH 'SMALLER GOVERNMENT'

BLOOMINGTON, Ind. -- Counties and local municipalities will face a tough challenge as states attempt to appease public resentment over rising property taxes, while at the same time dealing with a growing number of unfunded federal mandates, according to a new study produced by the Indiana University School of Business.

The study, "National Property Tax Comparison," was done for the National Association of Realtors by the IU school's Center for Real Estate Studies. It found that property taxes, as a percentage of personal income, generally are on the rise nationally. Property taxes as a percentage of personal income bottomed out in 1985 at 3.1 percent. In 1993 -- the latest year for which figures are available -- the national tax rate was 3.5 percent.

According to the study, states that relied the most on property taxes in fiscal year 1993 were New Hampshire, where they accounted for 45.05 percent of own-source revenues; New Jersey, 33.97 percent; Vermont, 31.5 percent; and Connecticut, 30.85 percent.

Those relying the least were Alabama, with only 7.27 percent coming from property taxes; New Mexico, 7.46 percent; Delaware, 9.16 percent; and Louisiana, 9.6 percent. The share consisting of property taxes in Indiana is 21.91 percent.

Jeffrey D. Fisher, the center's director, said many states are looking for an optimal level of property taxation. "I think we're going to see a trend away from reliance on property taxes. There's just so much discontent in all the states, with lawsuits and changes in legislation," he said, adding that "many states are looking for ways to shift more of the burden of funding for public schools to state income or sales taxes."

Fisher and other center researchers compared property tax burdens for all 50 states

and the District of Columbia, the amount of state dependence on property taxes, and changes in tax rates compared to the rate of inflation. >

The pressure to reform property taxation is coming at a time when states are facing shifting responsibilities in paying for social services such as welfare. Many community services are dependent on revenue generated by property taxes, and reducing them will mean some other form of taxation will be adopted to support them.

If you don't have the revenue from the federal government, you've got to figure out how you're going to fund it at the state level," Fisher noted. "If you're going to cut property taxes, you have to substitute some other tax or you have to cut back on services. Think about trade-offs and how much local control you want to give up."

Some counties in Indiana depend heavily on property tax revenues for a significant amount of their budgets -- in Lake County, property taxes account for 80 percent of the source revenue; in Vigo County, 73 percent; LaPorte County, 70 percent; and Delaware and Monroe counties, 60 percent. The state is just below the national median in ranking its tax burden at 27th in the nation. A total of 3.2 percent of Hoosiers' personal income goes to property taxes.

One option discussed in the report is the institution of transactional fees in the form of a local sales or service tax, an option being examined across the country. The perceived benefits of this would include relieving local residents of some of the tax burden, while offsetting it with a tax that is partially paid by visitors. The primary concern about this approach is the instability of a revenue source tied to the volatility of sales activity.

Prior to World War II, property tax proceeds more than doubled all other state and national taxes combined and exceeded federal and state tax levies. With the emergence of the federal income tax and other levies, there was a general decrease in the ratio of property taxes to total government taxes -- a trend that continued into the 1980s.

Ironically, the present upward trend in property taxes may have been caused in part by previous efforts at tax reform. "Some of the caps in different states that limit taxes limit the increase to a certain percentage rate. If you're in an inflationary environment like we had in the 1980s, and personal incomes are going up with the inflation rate, property tax rates are capped and taxes aren't going to go up as fast," Fisher explained.

"But if you're in a lower inflation environment, you're not hitting the caps on property taxes and you can have property taxes going up at a faster rate than personal incomes."

So while an initiative such as Proposition 13 may have initially saved California taxpayers more than $7 billion, today inequities exist where families with identical homes have different property tax bills, depending on when they purchased them, he said.

Fisher and his center will be evaluating for the Indiana Association of Realtors the various proposals that will be considered for reforming Indiana's property tax system.

For more information, contact George Vlahakis, 812-855-0846, gvlahaki@indiana.edu

State		% Chg. in Prop. Taxes
Oklahoma--17.3
North Carolina --13.3
South Carolina --11.7
Wisconsin--11.3
South Dakota--11
Maryland--10.9
Dist. of Columbia--10.7
New Mexico--10.4
Indiana--10
Washington--9.8

Property Taxes by Indiana County, Fiscal Year 1992

(Counties with a population of 100,000 or more, revenue in $000)

County	Tax Revenue	Source Revenue	Prp. Tax as % of Source Revenue	Tax per Capita
Allen	28,954	69,656	42%	96.25
Delaware	13,768	22,961	60%	115.06
Elkhart	14,617	50,001	29%	93.58
Hamilton	10,937	57,872	19%	100.40
Lake	83,765	104,901	80%	176.13
LaPorte	14,189	20,227	70%	132.53
Madison	14,893	24,539	61%	113.98
Monroe	11,765	19,768	60%	107.96
Porter	11,727	94,784	12%	90.95
St. Joseph	22,360	42,018	53%	90.51
Tippecanoe	11,140	24,105	46%	85.30
Vanderburgh	22,186	44,467	50%	134.41
Vigo	16,125	22,071	73%	151.97

City	Tax Revenue	Source Revenue	Prp. Tax as % of Source Revenue	Tax per Capita
Baltimore	483,428	916,370	53%	656.82
Boston	654,945	992,561	66%	1,140.46
Chicago	624,252	2,485,771	25%	224.25
Cleveland	50,977	444,783	11%	100.82
Indianapolis	413,336	731,628	56%	565.19
Los Angeles	641,813	3,340,043	19%	184.14
New York	7,870,393	23,684,564	33%	1,074.81
Phoenix	117,431	734,640	16%	119.41
Wash. D.C.	811,009	3,009,967	27%	1,336.31

Source: "National Property Tax Comparison, 1997"

Return to the OCM Home Page