An AP News Analysis.

By MIKE SMITH

AP Political Writer

INDIANAPOLIS (AP) — When lawmakers approved a major property tax relief and restructuring plan, Gov. Mitch Daniels and other big backers celebrated it as a new era of permanent taxpayer protection.

They called the package historic and monumental, saying it would bring true and lasting change. After months — even years — of trying to fix an antiquated and broken property tax system, they had finally gotten the job done.

“For the homeowner, this was a home run this session, one we will look back on a decade from now and say, ’This was the moment when local government changed, this is the moment when property taxes and the property tax system changed, and this is the moment when the state got a handle on property taxes,”’ said House Minority Leader Brian Bosma, R-Indianapolis.

There’s no doubt the changes are significant. But there are plenty of uncertainties about how they’ll ultimately affect taxpayers, schools and state and local government.

Will taxpayers truly come out ahead? Proponents say they will because homeowners’ tax bills will be “capped” at no more than 1 percent of their homes’ assessed value, with 2 percent limits on rental property and 3 percent caps on business property.

The limits will be phased in over the next two years, and if proponents get their way, they will ultimately be amended into the state constitution. The caps will give taxpayers certainty in knowing that their bills can only go so high, backers say.

But even if the caps make it into the constitution, they won’t be set in concrete. Through referendums, voters can approve future debt for local governments and schools — and more money for school operating costs — that would cause property tax bills to exceed the caps.

Proponents say that provides flexibility to the restructuring — but with that comes uncertainty.

The limits are projected to save property taxpayers $524 million when fully implemented in 2010. That is money local governments and schools won’t receive. Many taxing units will take little, if any, hit, and lawmakers are giving schools $120 million over the next two years to lessen the impact of the caps.

Still, some are bracing for budget blows.

Schools could offset their losses through successful referendums, but what if voters reject raising property taxes beyond the caps? Some school officials say they might have to cut spending on transportation and building maintenance — costs that will still be on the property tax rolls.

County councils or special county tax boards can raise local income taxes to lower property taxes and thereby offset revenue cuts.

If they raise the local income tax by at least 0.25 percentage points to offset property tax increases or cut property taxes outright, they could raise it another 0.25 percentage points to get new money for public safety. But how many would do that, knowing that people will already be paying higher sales taxes under the property tax relief plan?

How many Hoosiers will end up paying more in overall taxes than they save from the property tax cuts? Will they be the ones demanding change next year, or the year after that?

For the next few years, taxing units that face levy reductions of 5 percent or more can appeal to a new “distressed unit” board. The panel could help by temporarily setting the tax caps aside. Doing that would leave some taxpayers, at least for a while, uncertain about how high their bills could be.

Much of the property tax relief is based on the state absorbing about $3 billion worth of levies, including the remaining 15 percent of school operating costs. The state will pay for the costs with revenue from the sales tax increase and money it now uses to help local governments keep property taxes lower.

But will the state be able to afford such costs, especially during economic downturns or full-blown recessions?

Major supporters of the tax package predict it will deliver what they had promised — immediate, significant and lasting property tax relief.

House Speaker Patrick Bauer, D-South Bend, said the law will provide dramatic relief. But he is among those who say the overall plan comes with unanswered questions. “I consider this a work in progress,” he said.

Posted 3/24/2008