Bringing Public Finance Home

by Mary Hrovat

Tax reform is a hot topic in Indiana, having played a major role in the 1996 gubernatorial election. Kurt Zorn, a professor of public and environmental affairs and director of professional graduate programs in the School of Public and Environmental Affairs (SPEA) at Indiana University Bloomington served as chair of the Indiana State Board of Tax Commissioners from January 1991 to August 1994. From this post, he saw the genesis of a lawsuit that led Judge Thomas Fisher of the Indiana Tax Court to declare in May 1996 that the current system of assessing and collecting property taxes is unconstitutional. The Indiana General Assembly is required to institute a new system by March 1, 1998.

Indiana is one of only two states in the United States using a true tax value system (Nevada is the other). Under Indiana's system, property values are determined using the replacement cost of the property and a depreciation factor for its age. Thus, owners of two homes with the same market value but different ages may have different assessed values. Problems with the current system arose in St. John (Lake County, northwestern Indiana), where a group of citizens composed of new home owners and home builders thought the system unfair and filed a complaint with the tax board. Zorn had recently become chair of this board, which determined that the complaint provided no legal basis for action on the board's part. The board's decision led to a lawsuit filed by the Indiana Civil Liberties Union on behalf of the St. John citizen group, the result of which was Judge Fisher's ruling. The legislature must now institute a fair market value system for assessing and collecting property taxes.

"There's a lot of reason to believe that in the move from the true tax value system to the fair market value system, there could be some shift in the tax burden among property classes--residential, commercial-industrial, and agricultural--and of course there are going to be shifts within classes too," Zorn says. The nature and size of these shifts are of great interest to the state legislature and Indiana taxpayers. Given his recent service as chair of the tax board, Zorn felt it would be inappropriate for him to participate in the study (a joint study that Purdue and IU did to examine the impact of the shift of the tax burden due to the move from true tax value to a market value standard). As a result, the tax board contracted with SPEA faculty members from Indiana University Bloomington and Indiana University­Purdue University Indianapolis. These faculty members include David Good, an associate professor of public and environmental affairs, and Craig Johnson, an assistant professor of public and environmental affairs, at IUB, and Joyce Man, an assistant professor of public and environmental affairs at IUPUI. Good has experience working with the tax board: in 1994, he worked as a statistician for a school equalization project after the state legislature required that tax rates for school boards be equalized.

Zorn says that part of the business of the tax board is the promulgation of the rules and regulations that govern the assessment and collection of taxes, well in advance of the assessment carried out every four years. He describes the assessment system as complex and thinks that it will take longer than the court-ordered March 1, 1998 deadline to put any effective changes in place. A significant lead time is required because promulgation of new rules and regulations will take time, then public hearings must be held, and revisions to the rules and regulations may then be made based on public comments and feedback. Also, local assessors must have ample time to learn how to implement the rules and regulations. This process takes a long time, according to Zorn, more than just the year that will be available if the 1997 General Assembly approves a fair market assessment system for Indiana.

The SPEA faculty are working with assessed value data from the latest assessment in several Indiana counties. On December 1, 1996, they presented their work to the tax board, which used the information in making its recommendations to the legislature on how best to restructure the system.

The ramifications of the current property tax reform are far-reaching. The changes will affect farmers and businesses, which will in turn affect the economy of the whole state. At least some residential property owners are likely to face changes in their tax bills. In this area, as in others, the analysis and expertise of Indiana University SPEA faculty informs those who will make crucial decisions for the future of the state.

[editor's note--The Indiana Supreme Court vacated the Tax Court's decision in late December, returning the issue toJudge Tom Fisher for further deliberations.]