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Sunday, August 14, 2022
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  • WEST LAFAYETTE – The inflation rate in May was 8.6%, the highest since the bad old days of the Great Inflation 40 years ago. We’re all paying higher prices. So are our school districts. School districts face some costs that increase as prices rise, and other costs that don’t. Food, fuel and equipment prices rise, and schools must pay. But teacher salaries are set in contracts, and until those contracts expire, inflation won’t have an effect. In 2021, Indiana public schools paid 62,000 teachers $4.4 billion in salaries and benefits. That’s more than one-third of total school budgets. Teacher contracts run for one or two years, and until they expire, pay will rise at rates set before inflation increased. After a year or two contracts will be renegotiated, and it’s likely that teachers will expect their pay to keep up with higher inflation. Inflation had been running near 2% per year, and teacher pay increased by about that amount. The increase in average teacher salaries has been 2.3% per year, enough to keep up with inflation that was, but well short of 8.6%. After a year or two, the cost of teacher pay is likely to rise much faster.
  • WEST LAFAYETTE  – Here’s one way to think about property taxes: The local government sets its budget, subtracts all other tax revenue, and raises the remainder with the property tax levy. The assessor measures the value of all the parcels of taxable property inside the boundaries of the government. Then the government measures the share of each parcel in total assessed value. That is the share of the levy that the owners must pay. In other words, your property’s share in the total value of property is your share of the property tax levy. We use property value shares to divvy up responsibility for funding local government. Real life is more complicated, with deductions, credits, several ways to estimate value, and state limits on the levy and on tax bills. Still, knowing what’s happening to the values of property, compared to the total, tells us a lot about who pays property taxes. We’re particularly interested in the share of property taxes that residential property owners pay. That’s owner-occupied primary residences, known as homesteads, and rental housing. Why a special interest in residential property? For one, lots of people pay these taxes. Homeowners with a mortgage pay directly through their lenders; those who rent pay through their landlord. For another, all these people are voters, which interests the General Assembly. And that’s why the share of property taxes paid by residential property owners will be getting some attention. The residential share is going up.
  • WEST LAFAYETTE – The property tax is the biggest source of tax revenue for most Indiana local governments, and they were worried about the effect of the COVID recession on property tax revenues. But rising home values in 2020 will increase assessed values for tax bills in 2022. The federal COVID relief bills increased Indiana income in 2020, so the state’s limit on property tax revenue will keep increasing in 2022. Tax rates are likely to fall in many jurisdictions next year, so fewer taxpayers will be eligible for tax cap credits. Local governments will collect a bigger share of their tax levies. Looks like the recession will not be a problem in 2022. So, what should we worry about now? How about inflation? We have no experience with high inflation. The Indiana property tax is much different today than it was during the high inflation of the 1970s. So let’s try to think it through. Suppose there is a “pure inflation,” which adds the same increase to prices, incomes and property values. It couldn’t happen, but it’s a useful experiment to look at inflation’s effect.
  • WEST LAFAYETTE – What will be the effect of the COVID recession on the property taxes that fund Indiana local governments? I’ve been thinking and writing about the possibilities for a year and a half. Now we have enough data to answer that question. No spoilers, though. Let’s consider what could happen, and what did happen after the Great Recession in 2007-09. The Great Recession depressed new construction and reduced the demand for property. Property prices fell, especially for homes. Statewide, assessed values fell in 2011 and again in 2013. Assessments declined in 54 of 92 counties in 2013 alone. The COVID recession was in 2020. Changes in property values were assessed in 2021, for tax bills in 2022. The recession of 2020 would hit local government budgets in 2022. Property tax revenue is limited by the state-imposed maximum levy. It increases each year based on the six-year average of statewide non-farm income growth. 
  • WEST LAFAYETTE – Americans are having fewer children. Reports this past summer showed that the fertility rate dropped in 2020, to 56 births per 1,000 women age 15 to 44. Only 5.6% of women in their child-bearing years had babies. Early indications for 2021 showed a further decline. Fertility has been dropping for more than a decade. Fertility rates peaked in 2007 at 69 per 1,000 women age 15 to 44. The rate had been rising in the decade before that. Let’s take a longer view.  Much longer. The fertility rate has been falling most decades for at least 220 years. We have more than two centuries of data, thanks to the U.S. Constitution, which requires a census every 10 years. So we know that in 1800 the fertility rate was 278 per 1,000 women age 15 to 44. More than one in four women of child-bearing age had babies. The average woman had seven children. The fertility rate began to fall right away. In 1810 it was 274. By 1900 it was 130. National reporting of birth certificates made annual data available by 1909, so we know the birth rate hit a low point of 76 during the Depression in 1936.
  • WEST LAFAYETTE – We’ve got an inflation problem. What should we do about it? That depends on what kind of inflation problem we’ve got. In May the consumer price index was 4.9% higher than it was 12 months before. The last time we saw an inflation rate that high was July 2008. The last time it was that high, and it was more than just rising gasoline prices, was October 1990. It’s the highest inflation rate in almost 31 years. Inflation has increased these past three months, March through May. Partly that’s because the 12-month rate compares to March through May 2020, when prices were falling. That means the 12-month inflation rate would register high even if prices were just getting back to normal. It’s more than that. The three-month inflation rate jumped from 3.5% in February to 8.4% in May. That’s the annual rate, the inflation rate we’d get if prices kept rising that fast for a whole year. The last time the three-month annual rate was that high – and not just because of gasoline – was July 1982. It’s the highest inflation in almost 39 years.
  • WEST LAFAYETTE — Enough already. The economy is bad. This is the sharpest, deepest recession in 80 years. We get that. Let’s talk about something else. Like, how does the economy recover? Unfortunately, to answer that question we need to know what kind of recession we’ve got. So let’s look at some measurements that tell us what’s been happening. Gross domestic product measures the value of goods and services produced in our economy. The growth of GDP is our most complete measure of how well the economy is doing. Most of the time we show the quarterly numbers at annual rates, basically multiplying by four, and we look at “real” GDP, which removes the effect of inflation. Real GDP in the first quarter fell 4.8%. Bad, but not catastrophic. But the recession started in March. January and February were fine, probably a lot like 2019. In 2019, real GDP grew 2.1%. If that growth continued in January and February, but the whole quarter showed a 4.8% decline, then real GDP must have fallen 19% in March. That is catastrophic.
  • WEST LAFAYETTE – An unsettling number popped up on my computer screen last week. The index of leading economic indicators for Indiana decreased in August. It was the first decline since April 2009, during the Great Recession. The leading index is “leading” because it is made up of economic measurements that change before the general economy. If a recession is coming, the leading indicators drop first. If a recession is about to end, and a recovery will begin, the leading indicators start moving up first. For example, the number of new people applying for unemployment insurance is a leading indicator. When someone gets laid off, one of the first things they’ll do is apply for benefits. No economic survey is needed to measure that change. The unemployment offices report the data weekly, so if business activity is declining, the benefit application data will show it first. The state leading indicators are compiled by the Philadelphia Federal Reserve. Click on “Research and Data” and then “Regional Economy.” The leading index dropped by 0.6% in August. That means the Indiana economy is expected to decline by that much over the next six months, through February 2018.
  • WEST LAFAYETTE –  The most wonderful time of the year has come and gone for those who follow the Indiana state budget. On July 19, the State Budget Agency presented its accounting of what happened to revenues, spending and balances in fiscal 2017. The state ran an annual surplus of $42 million, and ended with balances of $1.78 billion, down from $2.24 billion in 2016. Wait a minute, says anyone who’s ever kept a checkbook. If I earn more than I spend, the balance in my checkbook goes up. What kind of arithmetic causes an annual surplus to produce a decline in balances? Calculating surpluses and deficits can be tricky. When you calculate the surplus, what counts as revenue? What counts as spending? To get that $42 million surplus, the state counts all the general fund revenues received from sales, income and other taxes, and from charges and fees. That was a little less than $15.5 billion in fiscal 2017. It then calculates the amount of spending, as appropriations plus some adjustments, less “reversions.” Reversions are money authorized in the budget but never spent. Revenues actually received, less money actually spent, gave that $42 million.
  • WEST LAFAYETTE – Think of the changes in the Indiana property tax system between 1998 and 2010. The Indiana Supreme Court threw out the assessment system in December 1998. We started using market values for the reassessment in 2003. In 2002, we changed the formula for calculating the maximum property tax levy, and created a huge deduction for homesteads. In 2004, we amended the Indiana Constitution to allow those big homestead deductions. In 2008, we increased them even more. We phased out the property tax on inventories from 2003 to 2007. We began annual adjustments of property assessments in 2007, which we call trending. We eliminated the property taxes for school general funds in 2009. We put property tax caps in the Constitution in November 2010. That’s a partial list. In the midst of all this policy chaos, we had the worst recession since the Great Depression, so bad that it reduced the value of property. Our new assessment system caught that decline in property values, so assessed value actually decreased for a couple of years. Practically every year for 12 years, policy changes or economic disruptions rocked Indiana’s property tax system. By the end of it all, we had no idea what “normal” looked like.
  • WEST LAFAYETTE – The late great George Carlin had a routine about a weather forecaster. “The forecast for tonight, dark. Continued dark throughout the night, with scattered light in the morning.” Some predictions are easy. Predicting the base rate of farmland used to be easy too. The base rate is the starting point for setting the assessed value of farmland for property taxes. The state’s Department of Local Government Finance (DLGF) recalculates it every year with a capitalization formula. They divide measures of farm income by a rate of return. The base rate for taxes this year is $1,960 per acre. Here’s how easy it was. The base rate for taxes in 2015 was calculated in 2014, averaging data from 2006 through 2011. There was a four-year lag between the most recent numbers and the base rate used for taxes. I could take numbers that were already in the books, feed them through the DLGF’s set formula, and come up with a really accurate prediction. In January 2012, I predicted the base rate for 2014 at $1,760. Nailed it. In January 2013, I predicted $2,050 for 2015. Right again. It was no big deal, like “scattered light in the morning.”
  • WEST LAFAYETTE – Consider the eternal questions. Why is the sky blue? Why is the grass green? Why are some Indiana local government property tax rates high, while others are low? Let’s leave the answers to the first two to actual scientists. I’ll take a stab at that last one. Suppose we measure the revenue capacity of Indiana local governments. Our counties, cities, school districts, libraries and townships receive revenue from property taxes and local income taxes. Schools get a lot of aid from the state. Counties, cities and towns receive state aid for roads. And there are interest earnings, charges and fees, and dozens of other smaller revenue sources. Let’s calculate the average property tax rate for all Indiana local governments, then multiply that rate by the taxable assessed value in each county. That gives the amount they could collect if their tax rates were just average. Calculate the average revenue from local income taxes by multiplying the average local income tax rate by each county’s taxable income. Then add in school and road aid, which depend on state aid formulas. And take the state average of the other revenues per person, and multiply by county population.
  • WEST LAFAYETTE – The General Assembly is in session, and the big issue this year looks to be road funding. How will we raise the additional $1 billion or more that we need to maintain our roads? Funny thing, we seem to be wedded to the idea that those who use the roads should pay for them. We don’t always think this way for other expenditures. We don’t for K-12 education. The Constitution doesn’t allow tuition for public schools. The authors must have thought that an educated public benefitted everyone, not just the kids and their parents. You could make the same argument for roads. We all benefit whether we drive or not. Even if you walk to the grocery store, the food on the shelves has arrived in trucks, driven on roads. But, for whatever reason, we want drivers to pay for roads. That’s why we accept excise taxes on motor fuel as a way to fund road maintenance.
  • WEST LAFAYETTE – Is it September already? While I’m gearing up for my economics class at Purdue, it’s a good time to take a look at the economy. Got to offer those eager young people the latest word!  Let’s start with gross domestic product, our main measure of goods and services production. GDP grew 1.2 percent above inflation from July 2015 to June 2016. That’s pretty slow. Don’t blame consumers. Consumer spending increased 2.7 percent above inflation over the past year, and when people buy, businesses produce more products and hire more employees. There are good reasons to think that consumers will keep spending. Job prospects are better. Wages are edging upward. Home and stock prices are up. Let’s put consumers down for 3 percent spending growth next year.
  • WEST LAFAYETTE – The good folks at the Indiana Department of Education sent me some school finance numbers to play with. School finance is a big topic in the Indiana General Assembly this year, so this is a good time to do some number crunching. Here’s number crunch one. In fiscal year 2015 – that’s July 2014-June 2015 – the state will distribute almost $6.6 billion to public school corporations and charter schools. State aid was $6.2 billion in calendar year 2012 (it was switched to fiscal years in 2013), so that’s an increase of 5.1 percent in two and a half years. Consumer price index inflation was about 3.4 percent during that period, so there’s been a small increase in what state aid can buy. Inflation is expected to be about 2 percent per year during the next biennium. Will aid increase enough to match? The increase in state aid will be one of the most closely watched numbers in the debate over the next budget.
  • WEST LAFAYETTE – Once again, farmland assessments and property taxes are going up. The Department of Local Government Finance, which oversees the property tax in Indiana, has set the base rate per acre of farmland for 2015 taxes at $2,050 per acre. That’s a 16 percent increase from the base rate for 2014 taxes. In December the DLGF announced the base rate for 2016 at $2,420, another 18 percent increase. The base rate has been rising for years. But, this year, it’s a hot topic in the General Assembly. The base rate is the starting point for farmland property tax assessment. It’s a statewide dollar amount per acre. It’s adjusted by each acre’s productivity index so that the acre’s value reflects how much corn it can grow. Some values are adjusted downward for factors like forest cover or frequent flooding. The resulting assessment is multiplied by the sum of the tax rates for the local governments where the land is located. That’s the tax bill.
  • WEST LAFAYETTE - The headline said “Hoosiers’ taxes rise as income goes down.”  The story told of the Tax Foundation’s finding that Indiana taxes had increased from 8.4 percent of income in 2001 to 9.5 percent of income in 2011. Like many, I thought, “You’ve got to be kidding!” Our Legislature has passed big tax reforms, we’ve voted for constitutional amendments, we’ve seen property tax cuts, income tax cuts, corporate tax cuts. And our tax burden has gone up? How?


    WEST LAFAYETTE -The Indiana General Assembly may consider eliminating property taxes on personal property in the upcoming session. Personal property is almost entirely business equipment. Eliminating this tax could encourage more business investment in Indiana, especially since some of our neighboring states have already eliminated this tax. Personal property owners pay about a billion dollars in property taxes to local governments, which is 16 percent of total property taxes. Eliminating this tax would create some big tax and budget issues for legislators to consider. Here's why.

  • WEST LAFAYETTE — July 11 was one of the great days on the number-crunching calendar. It was Indiana’s “close-out,” the day the Indiana State Budget Agency wraps up the numbers for the fiscal year.
    And there’s no doubt, we’re in good shape. We took in more revenue than we spent in fiscal 2013, and we’ve got nearly $2 billion in the bank, which is a healthy 13 percent of the total budget.
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  • Brooks excoriates Rokita over child rape case
    "We are confident of Americans’ ability to work through the issue of abortion now that the Supreme Court has returned it to the democratic process. But it’s crucial for law enforcement to stay above the partisan fray. A case in Indiana leaves us deeply concerned on that score. Initially, some doubted news reports that a 10-year- old Ohio rape victim had traveled to Indiana for a legal abortion. There were also unsubstantiated claims that the physician who performed the abortion had failed to report the abuse of a child and the abortion performed on a girl under 16, as Indiana law requires. Indiana Attorney General Todd Rokita rushed precipitously into this fray. He told Fox News he was investigating the physician and 'was looking at her licensure.' This, after admitting he hadn’t examined evidence that she complied with reporting requirements. Even worse was his inflammatory rhetoric: 'We have this abortion activist acting as a doctor,' he said. Despite the arrest and confession of a defendant in the rape, and news accounts documenting the physician’s timely reporting, Mr. Rokita continues to say publicly that he is investigating her. The justice system’s legitimacy requires that law enforcement be fair, deliberative and ethical. Government investigations should remain confidential unless and until a defendant is charged, with respect for the presumption of innocence and government’s burden of proof. A baseless investigation, if disclosed publicly, causes the target reputational damage, humiliation and loss. We are appalled that, by his own admission, Mr. Rokita announced his investigation before gathering the most basic facts."- Former Indiana congressman and district attorney Susan Brooks and John Tinder, writing in a Wall Street Journal op-ed.
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