Cutting Budgets Can Make Things Worse, In Ways You Did Not Expect

Clare Boothe Luce coined the phrase, “No good deed goes unpunished.”   

In the new budget framework, many Indiana units have been warned that their revenues will be severely curtailed in 2009.  The natural reaction would be to cut back on appropriations.  Most members of fiscal bodies believe and expect that when they make cuts in appropriations, they will be matched by cuts in property tax levies. 

However, that may be a mistake. 

There are two reasons: 

The first is what I call the “use it or lose it rule.”  Indiana has an odd budget law that says, if a unit reduces its property tax levy, it is punished by losing an equivalent amount taxing authority forever.  (There is a partial exception if the levy is restored in the very next year, but generally, once a levy has been reduced, it can never be restored.)  That is a big problem for a unit that has a one-time windfall or wants to spend down a cash balance.  There is no way to do it without impairing future taxing authority forever. 

The second reason is the way the 2008 Tax Reform itself discourages levy cuts.  Common sense would suggest that a unit that cuts its levy would fit more easily within the rate caps, but that is not the way the Tax Reform works.  Units that cut levies get very little credit for doing so.  They still share proportionally in the cost of the rate caps.  So, for example, if a city cuts its levy, and the overlapping school district does not, they both share proportionally in the cost of granting rate cap credits to taxpayers. The city, which cut levies, is hit just as hard as the school district, which did not.  

The lesson to be learned is to be very careful about cutting property tax levies under the new Tax Reform.  We are not saying levies should never be cut.  However, the decision should be viewed as a permanent decision for all future time, not just a one-year expedient.  Also, the levy probably should not be cut solely for the purpose of remaining below the rate cap.  If the sole objective is to remain below the rate cap, it may be better, fiscally, to exceed the cap and pay a share of the credit to taxpayers, rather than to reduce the levy and try to avoid the cap altogether. 

If your budget has already been adopted, we encourage you to check with your fiscal officer and make sure the budget ordinance or resolution makes clear, if appropriate, that an appropriations cut does not necessarily mean a cut in the levy. That will depend, of course, on the intent of the fiscal body at the time the vote was taken. 

Clare Boothe Luce also said, “Money can't buy happiness, but it can make you awfully comfortable while you're being miserable.”

[September 29, 2008]

[Revised November 26, 2008]