Capital Comments

Mid-July is number-cruncher nirvana if you follow the Indiana state budget. That’s when the State Budget Agency releases its closeout for the previous fiscal year. This year the glorious day fell on Friday, July 15, and we learned one astounding fact: At the end of June, the end of fiscal year 2022, Indiana balances were $6.1 billion. Our state has six billion dollars in the bank.

The inflation rate in May was 8.6 percent, 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.

Have you received your Form 11 from your Indiana county assessor? Purdue Economist Larry Deboer has. He was both shocked and not shocked by his new assessment. In this month's episode, Larry walks us through potential impacts of property assessments. 

Election Day is coming up – on Tuesday, May 3 – and school referendums will be on the ballot in nine school districts. It’s best if voters investigate the referendum issues in advance, so they know whether to vote yes or no. What if you didn’t do your homework and want to do the benefit-cost comparison on the fly, in the voting booth? Larry Deboer has advice just for you. 

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.

The inflation rate was 7.5 percent from January 2021 to January 2022, the highest inflation in 40 years. It arrived suddenly and unexpectedly. A year ago the inflation rate was 1.4 percent, which was lower than the 1.7 percent average rate over the previous decade. It’s an unwelcome throwback to the Great Inflation of the 1970s. What happened, and when will it go away?

Farmland property taxes have been falling. Total property taxes paid by agricultural property owners fell 2.3 percent per year from 2017 to 2021, mostly because of lower farmland assessed values. But farmland prices are rising. A Purdue Agricultural Economics survey showed that average farmland selling prices increased 12.5% from 2020 to 2021. Eventually, farmland assessed values will rise too.

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.

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.

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 percent 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.

Where is our economy going? Let’s ask some folks whose job it is to forecast the future of the U.S. economy. How about looking at three forecasts – one from government economists, one from academic economists, and one from business economists.

The recession may be over for the U.S. economy, but for Indiana local governments the recession is just about to start. That’s because the property tax and the local income tax respond to economic changes with a two-year delay. What happened to the economy in 2020 happens to local tax revenues in 2022.

Indiana's fiscal new year began on July 1, and there are reasons to celebrate. Listen to Dr. Larry Deboer explain why. 

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.

Might things be looking up? Dr. Larry Deboer takes a closer look at Indiana state revenue forecasts. 

What will happen with all the pent up demand for goods and services once the pandemic has passed? Dr. Larry Deboer has some thoughts...and a history lesson. 

Tax season is coming up. Federal income taxes are due on April 15, back to the normal date after last year’s delay. That’s the due date for Indiana’s state and local income taxes, too. The first installment of the property tax is due on May 10. You pay your motor vehicle excise tax with your vehicle registration each year. The due dates are based alphabetically; my last name gives me an April 7 due date. And, of course, sales taxes and motor fuel taxes know no season. You pay those when you shop or fill your tank, all year long. The debates about federal spending and the state budget are in the news, so we have some idea of where those taxes go. But what about local governments? Property taxes, income taxes, sales taxes, motor fuel taxes and vehicle excise taxes all fund local government, too. Here’s how.

If you want to be remembered in economics, get yourself a curve. There’s the Lorenz curve, the Laffer curve, the Kuznets curve, and, probably most famous, the Phillips curve. Phillips was A.W. Phillips, an economist from New Zealand who worked in London. In 1958 he drew a curve connecting the dots between inflation and unemployment. When unemployment went down, inflation went up. The Phillips Curve took the economics profession by storm.

The December state revenue forecast for Indiana projected that individual income tax revenue would be about $6 billion this year. But Indiana uses local income taxes too, and we know that the income tax revenues that local governments receive in 2021 will be just over $3 billion.

Can it be, is it possible, that 2021 won’t be terrible? The state revenue forecast was released on December 16 to provide a starting point for the Indiana General Assembly to craft a new state budget. Might the coming biennium be OK? It didn’t look OK last June. State revenues suffered an extraordinary drop in the last quarter of fiscal 2020, down $1.4 billion, 27 percent less than expected. We covered the loss by restricting agency spending and drawing down balances. What had been $2.3 billion in the bank was suddenly $1.4 billion. It wouldn’t last long at that rate, and then much bigger budget cuts would be needed.

How does the Great Recession of 2007-2008 compare to the COVID Recession of 2020? Larry Deboer, ag economist at Purdue University, explains. 

Though some predictions are harder than others, we are confident about this one: Property tax bills for farmland owners will go down next year. We can predict this because we know the base rate for farmland for tax bills in 2021. The base rate is the starting point for the assessment of farmland. The state’s Department of Local Government Finance applied its formula to six years of data on corn and soybean prices, land rents, interest rates and costs, and came up with $1,280 per acre. That’s 18 percent less than this year’s base rate of $1,560. This value is adjusted for soil productivity and other factors to come up with the assessed value for each acre.

Forecasts? Don’t talk about forecasts. You kidding me? I just want to know what’s happening now! With apologies to Jim Mora, that’s our problem. What’s happening in our economy, right now?

Believe it or not, these three things get tied together as Purdue Extension specialist, Larry Deboer, explains. Spoiler alert, the pandemic is part of the story. 

We got trouble, my friends, "with a capital T." The Indiana state budget closeout for fiscal 2020 was held in mid-July, so we have a good idea of how bad things are. Now that we know the numbers, we can take a look ahead. Let’s do some “supposing” about what could happen during this fiscal year 2021, and during the next biennium.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.

Timely topics on public policy issues related to state and local government in Indiana.