One is a Republican, the other a Democrat. The first speaks with a cadenced, pleasant Hoosier accent, his counterpart with the emphatic, not-quite-brusque manner of a New Yorker making a point. They enjoy enough prestige within their parties that they could some day wind up on opposite sides in the Senate or even opposing each other for the presidency.
But Mitch Daniels of Indiana and Andrew Cuomo of New York have made their names as governors with a surprisingly similar pursuit: They want to cut the cost of government, and not just at the state level. They have argued that putting their states' economies on track requires keeping a lid on taxation and public spending at both the state and local levels. And so it is that both Indiana and New York, despite radically different histories, legislatures and attitudes toward government, are engaged in parallel experiments: to see what happens when the state limits local government's ability to raise revenue through property taxes — in the midst of a stumbling economy.
They are hardly the only states to go this route, of course. Most states have some kind of limit on property taxes, though many of these are not very effective. The most famous among them — Proposition 13 in California, Measure 5 in Oregon, and Prop. 2 ½ in Massachusetts — were all imposed by the voters. For its part, Indiana's property tax cap was put in place by Daniels and the legislature in 2008, then was stitched into the state's constitution last November by an overwhelming vote of the electorate. New York's is the result of Cuomo's deft handling last spring of budget negotiations with the Republican-controlled Senate and Democratic Assembly.
What makes the Indiana and New York tax caps interesting is that they have been embraced by two politicians who see them as more than a politically popular means of reining in local taxes. They are also a tool for achieving a larger end: holding in check, and maybe even reversing, what they consider to be the overly complex, unnecessary and expensive growth of local governments, their workforces, and their overlapping jurisdictions.
Daniels has never made any secret of his dislike for excessive governance below the state level. Taking his cue from a 2007 commission he appointed to look into streamlining local government — the tagline on its report read, "We've got to stop governing like this" — he has tried repeatedly to do away with township government, which he considers wasteful and obsolete. Indiana's 1,008 townships carry a hodge-podge of responsibilities that, in most other states, are the job of counties: Fire and EMS services to unincorporated areas, property tax assessment, "poor relief," maintaining cemeteries, and a system of small claims courts.
"This is an idea," Daniels said earlier this year, in arguing to abolish township government, "whose time had come 100 years ago." Legislators, however, have just as obstinately begged to differ — even this year, when Republicans controlled both houses and Daniels and the GOP leadership began the session with township reform atop their agenda.
Cuomo has taken a less direct approach. As New York's attorney general, he issued a report in 2008 calling the state's system of local government "a ramshackle mess," and successfully pushed for legislation making it easier for towns, cities and special districts to reorganize and consolidate. As governor, this year he steered $79 million toward that goal in his budget. On the whole, however, localities have not rushed to take him up on the offer.
But with property tax caps in hand, both governors have a way of pressuring local governments to rethink what they do and how they do it. As Indiana's budget director, Adam Horst, puts it, "In the past, a local unit of government would say, 'Here's how much I want to spend,' and then set its rate. Under this system, it's, 'Here's how much revenue I have to spend, what can I get for that revenue?' It's a fundamental change in the question."
'A gradual impact'
Indiana's caps — which limit property taxes to 1 percent on the value of owner-occupied homes, 2 percent on other residences and farmland, and 3 percent on all other property — have been in place for two years. In tax year 2011, according to the state Department of Local Government Finance , taxpayers saw $566 million in savings on property taxes as a result of the caps. And some two-thirds of the communities in the state, according to Mary Jane Michalak, the department's chief of staff, saw less than a 1 percent impact on their general-fund budgets, an effect she calls "very manageable for the vast majority" of them.
That may be true so far, responds Matt Greller, executive director of the Indiana Association of Cities and Towns, but signs of strain are starting to show up. Many cities, he points out, rely on property taxes for 60 to 70 percent of their revenue. Bridges are getting shut down because they can't be maintained, roads are wearing out, swimming pools, parks and other amenities are being shuttered. "It's true we haven't seen massive layoffs of firefighters, but that's not a fair indicator," he says. "We'll see a gradual impact over the years in the ability of cities and towns to provide services."
Several cities are clearly under financial stress, including LaPorte, which is caught up in a cash-flow crisis, and Gary, which last year laid off more than 10 percent of its fire department, though it was able to recall some firefighters this summer after winning a federal grant. Others have been able to avoid layoffs or service cuts, but only by dint of stretching their resources thin.
Goshen, the seat of Elkhart County in the state's northeast corner, has lost $2.3 million in potential property taxes, cut its workforce by attrition, and frozen wages and salaries. Everything might appear calm on the surface, says Mayor Allan Kauffman, but "everyone's wearing more hats and there's more overtime. We're like a duck that's paddling like heck underwater."
Yet it is also clear that some communities are undertaking the strategic thinking that Daniels and his legislative allies were hoping for. Kokomo, a hard-hit automotive manufacturing city, is seeing some $3.5 million less in property-tax revenues for a $52 million budget. It has shed 16 percent of its workforce through attrition, handed off its public daycare center and ambulance service to nonprofits, and explored such cost-saving innovations as having residents on one side of the street carry their trash cans to the other side so that trucks equipped with mechanical arms need only go down a street once, thus cutting their routes in half. Yet it is also putting money into walking paths and parks, on the theory that the city still needs to be a pleasant place in order to survive in the long run.
"We need to make our city a place where people want to live," says Mayor Greg Goodnight, a Democrat. "I had a contentious meeting with members of one of my union groups that was unhappy about the wage freeze and wondering why we were spending money on walk paths and a children's splash pad at the community pool. I told them that if you think the plan is to put all our money into wages and benefits for active and retired employees, and not fix sidewalks and streets or parks, if you think that'll be beneficial to you, raise your hands. No one did."
In New York, that conversation — much less the kinds of spending decisions Goodnight and Kokomo's city council made — would not have been an option. Unlike in Indiana, cities, towns and counties in New York face strict mandates from the state on collective bargaining, binding arbitration, and wage, pension and benefit obligations. Municipal leaders have long argued that these mandates bear heavy responsibility for the cost of local government — and hence for rising property taxes. A December, 2010 report from the state Conference of Mayors, "You Can't Cap What You Can't Control," pointed out that city pension and health insurance costs were due to rise $206 million in the next two years — while a 2 percent property tax cap, which is what eventually passed, would allow only $39 million in additional levies.
Cuomo created a "mandate relief redesign team," and the state's municipal leaders pressed the legislature hard on the issue, but in the end the tax caps passed without significant mandate relief. "The property tax is one of the most regressive and onerous taxes you can put in place," says Sam Teresi, the mayor of Jamestown, a city of 31,000 in the far western corner of New York. "I for one do not oppose the notion of a property tax cap. But the legislature passed the tax cap as a standalone item, broke their arms patting themselves on the back, and left town without taking up mandate relief. If all you're doing is choking off revenues for local governments and not allowing us to go in and attack the problem on the expenditure side of the ledger, then you're going to be seeing municipal insolvencies around the state."
In truth, that isn't likely to happen yet. The tax-cap legislation did include a measure of mandate relief, although it was "weak and anemic" compared to what cities were seeking, says Peter Baynes, director of the New York Conference of Mayors. On the other hand, in order to assuage cities, the legislature allowed them to exclude a portion of their pension costs from their tax-cap calculations, which may result in 4- or 5-percent increases in property-tax levies, rather than the 2 percent required by the bill. "So in the short term, that exclusion may dampen the fiscal debates at the local level on how to deal with the cap," says Baynes.
Cuomo has said he intends to revisit the mandate issue in the next legislative session, and towns, cities and counties will certainly be pushing to do so. Without much greater flexibility, they argue, the "right-sizing" that Cuomo is aiming for will be hard to achieve. Departmental bargaining units have to sign off on fundamental changes in work rules, so merging a city and county highway department, for instance, requires all the unions involved to agree. "We agree that one of the benefits of the tax cap is that it will force local governments and communities to discuss what they can do to be more efficient," says Baynes. "But ironically, the labor mandates make it hard to have as much consolidation as the legislature and governor would like."
Rob Gurwitt is a freelance writer based in Norwich, Vermont. He can be reached at [email protected]