Capital Comments

The MLGQ is Long Overdue

Friday, February 21st, 2020

House Bill 1113 is 139 pages long. It covers lots of local government tax issues. It’s not controversial. It passed the House, with 95 members voting yes, and none voting no. The bill has moved on to the Senate.

Perhaps the simplest change in this very long bill is this: It changes the name “assessed value growth quotient” to “maximum levy growth quotient.” The AVGQ will become the MLGQ, if this bill passes. It changes the name, as the bill description says, “without changing the definition.”

It’s a name change 18 years in the making. Or maybe 48 years in the making. Here’s the story.

Otis Bowen ran for governor in 1972 on a pledge to do something about property taxes. Tax bills had been rising rapidly, with growth averaging 8.4 percent per year for the previous 20 years. Bowen won, and in 1973 the General Assembly passed a series of tax reforms. The sales tax increased from 2 percent to 4 percent, and the added money was used to reduce property taxes by 20 percent. The first local option income tax was created, so counties could choose to shift their taxes from property toward income.

And, a maximum property tax levy was imposed on local governments. The state would now set an upper limit on the amount of revenue that local governments could collect from property taxes. Of course, population growth and high 1970s inflation meant that the maximum would need to increase each year, if local governments were going to continue to provide enough services.

The state established a formula based on the growth of assessed value in each jurisdiction. The maximum levy for each local government could rise by the three-year average of assessed value growth within its boundaries, with a minimum of 5 percent and a maximum of 10. The formula was based on assessed value growth, so it was called the assessed value growth quotient, AVGQ.

Five percent seems like a high minimum to us, but remember that inflation averaged 7 percent per year during the 1970s. Costs were rising rapidly. In fact, local officials didn’t see the 5 percent limit as a minimum. They saw it as a maximum. Prior to 1973 they were raising levies by 8 percent a year; now the formula restricted them to 5 percent.

The reforms were effective. The new credits from sales and local income taxes reduced the levy in 1974 and 1975. Levy growth then averaged 6 percent per year from 1975 to 2002, less than growth in the decades before.

With a few modifications the AVGQ formula remained in place for 30 years. But inflation slowed. The inflation rate averaged 5.5 percent in the 1980s, and just 3 percent in the 1990s. The maximum levy kept increasing by 5 percent per year for most local governments. With costs growing more slowly, many frugal local governments set their levies less than their maximums, knowing that levies could be raised to the maximum if the need arose.

The need arose after the 2001 recession. Local income tax revenues dropped with lower incomes, and local governments made up the difference with bigger-than-usual increases in property taxes. Taxpayers were unhappy, so in 2002 the General Assembly responded by changing the AVGQ formula. Instead of local assessed value growth with a 5 percent minimum, the formula would be based on the 6-year average of statewide non-farm income growth, with no minimum. Property tax revenue growth would no longer depend on property assessed value growth.

The idea was to keep tax bills from rising faster than taxpayers’ ability to pay, as measured by income. Farm income was excluded because it can be so unstable. Income growth has averaged only 3.6 percent per year since 2002, so it’s a tighter restriction on levy growth. Levies have increased by about 4 percent per year, apart from the years when big new credits were applied.

It was a big change in the maximum levy formula. What didn’t change? The name. It was still called the “assessed value growth quotient,” even though the calculation had nothing to do with assessed value growth.

So, welcome to the maximum levy growth quotient, the new MLGQ! You’re long overdue.

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Author: Larry DeBoer, ldeboer@purdue.edu
Editor: Charles Wineland, cwinelan@purdue.edu
Category: Agricultural Economics, Extension
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