What's a referendum? How did they come about? Why do schools use them?

Monroe County Community School Corp. is, for the second consecutive year, asking voters to approve a referendum to fund local schools.

Here's what you need to know about what referenda are and how they gained importance.

What's a referendum?

A referendum is a public question that a local governmental unit, such as a school corporation, places on a ballot. A majority of voters decides in the election whether to approve the additional tax.

Why do we have referenda in Indiana in the first place?

For schools, referenda gained importance after the Indiana Legislature fundamentally altered the way schools are funded about 15 years ago.

At the time, annual property tax payments in some Indiana communities were experiencing wild swings. The Indiana Supreme Court in 2002 had ruled a prior taxing method as unconstitutional, prompting Indiana to adopt a "fair market value" approach, "which used the open market sales price of real estate to calculate property value," according to research published by the International Journal Education Policy & Leadership.

"As one might predict, re-assessments under the fair market value system resulted in increased property values and substantially higher property tax bills for many taxpayers," the authors wrote. "In reaction to the higher tax bills, public protests were held as citizens descended upon the statehouse to voice their concerns."

State legislators, worried about the predictability of tax bills, enacted what they called "tax caps" or "circuit breakers," which limited the amount of taxes property owners had to pay.

The new laws limited homeowners' annual property tax bills to no more than 1% of the value of their home. Farmers and owners of apartments had to pay no more than 2%. Business owners got an annual cap of 3% of the assessed value of their business. An analysis by the Indiana Fiscal Policy Institute showed the caps shifted much of the tax burden from residential to business and commercial property.

The move turned the property tax, a formerly progressive tax where, if a home's price went up, the share of taxes — not just the amount owed — went up, into a flat tax, where, regardless of the home's value, the tax could not exceed 1%. Whether Hoosiers benefited from the tax caps depended largely on their local tax rates. People in areas such as Bloomington, with high-value properties and, therefore, lower tax rates, saw little to no impact. Property owners in areas with lower property prices and high tax rates, got a tax break. The dynamic largely persists still today.

Homeowners in Brown County this year are getting a combined tax break from the 1% cap of $0. In Monroe County, the cap this year is cutting homeowners’ tax bills by a combined $811,000. In Bartholomew County — about half the size of Monroe by population — the tax bill reduction this year is $6 million. In some of those communities, including Columbus, the tax breaks benefit primarily out-of-state apartment complex owners and people with more expensive homes, some of whom saw their tax bills drop by more than $10,000 per year.

In Bloomington, very few homeowners get a tax break because of the 1% cap, because the property tax rate is low. In fact, a calculator on the state’s Department of Local Government Finance indicates that even the owner of a Perry Township home assessed at $10 million would not get a break from the 1% cap. The same is true for neighboring Brown County. But just one more county to the west, in Bartholomew County, the caps have an enormous impact.

In the city of Columbus, the annual property tax bill for the owner of a $1.5 million home would be nearly $28,000 without the 1% cap. However, thanks to that limit, the homeowner annually saves nearly $12,000. At the low end, however, the tax breaks are much smaller: The tax cap saves the owner of a $150,000 home only $276 per year. Put another way, the 1% cap cuts the tax bill on the low-income household by 16%, but for the wealthy household, it cuts the tax bill nearly in half.

How do Indiana's property tax caps affect school referenda?

The tax caps are reducing property owners' tax bills, and the dollars those property homeowners don't have to pay are taken away from the local taxing units — cities, counties, schools, etc. — leaving many to come up with new ways to raise revenue.

For example, city and county governments that took a hit from the property tax caps — and some that didn’t take hits — have increasingly relied on income taxes to bolster their coffers and/or began collecting monthly fees for services such as trash pickup that previously were provided at no extra charge.

Before 2008, local schools were funded almost exclusively by local property taxes. However, the state Legislature that year switched schools’ operational funding — which includes teacher salaries — to the state, in part by increasing the state sales tax from 6% to 7%. That didn't offset the loss in property taxes, though.

Then-Gov. Mitch Daniels in 2010 ordered the state education budget be cut by $300 million. MCCSC eliminated more than 60 teaching positions.

Schools, which have fewer options than cities to generate additional revenue, have primarily tried to collect more money through referenda, essentially by asking voters to voluntarily pay more to improve the operation of local schools.

Local voters in MCCSC’s district in 2010 passed a referendum that restored much of the Daniels cuts while also adding programs and resources. In 2016, when the initial referendum was about to expire, voters essentially renewed it.

Until this year, the local referenda generated an average annual $7.4 million for MCCSC. Local public education advocates have said those dollars enabled the corporation to pay its teachers higher salaries and allowed the addition of educational programming. MCCSC teachers get at least $50,000 per year, including a $4,500 raise from last year’s referendum. The teachers union and the district are negotiating a new contract this year.

Boris Ladwig can be reached at bladwig@heraldt.com.

This article originally appeared on The Herald-Times: What's a referendum? How did they come about? Why do schools use them?