The worst year of the Great Recession was 2009. Indiana’s unemployment rate hit 10.6 percent in June that year. Housing construction dropped to a 20-year low. Home values fell. Total income declined for the first time in more than 50 years.

The economy has recovered since then - a little. But next year – 2011 – will be the year that the Great Recession really hits Indiana local governments.

Property taxes are the biggest revenue source for most counties, cities and towns, libraries and townships. The property tax is stable in recessions but not quite as stable as it used to be, for two reasons:

First, Indiana has had a statewide reassessment every 6-10 years. New construction, remodeling or changes in use affect assessed value in between reassessments. It used to be that changes in property prices did not. Falling property values during a recession had no effect on property taxes.

But we started trending assessments in 2006. That means we adjust assessed values each year based on what’s happening to property prices. The drop in property values in 2009 provided information to trend assessments in 2010. And 2010 assessed values will be taxed in 2011.

Second, even if assessed values dropped, local governments could raise tax rates to compensate. Higher rates on a lower assessed value kept tax revenue stable.

But now we have property tax caps. With a few exceptions, homeowner tax bills are capped at 1 percent of the assessed value of their homes before deductions. Rental housing and farmland are capped at 2 percent and other business property at 3 percent. Lower assessments tighten the caps. If a local government raises 2011 tax rates to offset lower total assessed value, more taxpayers will hit their cap limits. Taxes above the caps are not paid. Tax cap revenue losses will be bigger in 2011.

We’ve been paying a lot of attention to the new tax caps, but the old tax controls are still in effect, too. Each non-school local government has its property tax operating levy limited to a maximum set by the state. That maximum levy can increase each year by a percent called the growth quotient. The growth quotient is calculated as the six-year average-percent change in Indiana statewide non-farm personal income.

Each year an old percent change is dropped from the growth quotient and a new percent change is added. For taxes in 2011, the percent change from 2003 was dropped. It was 3.8 percent, a normal increase in an expansion year. For 2011, the percent change from 2009 will be added. It was minus 1.5 percent. A negative number replaced a positive number in the six-year average, so the growth quotient dropped from 3.8 percent to 2.9 percent. Local governments that are taxing at their maximum (which is almost all of them) can raise their levies only 2.9 percent in 2011. That’s the lowest growth quotient anyone can remember.

Local income taxes are the second-biggest source of tax revenue for Indiana local governments.

Indiana incomes dropped in 2009. Indiana’s state budget saw an 11 percent drop in state income tax revenue in fiscal 2009 (which ended in June 2009) and another 10 percent drop in fiscal 2010 (which started in July 2009).

State income taxes and local income taxes are paid on the same taxable income, but the revenue is distributed on a different schedule. The state collects its revenue in “real time.” Each month’s revenue is the amount withheld from paychecks, plus other payments, less refunds.

Local governments get their income tax revenue distributions with a delay. The distributions for 2011 were based on the taxes paid in each county in 2010.

Those payments were based on income earned in 2009. And 2009 was the year that incomes fell. The average county will see a drop in local income tax revenue of about 16 percent in 2011. These aren’t revenue forecasts; they’re the actual distributions local governments will receive, because they’re based on revenue already collected.

In 2011 local property tax levies will grow slower than ever, and higher tax cap credits will mean that a smaller share of those levies will be collected. Local income tax revenues will drop substantially. The economy may be recovering, but the tough times for Indiana local governments continue.

The views and opinions expressed in this column are those of the author and not necessarily those of Farm World. Readers with questions or comments for Larry DeBoer may write to him in care of this publication.