March 24, 2008
Process Produced First-rate Property Tax Reform
The practice of economics can certainly compel a man to cynicism. Take for example tax reform. I’ve testified on tax reform before legislatures in three states and one foreign country. Each had much bigger tax problems than does Indiana. Today, in each of those places several solid proposals languish under the assault of special interests, much to the chagrin of taxpayers.
Here in Indiana, the story is different.
The past few months have seen reasoned and informed debate on property taxes. To be sure there has been a bit of pure politics, but nothing that derailed the efforts. It is enough to embarrass even the most the self indulgent cynic.
The property tax changes the Governor and legislature have given us are truly first rate. It caps residential rates at 1 percent, rentals at 2 percent and businesses at 3 percent, while raising sales tax rates by 1 percentage point. This nets taxpayers about a $600 million tax cut.
The costs of school operating expenses, child welfare and a few other costs are absorbed by the state. Contrary to much recent wailing, this strengthens and protects school funding. The temporary exemptions on caps for some fast growing counties and short term relief for capital projects buffer the transition.
Costs for local communities are slashed by more than $100 million through the elimination of assessors in all communities with fewer than 15,000 parcels. Communities worried about loss of revenue can impose their own local option income taxes to cover shortfalls.
Like all good compromises, the plan has something to which we all can object. I would like to tax services (yes, lawyers, physicians and economists). I would also like to see all assessors below the county level eliminated (the plan keeps the most egregiously costly ones for a county referendum).
The plan is also kind to those most affected by the sales tax increase. The roughly $275 per person annual increase in sales taxes is offset by an increase in the earned income tax credit. This is one of the better tools to spur movement out of poverty and is well used here.
By my estimates, this is also a jobs creation tax plan. Removing the uncertainty surrounding property taxes and reducing the average tax rate combine to account for as much as 20,000 new jobs in the state. That alone was worth the difficult effort poured into the plan.
Most importantly, this legislation sets the stage for the more difficult task of reforming local government. Local governments must now begin to convince voters (directly or indirectly) of the need for new income tax revenues. This is the first step towards a truly modern (and by that I mean early 20th century) style of local government in Indiana. The transparency that must ensue from this process is much needed, and should be welcomed by Hoosier taxpayers.
In the end, this is a triumph of policy over politics. Local policymakers seeking to make their communities more economically viable should be overjoyed, and the taxpayer triumphant.
About the Author
Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.
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