Economists don’t favor tax changes to achieve short-term gains.  The long lag time between recognizing problems, legislating solutions and implementing tax changes argues against fiscal policy as a remedy for economic woes.  Monetary policy is faster. 

This does not mean that taxes don’t matter.  Several instances of accidental economic stabilization have occurred.  The most recent example is the Bush tax cuts.  Designed as early as 1999 as a permanent reduction in income taxes, they were implemented just as the country started into the last recession.  Leaving aside the debate over the efficacy of the Bush tax cuts, they did come at a lucky time, lessening the effects of the recession that gripped us in late summer and early fall 2001. We just might be in a similar situation with Indiana’s property taxes.

The subprime mess continues to capture our attention.  One facet of subprime mortgages is that many are adjustable rate mortgages (or ARM’s) which are now seeing significant increases across the country.  This makes holding onto homes difficult for many homeowners (many of whom believed they could easily refinance their homes before the adjustable rate occurred). 

I don’t know specifically where in Indiana these adjustable rate mortgages are most prevalent.  But, I do know where mortgage foreclosures rates are at their highest.  My guess is that they are good indicators of adjustable rate mortgages. 

Here’s where it gets really interesting.

While working on our property tax studies at Ball State we compared several maps of property tax rates and foreclosure rates. Interestingly, when we overlay these two maps we find high property tax rates and foreclosures occur in many of the same places. 

Now admittedly, the geographic match isn’t perfect.  Some of the locations are rapidly growing Indianapolis suburbs, while others are frankly, struggling smaller towns.  Unfortunately, it will take months if not years to really understand where the problems are and what the cause may be.  But, as a call to policy action this coincidence is significant.

If we are to fix property taxes (and who doesn’t really think a remedy is in order) then we should do so sooner rather than later.  The reason is that we might get significant, unintended benefits from doing so now.  Here’s why.

Tax reform will almost certainly have its largest effect in places with high tax rates – which are also places with higher foreclosure rates.  By my calculations, a 1 percent cap will reduce housing costs by the equivalent of more than one month’s mortgage in the most heavily taxed locations.  That is not enough to mitigate the costs of the typical adjustable rate mortgage increase.  But, it might be enough for many homeowners to successfully renegotiate their loans and stay in their homes.

I don’t believe we should rush to the rescue of the financially irresponsible (lenders or borrowers).  But, we might be able to ease Indiana’s subprime fallout while reforming a flawed property tax system.  Now that would be lucky.