Indiana’s 2025 legislative session offered a valuable pair of economic lessons. The first is that there are no perfectly good or bad policies, only trade-offs. The second is that the cost of anything is measured by what you relinquish to obtain it—its opportunity cost.

Indiana’s property tax gifted me with a new, and pristine, example of both lessons.

The session began with Senate Bill 1, a version of Gov. Mike Braun’s property tax cuts. This legislation, which I’ve described before (see https://www.indystar.com/story/news/politics/2025/04/29/why-local-governments-might-hike-incomes-taxes-after-property-tax-reform/83324170007/), provides modest tax cuts to about half of Hoosier families—and less than $300 per year for that lucky half. It also provided the largest business tax cuts in state history by exempting business personal property tax payments and eliminating the 30% floor on depreciated tax payments.

I’ve already described how this bill will result in large income tax increases, probably in the range of $1,250 for the typical family. The unhappiness of this trade-off should be increasingly obvious to many folks (see https://www.indystar.com/story/news/politics/2025/04/29/why-local-governments-might-hike-incomes-taxes-after-property-tax-reform/83324170007/). But that isn’t the big lesson. The bigger lesson is what these business tax cuts do to employment in today’s tariff-burdened economy.

Before the April 2 tariffs imposed by the Trump administration, taxes on Indiana’s manufacturing firms, and their imported goods, was roughly $2.76 billion (in 2023). That was the fourth-lowest rate in the country. After the tariffs, that tax jumps an astonishing $22.37 billion.

The cost of producing anything is much higher—maybe 15% for a Hoosier automobile. This leaves Hoosier firms with a dilemma. Most businesses will raise prices, cut production, reduce staff and see lower profits—the side effects of a recession. Nearly all manufacturers will do that in the short run.

Over the long run, they can onshore production of the tariffed products, but that costs money. In fact, the reason the product was imported in the first place is that someone else can produce it more efficiently. So, that leaves them with a more expensive product that fewer Americans will buy—and is less profitable.

But, vanishingly few businesses will make capital expenditure decisions under the Trump tariff regime. Who knows what they’ll be in an hour or so, and capex decisions are long-term, multi-year choices. Congress will remove these tariffs; the only question is how bad the pain will be before it does.

In the meantime, Indiana’s business property tax cuts give businesses a good, reliable, high-probability opportunity to remain profitable without worrying about tariffs. You see, the goal is to cut production costs to remain competitive. Why bother fixing tariffs, which will go away, when the legislature slashed your property taxes?

Before this legislative session, a business investing $1 billion would have 25-year personal property tax liability of about $221.4 million dollars. That’s among the lowest in the country, but it is still a big number. With abatements, the cost would drop to about $86.6 million over 25 years.

Under Indiana’s new property tax law, that tax liability drops from $221.4 million to $122.5 million—and, with tax abatements, to effectively zero.

The quickest and easiest way for a business to cut its long-term production costs is to automate its workforce. Manufacturing labor accounts for roughly 39% of manufacturing costs, but in an automated factory they’d be down to under 5%. There’s no risk that such a move will backfire once tariffs are cut.

This decision has benefits and costs. The labor share of production will drop, and the capital share will spike. This flows more business revenue to owners—individuals, retirement accounts and pension funds. It will also grow demand for electrical and mechanical engineers, workers with advanced training in manufacturing technology, as well as AI developers.

It will trim far, far more jobs than it’ll create. We’ll see substantial declines in traditional factory employment (which already are highly, but not fully, automated). This will cut demand for labor in factories across the state and reduce local income tax revenues because there will be fewer jobs for fewer workers.

We may be on the cusp of a hyper-automation wave.

That is a good lesson on trade-offs. We economists have plenty of examples of these, but what about opportunity costs? Senate Enrolled Act 1 will take Indiana from the seventh-lowest residential property tax state to, well, uhm, the seventh-lowest residential property tax state. But, we pay the fourth-highest share of our family budget on hospitals—a whopping $2,356 per family more than the average American household.

That’s the opportunity cost lesson.

What if Senate Bill 1 addressed the hospital monopolization that is strangling Hoosier families? What if, instead of spending a long and tedious budget session struggling to find piddling property tax savings, we focused on reversing two decades of hospital monopolization? What might we have achieved?

If Indiana’s elected leaders had spent the session working through antitrust enforcement, they might have made some progress. If they hadn’t been distracted by an anti-tax hysteria, which made some sense 25 years ago, they might have made progress on health care.

Let’s just imagine what would’ve happened if they’d passed legislation that moves us from paying a whopping 10.5% of the average household budget on hospitals to 9.5%. That would have saved the average Hoosier family $1,081 this year.

It bears repeating that SEA 1 isn’t all good or bad, just like any legislation. There are winners and losers. Business owners, including stockholders, are big winners. The losers are people who earn income, whose taxes are going to be more than offset by income tax increases, or who lose their jobs to new labor-saving capital investment.

The opportunity cost to fixing a problem we didn’t really have was that we failed to fully address a much larger, more imminent and far more fixable problem that has festered for years—monopolized hospitals.

That’s what happens when you react to know-nothing candidates and radio show hosts for your public policy agenda.

This is also why, in every economics class, from high school to the doctoral level, we remind students of two things. First, every policy has trade-offs. Second, that the cost of everything is what you give up to get it. In this case, the cost was real progress on our worsening hospital monopolies.