One of the thornier issues in tax policy is anticipating behavioral, or second-order, effects. These are normally analyzed over a couple of years to avoid unintended consequences.

That didn’t happen with last year’s Senate Enrolled Act 1. The looming effects are worth noting, beginning with the size and scope of tax changes across businesses, families and local government.

Last year’s SEA1 was a modest short-term tax cut for households that own homes, maybe $300 a year for those with a $375,000 house and no other exemptions.

Over the long term, it is almost certainly a tax increase. Local governments will have to raise income taxes to levels that are almost certain to offset all the household property tax cuts. Meanwhile, SEA1 was among the largest state-level business tax cuts in U.S. history.

The business tax cuts came in two ways.

First, the law eliminated business personal property taxes for about 85% of companies. It did this by raising the tax exemption threshold from $80,000 to $2 million in equipment and property. Before SEA1, only the smallest businesses — think a local florist or a one-truck plumbing company — were exempt from these taxes. Now, even an Applebee's restaurant or a medium-sized retailer won't have to pay. That's a massive cut.

Second, the law eliminated what's known as the “30% floor.” Under the old system, businesses had to keep paying taxes on their equipment and machinery as long as they were using it, even as it aged and lost value. The equipment could never be valued at less than 30% of its original cost for tax purposes.

Now, that floor is gone, which means major manufacturers and other companies with expensive equipment will see their tax bills plummet as their machinery ages. This is the single largest tax break for capital-intensive businesses that I'm aware of in any state.

The result is that nearly all local governments will see tax revenue cuts of 10% or more. A large proportion will see revenues drop by 20% or more, and some face cuts approaching 40%.

To offset some of these revenue losses, local governments can impose higher local income taxes, while schools can pursue referenda for additional property tax dollars.

I’ll save most of this for a later column, but it is worth noting that this will have enormous distributional effects on families and communities. Affluent, mostly older Hoosiers will enjoy a larger tax cut while poorer, younger families see big tax increases, accompanied by public service cuts.

So, what are the second-order effects of SEA1 on businesses, families and local governments?

First, this is a windfall for existing businesses. If Indiana were a high-tax state, a large tax cut would likely move business investment into the state. But Indiana is a low-tax state.

A private sector study used to justify SEA1 claimed that Indiana's taxes on manufacturing and life sciences were high. But, if you read the fine print, you'd see that's misleading. The authors admitted they didn't include tax abatements or exemptions — the special breaks that Indiana routinely grants to businesses. When you factor those in, Indiana actually ranks as one of the lowest business tax states in the country.

There's very little reason to think this tax law will spur new business investment. Indiana was already a low-tax state for businesses.

The same logic applies to the property tax cuts for families. The cuts are modest and go mostly to older homeowners with paid-off mortgages — the people least likely to move. Meanwhile, the income tax increases that local governments will likely impose to replace lost revenue will hit younger, working families harder. Those are precisely the mobile families who cities and towns want to attract and retain.

In short, SEA1 is a perfectly designed tax cut to benefit relatively well-off taxpayers in the state without incentivizing any additional job or population growth.

The unintended consequences will fall hardest on local governments and the people who depend on their services. I see three major effects.

First, property tax abatements for businesses become nearly worthless. Cities and counties have long offered these abatements — temporary tax breaks — to attract new companies. The benefits were always overstated, but now they're practically nonexistent. Without the 30% floor, new businesses will see their taxable property values drop rapidly as equipment ages. Any tax revenue gains disappear quickly, and with the abatement on top of that, communities get essentially nothing.

It will take a few years, but cities and counties will eventually realize the best strategy under SEA1 isn't chasing new businesses, it's attracting wealthy residents. This shift won't necessarily hurt most Hoosiers, but it's bad news for economic developers and their consultants.

Second, SEA1 will force rural school consolidations. Suburban schools face serious cuts — Noblesville will lose 8.2% of its property tax revenues. Urban schools will suffer too, with Muncie losing 12.6%. However, rural schools are most at risk. They're already underfunded, face much higher transportation costs per student and have fewer buildings they can close to save money.

Within two years, Randolph Eastern will lose 10.1% of its property tax levy, Logansport will lose 22.2% and Barr-Reeve will lose 9.2%. Despite what you hear from the Statehouse or on talk radio, these schools have no fat to cut. For dozens of rural school districts, SEA1 means asking voters for more money through referenda, consolidating with other districts, or both.

Third, public services will decline. Even with local income tax increases phasing in over the next few years, quality-of-life investments across Indiana will stall. I'm talking about the spending that keeps communities livable: police and fire protection, good schools, well-maintained libraries, parks and trails.

Some of these effects will occur almost immediately. In many small towns, there will be nights without police patrols. Large cities will have fewer resources to address crime and homelessness. That won’t make any taxpayers better off.

Other effects will take years to notice. Deferred maintenance will make many of Indiana’s public buildings and parks resemble our local streets — an embarrassment that is hard to hide.

Some local governments will become more efficient, and that is a good thing. But, it is easy to judge whether or not Hoosier voters think they are overtaxed for the level of public services they now receive. Hoosiers are moving quickly from the low-tax, low-public service counties to the high-tax, high-public service counties. From that, we can infer that mobile Hoosiers are thirsting for more and better public services, and they are willing to pay for them.

SEA1 means that they’ll get fewer public services, precisely what people are voting against with their feet. That, folks, will be an unhappy consequence.

Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.