December 3, 2007
Indiana Needs a Property Tax
Judging from the many yard signs I’ve seen of late, a repeal of property taxes is a popular sentiment in the state. That’s too bad, because repealing property taxes would be an uncommon departure from Hoosier practicality and wisdom.
Like most states Indiana taxes income, consumption and wealth. We use these taxes to fund different levels of government. Our tax on wealth – the property tax – finances local activities like public safety.
Critics of Indiana’s property taxes are right to be flummoxed. I’ve even argued that many of the consequences of Indiana’s property taxes are worse than the most vituperative critics believe. The current system is irresponsibly expensive to manage; it distorts business and residential location decisions, and imposes very costly uncertainty on investment. This damages our economy. However, all of these problems can be remedied through the realistic property tax proposals offered by Governor Daniels and the legislature. But a full fledged repeal of property taxes in Indiana would be inequitable, unstable and inefficient. It would be enormously harmful to our state.
First, property taxes fund local services from the accumulation of wealth. Opponents of the property tax argue that because of it, no citizen can ever own a home outright, due to annual property taxes. But, that is the point of the property tax. We cannot legitimately stop paying to protect our most basic rights of life, liberty and property when we retire or pay off our mortgage. In all fairness, those of us who have accumulated wealth are in the biggest need of these basic protections. Reasonable property taxes are fair.
Second, property taxes are the most stable of tax revenues. This stability is especially important for the provision of local public services – primarily police and fire. If we replace property taxes entirely with income and sales taxes we had better plan for significant disruption of public safety when the next recession hits.
Third, unstable tax revenues cause the cost of government to rise. Faced with terribly uncertain budget futures, we all hedge our finances. Folks who engage in public budgeting are no exception. There’s plenty of evidence that unstable tax revenues drive up government spending – 1-3% per year by my estimates. Unstable tax revenues do not help businesses, and do nothing to eliminate tax uncertainty. Eliminating property taxes will not provide the stable fiscal environment that businesses need to thrive.
Of course, we need to extensively reform, and cap property taxes, but the advocates of a complete repeal are not providing honest math to accompany their proposals. To keep our current level of local government and eliminate property taxes would require a sales tax of between 13.5% and 15% or an income tax of between 9.5% and 10.5%.
I am a great admirer of Advance America, that’s why their astoundingly unrealistic property tax plan is so disappointing. The local spending cuts they propose would result in the elimination of all Indiana’s local parks and the halving of fire and police personnel statewide. There will be no other significant municipal services, no snow removal, road repair or signage.
I have all the bona fides of a fiscal conservative, and am a strong advocate for responsible reform of Indiana’s property taxes. But, repealing Indiana’s property taxes would be inequitable, inefficient and potentially damaging to our economy.
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