Taxation has a peculiar history in America . We are, after all, a people that came together as a country for the first time in rebellion against taxes levied by a distant Parliament. Yet at that time, we were by far the most lightly taxed European-born population on the planet.  And to add insult, the taxes we fought against so fiercely were brought on by war debts incurred by the English in financing the war that pushed the borders of our fledgling country westward.

The tax environment of today is not all that different, especially in Indiana .  We don’t take up arms against tax collectors anymore, although some township assessors might beg to differ.  And, of course, taxes and the public sector they support are much larger than they were in those revolutionary times.  But we think of ourselves as a state where taxes are already too high, and most ideas that call for new taxes are dead on arrival.  And the pressure to incrementally roll back existing taxes, by exempting certain activities from the base, grows stronger every day.

That’s just the democratic process at work, of course.  But the choices we make on taxes have implications for how well the public sector can do its job, and for the overall economy.  So at the risk of being tarred and feathered in the fine American tradition, let me talk about a few issues with taxes that few of those seeking reelection dare talk about.

One of these is the stability of our tax base during economic downturns.  Indiana is not out of its fiscal crisis from the last recession quite yet, but at least recent revenue reports give some hope that our problems have stopped getting worse.  The state’s first quarter take from the personal income, sales, and corporate income taxes were up 8.1 percent from the same period in 2003, although 3 percentage points of this increase were due to sales tax increases earmarked to pay for property tax reductions.

But what about the next downturn? Unfortunately, Indiana is likely to be in even worse shape to adequately handle a dip in the economy in the future than it is today, for at least three reasons. 

First, a significant portion of economic activity, particularly in the services economy and in internet commerce, largely escapes our current tax instruments.  As individual businesses and customers, we’re happy that wedon’t pay sales tax on doctor visits, lawn care, and purchases online.   But as a result, the state’s revenue wagon is hitched up to a slower and much more erratic horse.

The enactment of tax reform legislation that shifted more school funding to the less stable sales tax from the property tax will also increase the amplitude of the next revenue shock.  So has the exemption of grocery items and prescription drug sales from the sales tax base made the state’s tax base more erratic.

But the question of revenue stability is just part of the much larger, and much thornier, issue of revenue adequacy.  Is the state ofIndiana raising enough money to fund its commitments and activities?   The state of political affairs these days is such that few are willing to honestly address that question.

For elected leaders, who can blame them? Any discussion that even raises the possibility of increased taxes quickly finds its way into the opponents attack ads, and things quickly go downhill from there.  But the results of that inaction aren’t too pretty, either.