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July 12, 2002

Indiana Gets Its Tax House in Order

It has been said that at least two generations must elapse before one can begin to write the history of any event. If that is so, then we should all hold our tongues before rendering judgement on the wisdom of the Indiana Legislature's passage of the tax restructuring compromise, until the evidence of its importance and impact emerges.

But few of us in politics, or in economics for that matter, are interested in writing good history. Our reactions in the immediate wake of this important event may be clouded by dozens of factors that bias our judgment, but such is the environment in which decisions are made. And now that our public servants have re-written the rules that govern how state government is to be financed, the question is, how will the private sector respond?

To the credit of our political leadership, that question occupied center stage virtually throughout the entire debate. There may be some truth to the ancient adage that "there is no safe harbor when the legislature is in session," but with Indiana's economic growth being mentioned in every breath of the tax debate, businesses could at least take some comfort in knowing that the issue of competitiveness would be on the table.

Perhaps it was that concern that produced a final result that looks to be as friendly to business investment as any you could imagine.  

The list of roadblocks to business spending that are being removed is quite impressive. To begin with, the tax package rolls back property taxes, which are based on land and capital, and shifts the tax to consumer spending in the form of higher sales taxes. And the hated inventory tax will be gone in five years.

But that's only half of it. Less attention has been paid to the changes in assessment rules that affect depreciation of business personal property, once slated to go into effect with the coming tax year. But those new regulations loomed ominously for manufacturers and other capital intensive employers, whose tax exposure was to rise significantly. That frightening prospect is now gone, thanks to the legislature. Meanwhile, the market value-based assessment procedures going into effect next tax year will quietly shift the downsized property tax burden away from most businesses as well.

If you think that business as a group hit a home run, you're only half right. Indiana's property tax assessment manuals may be new, but the method itself remains largely the same. That localized, fragmented process produced a slow, steady tilt of property tax burdens towards business and away from residential homeowners over the last two decades. The result was an assessment situation that was way out of balance, particularly in the northwest cornerof the state.

No one likes to be taxed, of course. That's why tax debates are like special interest conventions, with each group claiming that the provision that lines its own pockets is in the best interest of all. The bigger question is, is shifting tax burdens away from the property to the sales tax good for the Indiana economy?

The evidence we have from economic studies, conducted both at Ball State and elsewhere, suggests that it is. In swapping these tax bills, we are making the state more attractive to business investment at the same time as we make it a less friendly place for households to spend their money. The key factor that tips the balance is the greater leverage that business spending has in the local economy. Business spending makes Indiana facilities more competitive and helps them grow market share and the overall economic pie.

It's going to take more than a signature on a piece of paper to get the state economy off the mat. And it will take more still to reverse the longer-lived trends that have adversely affected our economic status. But getting our tax house in order is an impressive and long-awaited start.

Link to this commentary: https://commentaries.cberdata.org/414/indiana-gets-its-tax-house-in-order

Tags: taxes, business


About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. 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.

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