April 19, 2002
Let's Fix What's Broken With Indiana Taxes
The jostling and positioning preceding the Indiana Legislature's May 14 special session is starting to resemble the old comedy routine where the military commander asks his lined up troops for a volunteer to step forward. The laugh comes, of course, when everyone steps back and leaves a single sleeping soldier out ahead of the rest. So it is that each of the power players in the law-making process have been asked to volunteer a new proposal to get tax restructuring and deficit reduction negotiations off the dime, and each has retreated to the shell of their uncompromising rhetoric.
But if there's one thing you learn as an economist, it is not to be bashful about expressing your opinions. No one has asked me what I would do to address Indiana's budget problems as of yet, but that doesn't mean I'm not ready. And with no one else ready to go onstage, it looks like you're just going to have to sit through my act for a while.
The prevailing wisdom in Indianapolis seems to be that the property tax is broken, and needs to be de-emphasized in favor of other taxes. Perhaps. But common sense says that if something is broken you either fix it, or get rid of it, not keep it around. And there's a lot to be said in defense of a professionally administered property tax that is responsive to the will of the electorate.
So my first proposal on tax restructuring is to simply table the calls for shifting half or more of the levies for schools and courts to the state's general fund, and concentrate on fixing the property tax instead. Even if that idea makes your eyes turn red, you must agree to one point. That is, if we do nothing to reform the administration of the state's oldest tax instrument, its problems are only going to get worse.
What kinds of reform are needed? Market value assessment is one, and it has taken a court order to bring it about. But that assessment basis won't stick unless we thoroughly revamp the assessment process. Start by drastically reducing the number of assessment officials to, say, one per county. Then hold those officials to closer scrutiny by giving the state the administrative power to inflate or deflate county assessments, across the board, in order to ensure equal treatment of property statewide.
Finally, we must end the fixed levy system that lets assessors give out tax breaks at no cost to the public purse, and replace it with one that fixes tax rates instead. That gives homeowners and businesses a fixed basis on which to plan, and gives everyone the proper incentives when they come to the assessment negotiating table.
How can we handle the looming increases in residential property tax bills that result from market value based assessment? First, I would scrap the new assessment rules on business personal property that increase the tax exposure of new investment, in many cases dramatically. These rules were intended to soften the blow of reassessment to homeowners, but they are also job killers, pure and simple.
Instead of leaving this important task to an unelected administrative body, the legislature should pass a law that gradually phases in market value based assessment, say, over five years. And we should replace the antiquated shelter allowance concept with the more modern "circuit breaker" used by other states to target property tax relief to those with limited means to pay.
From the vantage point of my soapbox, it looks like we are raising an awful lot of taxes just to make sure that residential property tax bills remain unchanged from reassessment, at least on average. And we're doing absolutely nothing to stop the same problem -- unequal tax treatment of property -- from happening again. So this economist says let's solve the problem that ails us before we create new ones.
About the Author
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