December 21, 2001
Keeping Score on Indiana Tax Reform
Even though Indiana's fiscal crisis has pushed it off of center stage, some excellent points have been raised in the debate over the O'Bannon/Kernan tax reform proposal since it was unveiled in October. After too many years of empty posturing and frustrating delay, at last we have a proposal on the table that acknowledges the seemingly obvious fact that there can be no significant cuts in property taxes without replacing the revenue with increases in other taxes.
We should expect nothing less from our political leadership. Those who object to the tax increases in the plan, while supporting the cuts, are practicing the same political opportunism that has backed us into the corner we find ourselves in today.
But if the discussions at recent public forums hosted by the legislature are any guide, there are still some important issues about taxes that aren't getting raised. The specific issues may appear technical and complex, but the overall issue is quite simple. If we care about how taxes impact economic growth, then how we design them matters a great deal.
The new assessment rules being put into place by the State Board of Tax Commissioners dealing with depreciation of business personal property are a case in point. These new rules have often been depicted as part of the "new reality" mandated by Tax Court decisions that the administration's tax plan aims to address.
But that is only partially true. The decision to implement straight line depreciation of business personal property is purely political, intended to partially offset the big gain that businesses might otherwise reap from moving to market value as the basis for property assessment. Under the new rules, the tax exposure of productivity-enhancing investment in new equipment is markedly higher than before.
Given the magnitude of the shifts that would otherwise occur, the new rules do make political sense. But from an economic development perspective, they take us in the wrong direction. The overall burden of property taxes on businesses in Indiana is lower, yes. But we've lowered the taxes businesses pay on their immobile land and structures, while raising taxes on more discretionary investments in plant and equipment to achieve that result.
But the larger issue with tax reform in Indiana is how we keep score. Shining a bright light on how the tax reform proposal shifts tax burdens between businesses and homeowners misses two crucially important aspects of Indiana's tax plight.
For one thing, it's a little like tallying the score of a baseball game from what's happened in the ninth inning alone. Our old rules allowed assessors across the state to gradually shift taxes away from residences, and onto businesses, for decades. That's what the court case that started us down this road was all about.
More importantly, we need to recognize that we don't tinker with our taxes in a vacuum. Most burden shift calculations presume that farmers, business people, workers and homeowners behave the same way under new tax rules as they did under the old ones. That's acceptable as a starting point, but the game doesn't end there.
How the economy ultimately responds to a new tax structure can be just as important to our own individual welfare as the extra dollars we might first see -- or save -- on our next tax bill. To its credit, the administration's proposal recognizes this in targeting some particularly onerous taxes for extinction. But if we are ever to realize real improvement in the tax structure of our state, we should always remember that there are 49 other states where businesses and workers can invest and live.
About the Author
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