Education & Workforce Development and Environment and Utilities and Government

EYE ON THE PIE: Taxes pay for what Hoosiers want

July 23, 2007

Good people, me included, have been making dumb statements about the property tax mess in Indiana. The problem is that we don't know enough to talk or write intelligently on the topic. The result is that we can be led by our noses into an even worse mess.

"Abolish the property tax!" some demand. Then what? Abolition of the property tax means raising some other taxes or fees, unless government spending on services decreases. The state has been urging counties to adopt local income taxes. One problem is that you and I don't know if our total tax payments will go up or down as a result of that move.

If we want to keep total taxes fixed, expenditures cannot rise. It is possible that some limited decreases in spending are possible for some areas of government, but there's not much fat left to trim in most agencies.

In fact, many agencies are understaffed and the public interest already suffers.

Now which do you want-lower taxes or lower levels of public services? The easy answer is always lower expenditures, because we rarely know the value of the many services we require of government. Instead, we are ready to assume there are plenty of useless people doing unnecessary things inefficiently in the public sector. Very rarely do we have any proof, only anecdotes from others and our own imperfect observations.

Some say, "Higher property taxes will force many of us to abandon our homes. With so many homes on the market, prices will fall and a big piece of our lifelong savings will be eroded." Maybe.

Higher property taxes, theoretically, reduce home values. How much buyers are willing to pay for a house depends on many factors. One of those factors is the annual outlay for property taxes. Outlays for utilities, lawn mowing and many other routine expenses also factor into home-purchasing decisions. The more we need to lay out for any of these items, the less we are willing to pay for the house, except if the outlay of money means we gain something we want as much as we want the money.

For example, a house with a lawn is worth much less to me than it might be to you. I won't mow grass. I won't pay to have someone else mow grass. I think grass is a bad idea for humans and for the environment.

But you might love grass. It makes you feel like the ruler of a great empire to look out on a vast expanse of grass that is yours. Riding that status-enhancing mower satisfies your desire to be seen as master of machine and nature, to escape your family or to avoid civic engagement.

As for property taxes changing the value of a home, it will. The increased annual outlay for property taxes will lower the value of your home. By how much? That depends on how the buyer calculates the present value of a future stream of outlays.

I figured that a rise of $100 per year will cut the value of a house by $1,200 to a buyer who can borrow money at 7 percent, and who is looking at his monthly expenses over the next 25 years. Under those conditions, a $500 increase in your annual tax bill cuts what you can expect to get for your house by $5,900. (See table for more calculations.)

But what really matters is not that your taxes rise, but how the government spends the money. If that money is put to good use, your property value may actually rise. For example, increased police patrols and better public schools can have dramatic positive impacts on home values. In those cases, higher taxes can pay off handsomely.

We should not have people in the streets protesting higher taxes. They should be demanding intelligent spending. These protestors generally don't bother with a realistic view of both spending and taxation. Perhaps their misguided belligerence results from a failure of their hometowns to provide adequate financing of and wise spending for their education 20 or 30 years ago.



Marcus taught economics for more than 30 years at Indiana University and is the former director of IU's Business Research Center. His column appears weekly. To comment on this column, go to IBJ Forum at www.ibj.comor send e-mail to mortonjmarcus@yahoo.com.
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