EYE ON THE PIE: Property tax isn't evil, it's abused

August 6, 2007

There are two books I want to call to your attention. They are both written by Hoosiers and are both vitally important to Indiana at this time. But this column, again, must be about property taxes because that is the compelling issue of the day.

One book is "I Never Worked a Day in My Life," by Bill Haeberle, the retired IU business professor who has started and aided hundreds of businesses.

The other is "Performance is the Best Politics," by Fort Wayne's Mayor Graham Richard. As Indiana demands effective, efficient government at all levels, Richard comes forward with an extraordinary, readable guide to achieve our goals.

But reviewing those books in detail will have to wait. The Wild Ones are on the loose in Indiana, calling for the abolition of property taxes.

Property taxes are appropriate to pay for those government services and investments that enhance the value of property. Quality schools and libraries enhance the value of property. Dependable police and fire services enhance the value of property. Efficient courts and government offices add value to property. Good roads, sidewalks, street lights, sewers, water systems and other infrastructure are most important to the value of property.

Unfortunately, in Indiana, we forget that the local property tax is a tax on property, a resource that is not mobile. Services that are provided directly to people who are mobile should be the responsibility of state government. Basic expenditures for education are the state's responsibility. School buildings and transportation should be paid for with local taxes. All forms of social welfare, including juvenile and health services, should be paid for through state taxes.

Unsubsidized property taxes help constrain urban sprawl. They discourage people from occupying more housing and land than they can afford. Smaller lots and higher population densities make public transportation more feasible plus reduce the costs for streets, sewers and public safety. They may even increase the variety of private businesses an area can support.

If we substitute income taxes for property taxes, there will be a shift in tax burdens from those who have chosen to own larger houses and more land to those who work. If we substitute a sales tax, the burden shifts to those who chose more diverse ways of investing in the well-being of their families than simply buying sun rooms and three-car garages.

If income or sales taxes substitute for property taxes, should those funds be split among the cities, towns, libraries, counties and school districts according to the revenue each would have received from the property tax? Would the funds be allocated back to the place they originated?

How would income tax collections be divided between the city and its schools? Who would decide? Would the General Assembly set rules legislators could change at their whim? What citizen input would be involved?

The idea that Americans have most of their personal savings tied up in housing is not necessarily beneficial. The result is that many people have limited abilities to move as circumstances may require. When people lose jobs or get older, too many are tied to homes they cannot sell readily or can no longer sustain.

Exemptions, deductions and credits the Legislature has put in place only complicate the property tax and magnify inequities. Two examples follow:

If tax abatements are given to some business property owners, abatements should be acceptable and automatic for all types of property. If you improve your home (beyond routine maintenance), you should get property tax abatement.

Why should a low-income person over age 65 be granted a reduction in the property's assessed value, but a person age 64 (who might have much lower income) not be eligible for relief? When will we learn that the property tax should be a tax on property, independent of its use or the characteristics of the property's occupant?

Rather than abolishing the property tax, let's use it wisely.

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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