Government

Income tax neither simple nor fair EYE ON THE PIE:

April 11, 2005

It's that time again. You do your federal income tax and then you do your Indiana income tax. Ah, the Indiana income tax. We are so proud that we have only one tax rate (3.4 percent) instead of an evil graduated income tax.

This, we think, makes our tax simple and equitable.

Yet the Indiana individual income tax is neither simple nor equitable. It is a complex mess of special treatment based on arbitrary and inconsistent sentiment. Some examples:

Indiana gives special treatment to taxpayers because of their housing arrangements. We allow a deduction from income of up to $2,500 for rental payments or for residential property taxes. That is worth $85 in taxes at our 3.4-percent rate. It does not matter how poor, how old, how many people in the household. It's a flat and deceptive deduction.

Remember, the state is already subsidizing property taxes for homeowners through the property-tax replacement credit, the homestead credit and the homestead exemption on the property-tax bill. Thus, this deduction on the income tax is just an additional way of reducing the taxes on those who own their homes. Does the state have a reason to believe renters are, by definition, less worthy citizens?

Then there is special tax treatment for residents of Lake County. Why should Lake County residents get special treatment? Ask your legislator, not me. Lake County residents who have earned income of less than $18,000 can get a maximum credit of $300 off their tax liability. Note how this is different. First, it is an earnedincome limitation. Earned income (from wages, salaries, tips) may be zero for a retired person on a generous pension or one who is so wealthy she lives just on stock dividends and bond interest. Second, it is a credit that cuts the income tax $300, while other Hoosiers can reduce their income taxes only $85 because of property taxes. Is this simple and equitable?

Then we have the famous 65-and-older exemptions. If you are over age 65, regardless of your income, you can reduce your tax liability $34 (3.4 percent X $1,000). Blind? Get another $34 off your taxes. Deaf, in a wheelchair and age 64? You get nothing off your taxes. Simple and equitable?

On your federal income taxes, the grandchild who lives with you and for whom you provide support helps reduce your tax liability. But that reduction is restricted on the Indiana tax form.

Then there is the hodgepodge of county income tax rates. The General Assembly, which constrains the ability of local government to govern itself, has generously provided for three different local option income taxes at varying rates. Counties that fail to adopt one or more of these taxes are considered obstreperous because they do not employ the tools fashioned by the great minds of the General Assembly.

Lake, Posey and Sullivan counties, for reasons of their own, have not yet imposed these optional income taxes. Twenty-three counties have rates of 1 percent. Fourteen counties are below that level and the balance (52) are in excess of 1 percent. The highest rate is 1.5 percent to be found in Cass, Elkhart, Randolph, Union, Wabash, Washington and Wayne counties. The lowest rates are in Vermillion (0.1 percent) and Jefferson (0.175 percent) counties.

It would be simpler and more equitable for the state to return some portion of income tax revenue directly to the counties and stop the nonsense of local option taxes with their limitations, provisos and variations. But that would require a more thoughtful Legislature than we have enjoyed in the past half-century.

P.S. Don't forget to fill in line 17, where you report the sales taxes you did not pay on catalog and Internet purchases.



Marcus taught economics 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 mmarcus@ibj.com.
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