Economy and Government

ECONOMIC ANALYSIS Patrick Barkey: Though state revenue rises, property tax hikes lurking

June 13, 2005

Is there such a thing as good news about taxes? Perhaps not. Muscles tense and faces frown at the mere sound of that three-letter word.

But you should know there is a quiet tax increase occurring in the state that few, if any, of its residents are complaining about. We're all paying more in taxes to the state-quite a bit more, actually-and the governor and the General Assembly have little to do with it.

What's happening, of course, is that the economy is coming back to life and, with it, the base for most revenue is growing. That's not a tax increase, of course, in the usual meaning of the term. But it's more money coming out of our pockets and into public coffers just the same. The difference is that when the base grows, we've got more to spend on ourselves as well.

According to the monthly revenue reports published by Indiana's Office of Management and Budget, 2005 is shaping up to be a very good year for state revenue. In the case of the income tax, especially, the growth has been substantial. In the first quarter, income tax collections were up almost 11 percent over the first three months of 2004. And in April, an important month for the income tax, revenue was up almost $100 million over year-ago collections, a 19.2-percent rise.

Growth in sales tax receipts, while much more restrained, was still reasonably healthy. The last four quarters have seen collections average about 5.4 percent more than year-ago levels. Taken as a whole, the revenue situation for the state is better today than anytime in the last four years.

But if you think this happy news will drive the word "taxes" off the front page for the next few years, you may be disappointed. Here's a hint: There's one very important tax in Indiana I haven't mentioned yet.

That's right, the property tax. Its revenue hasn't surged with the economic recovery for the same reason it didn't fall when the economy was faltering. Even though the state has switched to an assessment method based on market value, the property tax base remains only loosely connected to economic activity. And that makes it a tax governments love, taxpayers hate, and few people seem to actually understand.

We're about to learn that what was called "comprehensive reform" of the property tax three years ago didn't live up to that billing. Thanks to budget cuts and freezes by state government enacted this session, localities will be under more pressure to raise revenue locally to make up the difference. And the easiest way for them to do that is to raise property tax rates.

They'll do it the same way they always have. Even though the Tax Restructuring Act passed in 2002 shifted some of the property tax burden to the state sales tax, it left the administrative and legal apparatus of tax rate determination intact. Thus, we still have overlapping taxing jurisdictions, some with unelected boards, using potentially inconsistent township-level assessments, with the power to set rates to meet their revenue requirements.

It's a system that has proven both cumbersome and unpopular. And the prospect of rate hikes to make up for shortfalls in revenue from the Statehouse promises to put the question of our reliance on property taxes back on the front burner.

Like all questions about taxes, it doesn't have an easy answer. What most Americans want-and what is impossible to give them-is a tax they can avoid. Failing that, a tax that rises and falls with their ability to pay is the nextbest option.



Barkey is an economist and director of economic and policy studies at the Miller College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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