Education & Workforce Development and Environment and Government

EYE ON THE PIE: Time to realign taxes with services

October 24, 2005

Many folks want to get rid of property taxes. They think property taxes are o l d - fa s h i o n e d , although most who think so have not thought through the issue.

These property-tax abolitionists want to use income or sales taxes, which they contend are more "fair," whatever that means. They forget that one aspect of "fairness" is to relate taxes to services received. This is called beneficiary taxation.

An example of beneficiary taxation is the tax on gasoline. The more you drive, the more you use the streets and roads and, with more gasoline used, the more taxes you pay for streets and roads.

The gas tax tends to match payments with benefits received.

The property tax is based on the value of property being taxed. It should be used to support services that provide benefits to and increase the value of property. The first of these are fire and police protection. You don't want to invest in a place that does not provide these services well.

Parks and libraries, storm and wastewater systems increase the value of property. People want to locate in "nice" places that offer good education for their children and the children of their neighbors. Good schools make neighborhoods safer, cleaner and more civil, and raise the value of property.

The state (or federal) government does have an interest in some of these services, particularly when inaction in one town or county will have an adverse effect on another place. This is clear in environmental issues, but it also applies to education, because people are mobile. Therefore, state funding for some education expenses are appropriate to assure minimum levels of learning by all children. But it is unreasonable to argue that there should be equal funding behind each child in every school district.

Property taxes should not be used to solve the problems of poverty. Health services for the poor, welfare payments and the increasingly expensive and expanding services for children are not related to property. These are problems more related to income distribution. The state's income taxes should be used to support them.

In addition, property taxes should have nothing to do with who owns the property or how it is used. Hence, all special treatment for homeowners and/or other favored groups should be eliminated from the law.

Income and sales taxes are based on what you earn or what you buy. They have little, if anything, to do with the government services from which you benefit. This does not mean income and sales taxes should not be used by governments. They are appropriate for general services that benefit us all.

The legal system, for example, provides us with an environment in which justice is sought. It does not matter if you or I use that system directly. We benefit from its existence because we all know it is there to protect us.

Let's change the way our total pool of tax revenue is used in Indiana. This means aligning services with the taxes that should support them. If we refuse to increase property taxes, then I recommend the sales tax base be expanded to include some services (haircuts, manicures and similar consumer services). At the same time, I would raise the sales-tax rate uniformly across the state, with the proceeds redistributed to the place where the purchases take place.

There are many virtues of property taxes I have not been able to explore here. One example: Property taxes constrain the size of houses and lawns.

I doubt that many would agree with me on most of these ideas. So what's new?



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 mortonjmarcus@yahoo.com.
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