Eye on the Pie and Opinion

MARCUS: Tax expenditures are back door to spending

August 7, 2010

Federal, state and local budgets are in disarray. There isn’t enough revenue to do what the public wants done and the people do not want to pay for what they want.

No, that is wrong. The people are divided on what they want, skeptical about the ability of government to provide services, and resentful about paying for those services they do not perceive as benefiting themselves.

Education is a good example. We want “high-quality” education, but we cannot agree on the measures of quality or what is meant by “high.” How much chemistry and biology should our children know when they leave high school? Is it sufficient that they merely feel the chemistry of their respective bodies? Or should they comprehend that physics, chemistry and biology are unified concepts affecting life and all matter?

The answer currently provided by the voice of the people (the Indiana General Assembly) is, “Students should graduate and be able to get a job so they can earn money which they can spend in casinos.”

This makes sense, because the people have endorsed the careers of legislators who promise them low property, income and sales taxes while taking the saps who visit Hoosier casinos for nearly $1 billion in gambling taxes.

We are quite willing to accept this tax on gambling because discrimination in taxation is the national pastime—and it is not a game. Tax discrimination is widespread at the federal and state levels. It is a tool of public policy.

We tax tobacco and alcohol more heavily than other consumer purchases because we believe it is good for society to reduce the use of those substances. We do not tax owner-occupied housing as much as other forms of shelter because we believe that good flows from home ownership. The elderly and the blind are given tax breaks because we feel they deserve special consideration.

At the federal level, Congress’ Joint Committee on Taxation estimates that the mortgage interest deduction on the income tax reduces revenue $86 billion, the property tax deduction cuts revenue $25 billion, and the capital gains exclusion on the sales of principal residences is another $15 billion not collected. That’s $126 billion in reduced tax liabilities given to homeowners in 2009 regardless of whether they are rich or poor, young or old, disabled, minority, liberal or conservative.

This type of subsidy is called a tax expenditure. How much are state tax expenditures in Indiana? I don’t know. I have not found a report on them. I did find reports on tax expenditures for Minnesota, California and New York. But then, we’re not known for transparency or for giving the public a clear understanding of our state’s finances.

Now Indiana is poised to put a new tax subsidy into its constitution. The property tax cap proposal is just more destructive legislative pandering to the prejudices of an ill-informed public. We already have substantial property tax subsidies for homeowners from the 35-percent homestead reduction in assessed value. That subsidy is so huge that the caps mean nothing to most homeowners. According to the Indiana Legislative Services Agency, of the $148 million “relief” from the caps in 2009, only 4 percent went to owner-occupants. Nearly 60 percent of the caps benefited the owners of small rental housing units, commercial apartments and second homes, with about 36 percent going to commercial and industrial properties. Farmers got virtually nothing from the caps.

Tax expenditures are a back-door means of subsidizing pet causes when legislatures don’t have the courage to spend money directly to achieve their goals. The various committees examining federal debt issues are all evaluating tax expenditures. Maybe the Indiana General Assembly could do likewise.•

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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. He can be reached at mmarcus@ibj.com.

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