Hoosier propertytax laws are so bad, they should be totally revised, but not discarded. As it stands, there is little economic sense in how those laws are written or applied. We have homeowners ranked against renters, plus residential, commercial, industrial and agricultural interests are in perpetual conflict. The only beneficiaries of this ceaseless conflict are the party automatons in the General Assembly.
Let's consider the simplest case. Mr. Gold lives in a house with an assessed value of $150,000. Mr. Silver is across the street and his assessed value is half as much, $75,000. Wouldn't you expect Silver's property tax bill to be 50 percent of the amount Gold has to pay? No? Why not?
Ah, because we want to help those who are able to afford only modest homes compared to those with more luxurious houses. But what do we know about Silver and Gold? We don't know how much income they have. We don't know if Gold is a guy in his 40s with a wife and five children while Silver is a young bachelor living off an inheritance. So why should we give a break to Silver?
And a generous break is what we do give. We allow each owner-occupied home to take $35,000 off of its assessed value without any questions asked. That brings the assessed value for Gold down to $115,000 and for Silver down to $40,000. Where Silver had an assessed value at 50 percent of Gold's, it is now down to 35 percent.
Let's apply the average Indiana property tax rate of $2.50 per $100 of assessed value to these homes. Gold would get a bill of $2,875 and Silver a bill of $1,000. For a home that is twice as expensive as Silver's, Gold gets a bill that is nearly three times higher. Whatever happened in the land of Dan Quayle and the flat tax to allow such inequities to exist?
But our General Assembly goes further. After the property tax is calculated, we go back and give the owner-occupant a tax credit of about 15 percent. This makes Gold's final bill $2,444, Silver's $850.
Silver's lower valued property gets him a tax "savings" of $1,025, while Gold gets a "gift" of $1,306. Do the local governments have to find $2,331 (the sum of these "tax reductions")? Is that done by raising the tax rate through ongoing reiterations of a mathematical model?
Or is it achieved by cutting services and not replacing employees who leave? This is the route to productivity changes, if you have workers who will assume more responsibility. We could outsource, because everything is better when done by someone else. That's why we eat out so often.
Let's ask an easier question. What if there were no homestead deduction and no homestead credit? At first, there would seem to be a great increase in local tax collections, since $2.50 per $100 would be applied to the original assessed value. That would be total receipts of $5,625, when the locality expected only $3,294 in the first place. So the government could scale back the tax rate from $2.50 to $1.46 and collect the same amount of money.
The result would be a shift of about $250 from Mr. Gold to Mr. Silver. If that's considered too big a change, then phase it in over five years. The two taxpayers and their properties are being treated the same way. If one taxpayer is richer and you want to tax the rich more than the poor, do that by putting in a progressive income tax. If you think we should fight sprawl, try a progressive tax rate on the footprint of houses and square footage of lawns.
In this brief discussion, I have left out the property-tax relief fund and the benefits to property taxpayers through the federal income tax. But that's just more detail of many unjustifiable practices.
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 email@example.com.