EYE ON THE PIE: Resurrecting important tax reforms

November 19, 2007

With new mayors and council members in many of our cities, it's time to drag out some previous suggestions for fiscal reform.

First, it's time to reconsider propertytax abatement. But we can't understand property taxes and their abatement if we don't understand assessment practices. And, it is not clear what is happening these days with property assessment.

For example, does a property's assessed value change automatically when it is sold, or does it change only in line with the trend for average price changes in its neighborhood? How often will there be reassessments that are not based on trending?

If you upgrade the interior of your home, will your assessment go up? Or will the assessment remain the same and rise only if neighboring properties sell for more than they had previously?

I've looked for the answers on the Web site of the Department of Local Government Finance (DLGF) but I can't find them. Maybe they aren't there.

My recommendation is that all real property improvements receive property-tax abatements. As a state, we want to encourage all property owners to make permanent improvements. There should be no need for case-by-case political approval. Permanent property improvements of all types should receive the same abatements.

Second, some portion of every sales-tax dollar should be returned to the taxing district in which that dollar was raised to support local services. This should not be a mandated replacement of property taxes, but a new source of funding.

Don't tell me we don't know where the taxes are raised. That has been the excuse of the Department of Revenue for more than 30 years. With today's technology, it is either politics or sloth that keeps everyone from knowing how much in sales taxes is raised in every county.

Third, let's stop unfair subsidies to seniors. Why should a person get a $1,000 income-tax exemption just because he is over 65? Why is a rich person of 66 given a benefit denied to a poor person of 64? Income taxes should be based on income, not age. As Dr. Seuss might have said, "a person is a person, no matter how old."

Fourth, get rid of preferential treatment for homeowners. Property taxes are levied on land, buildings and other improvements. Whether that site and structure are used as a house or a bakery is of no consequence for property-tax policy.

Fifth, let's give larger individual exemptions to make our income tax more progressive. Right now, we provide a $1,000 exemption per person (plus an added $1,500 for children). Raise that to $5,000 per person, so that a family of four with an adjusted gross income of $20,000 would pay no Indiana income tax.

Sixth, stop blind budgeting. Let's have localities budget on the basis of actual revenue received, rather than on the thin air of revenue expectations. Today, your city or town makes up a budget and submits it to DLGF long before revenue is known. Then, DLGF certifies a property-tax rate for each locality. Later, the Office of Management and Budget figures out how much local income tax is returned to your county.

By this time, schools, counties, cities, towns, libraries and other local entities are already spending the money they have yet to see. Wouldn't it make more sense to have these governmental units spending from money they actually know they have?

Seventh, local revenue sharing is very important. If a factory moves into one school district, how are the property taxes to be distributed among the surrounding schools where the workers may reside? It's time to start sharing the benefits of economic development.

There are many other reforms to consider, but I have run out of space and you might have run out of time.

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.
Source: XMLAr01100.xml

Recent Articles by Morton Marcus

Comments powered by Disqus