ECONOMIC ANALYSIS: Why eliminating property taxes is a bad idea

December 3, 2007

Judging from the many yard signs I've seen, a repeal of property taxes is a popular sentiment in the state. Too bad, because that would be an uncommon departure from Hoosier practicality and wisdom.

Like most states, Indiana taxes income, consumption and wealth. We use these taxes to fund different levels of government.

Critics of Indiana's property taxes are right to be flummoxed. I've even argued that many of the consequences of Indiana's property taxes are worse than most critics believe. The current system is irresponsibly expensive to manage, distorts business and residential location decisions and imposes costly uncertainty on investment. This damages our economy. However, all these problems can be remedied through the realistic property tax proposals offered by Gov. Mitch Daniels and the Legislature. But repealing property taxes would be inequitable, unstable and inefficient.

First, property taxes fund local services from the accumulation of wealth. Opponents argue that no citizen can ever own a home outright, due to annual property taxes. However, that is the point of the property tax. We cannot stop paying to protect our most basic rights of life, liberty and property when we retire or pay off our mortgage. Those of us who have accumulated wealth are in the biggest need of these basic protections. Reasonable property taxes are fair.

Second, property taxes are the most stable of tax revenues. This is especially important for the provision of local public services-primarily police and fire. If we replace property taxes with income and sales taxes, we had better plan for significant disruption of public safety when the next recession hits.

Third, unstable tax revenues cause the cost of government to rise. Faced with terribly uncertain budget futures, we all hedge our finances. There's plenty of evidence that unstable tax revenues drive up government spending-1 percent to 3 percent by my estimates. Unstable tax revenues do not help businesses and do nothing to eliminate tax uncertainty. Eliminating property taxes will not provide the stable fiscal environment businesses need to thrive.

Of course, we need to extensively reform, and cap, property taxes, but the advocates of a repeal are not providing honest math. To keep our current level of local government and eliminate property taxes would require a sales tax of 13.5 percent to 15 percent or an income tax of 9.5 percent to 10.5 percent.

I am a great admirer of Eric Miller's Advance America organization; that's why its unrealistic property tax plan is so disappointing. The local spending cuts it proposes would eliminate all of Indiana's local parks and reduce fire and police personnel by half statewide. There would be no other significant municipal services-no snow removal, road repair or signage.

I have all the bona fides of a fiscal conservative, and am an advocate for responsible reform of Indiana's property taxes. However, repealing them would be inequitable, inefficient and potentially damaging to our economy.

Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.
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