Economists don’t favor tax changes to achieve short-term gains. The long lag time between recognizing problems, legislating solutions and implementing tax changes argues against fiscal policy as a remedy for economic woes. Monetary policy is faster.
This does not mean taxes don’t matter. Several instances of accidental economic stabilization have occurred. The most recent example is President Bush’s tax cuts. Designed as early as 1999 as a permanent reduction in income taxes, they were implemented just as the country started into the last recession. Leaving aside the debate over the efficacy of the Bush tax cuts, they did come at a lucky time, lessening the effects of the recession that gripped us in late summer and early fall 2001. We just might be in a similar situation with Indiana’s property taxes.
The subprime mess continues to capture our attention. One facet of subprime mortgages is that many have adjustable rates that are now ratcheting up. This makes holding onto homes difficult for many homeowners (many of whom believed they could easily refinance their homes before the adjustable rate kicked in).
I don’t know where in Indiana these adjustable-rate mortgages are most prevalent. But I do know where mortgage foreclosure rates are at their highest. My guess is they are good indicators of adjustable-rate mortgages.
Here’s where it really gets interesting.
While working on our property tax studies at Ball State University, we compared several maps of property tax rates and foreclosure rates. Interestingly, when we overlay these two maps, we find high property tax rates and foreclosures occur in many of the same places.
Now, admittedly, the geographic match isn’t perfect. Some of the locations are rapidly growing Indianapolis suburbs, while others are struggling smaller towns. Unfortunately, it will take months, if not years, to fully understand where the problems are and what the cause may be. But as a call to policy action, this coincidence is significant.
If we are to fix property taxes (and who doesn’t really think a remedy is in order?), we should do so soon. The reason is that we might get significant, unintended benefits. Here’s why.
Tax reform will almost certainly have its largest effects in places with high tax rates-which also are places with higher foreclosure rates. By my calculations, in the most heavily taxed locations, a 1-percent cap will reduce housing costs by the equivalent of more than one month’s mortgage. That is not enough to mitigate the costs of the typical adjustable-rate mortgage increase. But it might be enough for many homeowners to successfully renegotiate their loans and stay in their homes.
I don’t believe we should rush to the rescue of the financially irresponsible (lenders or borrowers). But we might be able to ease Indiana’s subprime fallout while reforming a flawed property tax system. Now that would be lucky.
Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at email@example.com.