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EYE ON THE PIE: Taxes are toys for legislators

March 3, 2008

"I don't believe you," Carolyn Cornpone laughed.

"It's true," I said. "Some members of the Indiana General Assembly have proposed tying property taxes to the income tax."

"But," she said, "that makes no sense. They already intend to raise state and local income taxes just to pay for the property-tax relief they are currently considering."

"Who said Hoosier legislators have to make sense?" I asked. "All they think they have to do is posture for votes."

"Whatever happened to the simple idea that the property tax is a tax on property, that the sales tax is a tax on sales, and that the income tax is a tax on income?" she asked.

"Those propositions were never adopted by the General Assembly. A tax is a toy for legislators to manipulate. They do so according to their reading of the public's ignorance and pressures from wellfinanced interest groups." I stated.

"And how do these lofty elected thinkers propose to link property taxes to the income tax?" she asked.

"There are several ways it could be done," I replied. "They could put a simple cap on property taxes according to income received. This way you would enter your property taxes paid on your income-tax form. Then you would calculate some percent of your income and deduct the difference between the two numbers from your taxable income."

"I'm already confused," Carolyn said.

"Let's say you pay $2,000 in property taxes on your home," I said. "Your taxable earnings are $40,000 a year. At 1 percent, your cap would be $400. Take $2,000, deduct $400 and you could write off $1,600 of your taxable income. That leaves your taxable earnings at $38,400. At the current 3.4-percent income-tax rate, that $1,600 write-off is worth a big $54.40!"

"You can't be serious," Carolyn said.

"Don't like that? Try this one," I offered. "Let that $1,600 be a credit against the income tax you owe. Since on $40,000 you would owe $1,360, with a $1,600 credit, the state owes you a refund of $240. Of course, the state's income-tax revenue is lower, which means that the income-tax rate will rise to pay for these credits."

"That's both insane and inane," she said. "It means a poor person living in an expensive house gets a big deduction in taxes, while another poor person living in a modest house gets little in benefits from this proposal. It encourages people to consume more housing than they can afford and gives them an extra incentive to under-report income."

"Well," I admitted, "that's only one possibility. A different idea would give every taxpayer a credit against income-tax liability of maybe $3,000 or the actual amount of property taxes paid, whichever is less. Now you would be treating every taxpayer alike, yet it would be a greater percentage benefit to poorer people."

"That's better," Carolyn said.

"Yes," I agreed, "but there are many more possible variations."

"Do you think that any such linking of property taxes and income taxes is likely?" she asked.

"Yes and no," I answered in my most inscrutable tone. "There is already a commitment to increase income taxes at the state and local levels to pay for propertytax reductions. But whether there will be a link between property taxes paid and the income of specific taxpayers is doubtful."

"Then why has such a proposal come up?" Carolyn asked.

"It's a premature legislative variation on March madness," I said.



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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