ECONOMIC ANALYSIS: How the property tax reform plans stacked up

March 10, 2008

As this year's short legislative session comes to a close, I want to recap the property tax proposals that were bandied about. I probably should begin with the problem.

Though Hoosiers pay less in state and local taxes than most Americans, the growth in state and local tax bills has been way out of sorts with income growth. Also, in some places, property taxes are astoundingly high-and in the most expensive places, taxpayers are not getting anything like the value of public services they are paying for. Sadly, the administration of Indiana property taxes is more costly and ineffective than any I have seen in the developed world. This is the genesis of the crisis.

The first tax plan of the season was Advance America's plan to eliminate property taxes. Gov. Mitch Daniels then offered a plan to cap property taxes at 1 percent for residents, 2 percent for rental property, and 3 percent for other business. Also presenting plans were the Indiana Farm Bureau and Rep. David Orentlicher, an Indianapolis Democrat. In late February, Senate Democrats offered their own plan, which introduced an income-graduated property tax.

Obviously, cutting property taxes significantly means raising other taxes, and there are only really three options: income taxes, sales taxes and corporate taxes. Advance America offered to increase sales taxes 2 percent and income taxes 1 percent (and included a third, as-yetunnamed tax that would, in effect, double corporate income taxes). The governor proposed a 1-percent sales tax increase, as did the Senate Democrats' February plan. Indiana Farm Bureau and Orentlicher included both sales and income tax increases of 1 percentage point or less. We certainly are blessed with choices, but some are better than others.

I hesitate to mention again the unworkability of Advance America's plan because it brought a hail of personal calumny I haven't heard since I trained as an Army paratrooper. But duty calls me to again point out that the plan utterly fails to consider the impact of the tax rates on consumers and businesses and glosses over a doubling of corporate income taxes, among its other flaws.

Daniels' plan has raised the ire of the business community because of its threetiered rate cap and because of the significant cuts it would force for some local governments. Indiana Farm Bureau's and Orentlicher's plans raise income taxes-which would effectively place Indiana income taxes among the highest in the region. The Senate Democrats' plan to link homestead exemptions was innovative but flawed in its levying of a huge marginal tax rate on income and creating an incentive for overinvestment in housing by the poor.

None of the tax plans is perfect-I would have preferred a tax on services, but the medical and legal lobbies are just too strong. However, as the session winds down, I think Hoosiers can be satisfied that a property tax fix is possible.

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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