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ECONOMIC ANALYSIS: Final version of tax reform deserving of accolades

March 24, 2008

The practice of economics certainly can compel a man to cynicism. Take, for example, tax reform. I've testified on tax reform before legislatures in three states and one foreign country. Each had much bigger tax problems than does Indiana. Today, in each of those places, several solid proposals languish under the assault of special interests, much to the chagrin of taxpayers.

Here in Indiana, the story is different.

The past few months have seen reasoned and informed debate on property taxes. To be sure, there has been a bit of pure politics, but nothing that derailed the efforts. It is enough to embarrass even the most the selfindulgent cynic.

The property tax changes the governor and Legislature have given us are truly first-rate. They cap residential rates at 1 percent, rentals at 2 percent, and businesses at 3 percent, while raising sales tax rates 1 percentage point. This nets taxpayers about a $600 million tax cut.

The costs of school operating expenses, child welfare and a few other costs are absorbed by the state. Contrary to much recent wailing, this strengthens and protects school funding. The temporary exemptions on caps for some fast-growing counties and short-term relief for capital projects buffer the transition.

Costs for local communities are slashed more than $100 million through the elimination of assessors in all communities with fewer than 15,000 parcels. Communities worried about loss of revenue can impose their own local-option income taxes to cover shortfalls.

Like all good compromises, the plan has something to which we all can object. I would like to tax services (yes, lawyers, physicians and economists). I also would like to see all assessors below the county level eliminated.

The plan also is kind to those most affected by the sales tax increase. The roughly $275 per-person annual increase in sales taxes is offset by an increase in the earned-income tax credit. This is one of the better tools to spur movement out of poverty and is well used here.

By my estimates, this is also a jobscreation tax plan. Removing the uncertainty surrounding property taxes and reducing the average tax rate combine to account for as much as 20,000 new jobs in the state. That alone was worth the difficult effort poured into the plan.

Most important, this legislation sets the stage for the more difficult task of reforming local government. Local governments now must begin to convince voters (directly or indirectly) of the need for new income tax revenue. This is the first step toward a truly modern style of local government in Indiana. The transparency that must ensue from this process is much needed, and should be welcomed by Hoosier taxpayers.

In the end, this is a triumph of policy over politics. Local policymakers seeking to make their communities more economically viable should be overjoyed, and the taxpayer triumphant.



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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