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EYE ON THE PIE: Does reliance on property taxes matter?

September 22, 2008

It seemed like a good, simple idea at the time to focus this column on how Indiana taxes compare with those of other states.

But that turns out to be more of a job than you might think. For example, which year do we use? The most recent year available from the U.S. Bureau of the Census is 2005-06.

But that year won't work because 12 percent of Indiana's revenue came from its state highways in 2005-06. Remember, we leased the Indiana Toll Road for $3.7 billion or so, a figure so big that it distorts not only Indiana, but the total figures for all the states for that year. So we have to use data from 2004-05.

What taxes are we talking about? Do we add together the state and the local governments or do we consider them separately? Are we going to focus on taxes and forget all the non-tax revenue collected by governments?

Since it really doesn't matter who collects the revenue, we'll examine state and local governments added together. What does matter is who makes the spending decisions. In Indiana, the real power to tax and to spend lies with the General Assembly.

In 2004-05, Indiana (state and local governments combined) received $39.6 billion as "general revenue." This sum includes charges and fees. However, it excludes revenue from liquor stores, because the Hoosier state does not operate booze boutiques as do some other states. It excludes $2.9 billion in revenue for our government employee retirement funds, as well as our worker's and unemployment compensation funds. It also excludes $1.7 billion received by municipally owned water, gas, electric or transit companies.

Of that $39.6 billion in general revenue, $7.2 billion (18.2 percent) came from the federal government. That is well below the national average of 21.6 percent. Virginia ranks last (14.4 percent) in federal funds as a portion of state and local general revenue. Indiana ranks 44th, while Mississippi is the most dependent on federal funding (33.7 percent).

We could get excited about that "deficiency," but it would counter the reason for a federal government. Funds flow to Washington to meet national purposes, not to have them sent back to us as "our fair share." Without programs to help the concentrations of the poor that other states endure, without the nation's priority projects, we shouldn't expect "our fair share."

Indiana hardly differs from the nation in its reliance on taxes to fund its treasury. In 2004-05, taxes accounted for $22 billion (55.6 percent) of general state and local government revenue in Indiana, compared with 54.2 percent nationally. That $22 billion equals 11.8 percent of Indiana's personal income. By this measure, Hoosiers pay a slightly greater percentage of their income in taxes than the 11.2 percent paid nationwide.

But is personal income the right measure of tax burden? On a per-capita basis, Hoosiers pay $3,538 in state and local taxes. Nationally, the average citizen pays $3,749, or 6 percent more than the average Hoosier.

Property taxes account for 37.7 percent of our state and local tax bill, with 30.6 percent being the U.S. number. Indiana ranks eighth in the nation in reliance on property taxes, just below Connecticut and just above Illinois. In New Hampshire, 61.5 percent of state and local taxes are from property taxes, while property taxes represent 14.3 percent of state and local taxes in New Mexico.

If we use property taxes more than other states, so what? It means we use other taxes less than other states. Who can demonstrate which combination of taxes is best?



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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