Determining governmental and tax structures is a major responsibility of state government. But, as we proceed into the 21st century, it is important to note that the size, density and distribution of our population have changed over the last 1-1/2 centuries.
The General Assembly began to address the governmental structure issue with its discussion of township government in recent sessions. Now, Gov. Pence is to be commended for raising the question of revising Indiana’s tax structure.
Taxation is the process for acquiring the revenue necessary to fund government operations and programs. Responsible policymakers seek to identify the real needs for government activity and, in this light, to make revenue acquisition as fair and equitable as possible.
Often, however, tax structure itself introduces strong incentives and disincentives that have the potential for unintended impacts on economic fairness and activity.
Recognizing this, and that strong constituencies support current structures, three changes in the tax code would ease inequities, reduce perverse incentives and move public policy toward greater overall public benefit. They should be considered in the tax reform discussion.
1. Property tax. The current property tax is a disincentive to investment and development. Studies, primarily by Indiana University of Pennsylvania, show that applying all or most of the tax to improvements on a property (as in Indiana) discourage improvement, while a “site-value” tax, meaning all or most of the tax being applied to the land on which development occurs, will greatly enhance the development of that land—with the benefits that can accrue to urban areas through enhanced land use and lower costs for public services made more expensive by sprawl.
This benefit is as positive in small communities as it is for larger urban centers.
A corollary is that property owners exempt from the property tax should, at a minimum, be required to pay fees in lieu of taxes for services available for their facilities, such as police and fire.
2. Payer/beneficiary imbalance. The ability of developers to leave urban areas and develop land previously used for other purposes, such as farming, is directly subsidized by taxpayers and utility ratepayers because developers do not pay the costs of their required infrastructure.
An economically more appropriate and fair system would be to require the developer to pay the cost of the streets, sewers and utilities they need and then be reimbursed for their costs by the buyers of the new homes and businesses who will benefit from the services that, today, existing taxpayers and ratepayers pay to make available.
3. Shared responsibility. As much new development has occurred in jurisdictions outside the urban core, a heavier tax burden has been left on those living in the central jurisdictions. Large numbers of those in suburban areas take advantage of the services these taxes support without contributing their fair share of the costs.
Creating regional taxing districts to equalize the impact of roads, schools, law enforcement and social services throughout what, in reality, amounts to a common economic region would produce greater equity while providing incentives for economic activity that are more efficient and in the general public’s best interest.
Clearly, these changes raise significant political questions and their enactment might prove difficult. However, if we are going to improve the tax code, these concepts should be considered as a part of any meaningful reform.•
Lamkin, a former physician and state representative, is president of the Indiana Employers Quality Health Alliance. Send comments on this column to [email protected].