WATTS: Is it time to buy into local option sales taxes?

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On Black Friday, we shook off tryptophan hangovers to find holiday deals; we “shopped local” on Small Business Saturday; and the thrifty agoraphobes among us used Cyber Monday to seek sales in solitude.

As an independent research organization, the Indiana Fiscal Policy Institute expects to raise some unpopular questions. So, as we add up our receipts from the biggest shopping weekend of the year, it’s as good a time as any to ask:

Is it time for Indiana to rethink local option sales taxes?

The idea has typically been dead on arrival at the General Assembly. Sales tax is our biggest source of state revenue, with recent increases funding K-12 operations (easing the impact of property tax caps on schools). Since the days of Gov. Otis “Doc” Bowen, local income taxes have expanded to offset property tax controls.

But upcoming research from Purdue University economist Larry DeBoer (supported by the Indiana Fiscal Policy Institute) suggests trouble with this trade-off. The data indicates that local tax revenue generated by new homeowners (factoring in tax caps and homestead deductions) doesn’t keep up with added costs of services (road maintenance, public safety, education, etc.).

Indiana needs population growth to fuel a competitive economy, but success means stress on local budgets (potentially jeopardizing the quality of life that appeals to new residents).

The research also shows that urban local governments face tighter budgets than rural and suburban peers, causing chronic pressure to raise taxes or cut costs.

Seventeen counties classified as urban (led by Marion) are home to 62% of all Hoosiers and 70% of the state’s economic output and jobs. They anchor growing metro regions, dominating—along with their adjacent counties—Indiana’s 2020-2050 population growth projections.

Helping thriving communities manage growth and keeping our urban areas competitive should be top policy priorities. A local option sales tax could expand and diversify local revenue capacity, adding flexibility to invest in livability and economic development projects along with essential services.

A local sales tax might be especially impactful for urban areas. Raising income taxes could widen disparities in regions with heavy commuting patterns, favoring counties of residence (versus counties of employment). A sales tax would capture revenue from employees, shoppers and visitors, sharing a sliver of the burden with local taxpayers without wading into the toxic debate over commuter taxes.

A recent study from the Brookings Institution, “City Budgets in an Era of Uncertainty,” notes that the most resilient local governments have revenue systems aligned with their economic strengths.

Our urban counties are retail hot spots, generating about $4 of every $10 in statewide taxable sales. Currently, sales taxes generated in urban centers (with lower average school enrollment) are redistributed to the rest of the state as education aid. It’s unavoidable that places like Indianapolis are revenue “donors”; a local sales tax would at least allow access to their base of taxable sales for infrastructure and other needs.

Local sales taxes wouldn’t make sense everywhere, and plenty of questions remain: Would combined state and local rates give parts of Indiana an uncompetitive tax climate? Would it be too regressive or make local finances even more volatile (tied to the ups-and-downs of consumer confidence)?

But growing fiscal strain on Indiana’s growing communities makes the idea worth consideration. Every pothole dodged on the way to the mall last weekend should remind us that our local tax system needs repairs, too.•


Watts is president of the Indiana Fiscal Policy Institute.

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One thought on “WATTS: Is it time to buy into local option sales taxes?

  1. Sales taxes are extremely regressive, meaning they have a much larger impact on low income residents. They should be used carefully.

    Indianapolis could use really use a local income tax; a tax on income earned in the county. The current county resident tax does not cover the cost of all of these people that use Marion county roads, or police or fire protection while they are in Indianapolis.