Indiana's Property Tax Refund: A Dumb Idea?

Facing homeowner property tax hikes estimated at close to 25 percent for the upcoming year, Indiana lawmakers have included a temporary property tax refund in the budget bill they passed over the weekend.

As we note here, the refund appears to have been designed by public relations strategists rather than tax policy wonks. Every homeowner will get a check in the mail this fall telling them with a little note telling them what the check is for and who they should thank for it. Republican leaders saw this as a political trick:

House Minority Leader Brian Bosma, R-Indianapolis, called the rebates a "harebrained idea" that "helps politicians and not the taxpayers."

But there are more substantive reasons for thinking that this year's property tax rebate may not be the best way of staving off a property tax revolt. With the property tax, the first thing lawmakers should ask after noting that their constituents are mad as hell about property taxes is "why are they mad?" In Indiana, as in most states, the answer is usually that people see their property tax bills going up even though their ability to pay them has not.

From this perspective, the main thing to know about the budget bill's property tax refund is that it doesn't seem very well tailored toward making people less mad. Getting a rebate check in the mail a couple of months later will be cold comfort for someone on a fixed income who simply can't afford a double-digit property tax increase.

A second reason to be concerned about this approach to doing things is that it basically asserts that everyone needs a property tax cut. As we've noted before, lawmakers have a disturbing tendency to rail about the plight of fixed-income families in drumming up support for property tax cuts-- only to pull a shell game that ends up cutting taxes for even the wealthiest family. This is a concern because the refunds going to the best-off Indianans could have been more productively used to help keep fixed-income seniors from having to sell their homes-- a goal that virtually any lawmaker would sign on to in theory.

A third reason? Upper-income Hoosiers will be sending part of their refund directly to Uncle Sam. The refunds will reduce, dollar for dollar, the amount of itemized deductions for property tax that itemizing Indianans can write off on their federal 1040 next year. So anywhere between 10 and 35 percent of the refund check, depending on your federal tax bracket, will never see the inside of your wallet. This problem could have been avoided of Indiana lawmakers had decided to target property tax relief to fixed-income families (who tend not to itemize their federal income taxes).