ISTA Gives Thumbs Down to Governor's Tax Plan

Representatives of the Indiana State Teachers Association have announced the ISTA's opposition to a plan, announced last month by Governor Mitch Daniels, that would eliminate property taxes as a source of school funding revenue, and would have the state pick up the schools' general fund tab entirely (they already pay 95% of these costs) using a sales tax hike to pay for it.

ISTA representative Dan Clark offered two reasons for this position.
1) State funding of schools would mean that in times of fiscal shortfalls, schoolchildren would have to compete for scarce state budget dollars with other funding priorities.
2) The property tax is actually pretty useful in its dependability. Because it's less subject to economic fluctuations than the sales tax, you can always depend on it to bring in enough money to pay for needed services, even during the hardest times.

Both points are legit. Indianans need look no further than Wisconsin to see the dangers of states deciding they can afford to pay for an adequate education themselves. Wisconsin has had perpetual trouble living up to their guarantees they've made for assuming the lion's share of school funding costs. And the level of state funding has been a political football even in the good times.

And it's absolutely true that property taxes are a more stable funding source than sales taxes. That is, of course, one of the things that makes people mad about property taxes-- if you lose your job, your property tax bill will still be in the mail next year-- but the glass-half-full way of looking at it is that this is a tax base that isn't going to disappear anytime soon.

There are other reasons to be concerned about the Daniels plan. One could ask why the state wouldn't harness progressive personal income taxes as a way of bankrolling a state takeover of local school funding. And there are basic question of local autonomy and local control that should give any school-age parent pause.

But Clark and the ISTA are right on the money on this one.

Mangan: If It's Broken, Throw It Away

If it's broken, throw it away.

That's the word from Patrick Mangan in today's South Bend Tribune. He's referring to Indiana's property tax system, which he believes is the reason why "many hard-working families [have] lost a generation or more of wealth-building capital in homes and investment properties."

Here's the logic, if you can call it that, in a nutshell:

1) We think it's important to "help working families progress to the middle class." (I'm with him so far).

2) There are two "key benchmarks" for achieving this goal: education and homeownership. (Still reasonably with him.)

3) Indiana property taxes are making people lose their homes. (totally plausible, given everything else that's already going on in the state's economy)

4) Therefore, we should repeal all Indiana property taxes paid by individuals at all income levels, as well as the property taxes paid by businesses big and small.

This is, of course, the same recipe anti-tax federal lawmakers used six years ago to engineer the (temporary) repeal of the federal estate tax. If there's anything demonstrably wrong with a tax, the only true reform is repealing the whole thing.

The question Mangan has to answer, and simply doesn't, is this: if the problem is that the property tax makes it harder for lower-income families to move up the ladder by becoming homeowners, why is your solution to offer a tax break for every homeowner in the state? Why not take a hard look at the hodgepodge of property tax breaks the state has enacted over the past thirty five years and try to come up with a cheaper, more rational, better targeted approach to property tax relief for low- and middle-income homeowners and renters?

This is obviously harder, in the short run, than just pulling the plug and repealing the property tax entirely. But it's also a much smarter move.

Mangan argues that we "We need a tax system with fewer moving parts." And there's some truth to this. No one, starting from scratch, would design a property tax system the way Indiana has, with an array of different tax credits for different groups. Homeowners get about five different tax breaks en route to determining their final bill. But again, the grown-up way of dealing with such a problem is a word starting with "R" that isn't "repeal"-- it's reform.

A very sensible approach for rationalizing Indiana's property tax mess is repealing the array of homestead credits and exemptions that currently exists, and replacing the whole mess with a simpler, fairer "circuit breaker" credit that limits the percentage of income that low- and middle-income homeowners and renters must pay in property tax.

If the problem is that low-income families are losing their homes, the circuit breaker can fix it.

It's not obvious that repealing the entire property tax will have the same effect.

A Broader View on "Congestion Charges"

It's hardly news that Indianapolis-area workers spend a lot of time on traffic. But a new report makes news out of this anyway:

Indianapolis-area drivers wasted 43 hours in 2005 due to rush-hour congestion, according to a study released Tuesday by the Texas Transportation Institute, which regularly rates the congestion of metropolitan areas.

There are broadly two ways of fixing this problem: build more roads, or use policy levers to get people to drive less on the most crowded roads. The latter approach means higher gas taxes, higher tolls, or a "congestion charge" of the sort New York City policymakers have been discussing for a while.

Neither of these alternatives is cost-free. Building roads costs money, which has to be raised somehow, and using taxes or tolls to raise the price of driving imposes a burden on working families. But doing nothing imposes big costs, too. As Rep. Peter DeFazio notes, "There is a tremendous cost to doing nothing." An hour sitting on a gridlocked highway is an hour you could have spent earning money--which means that gridlock imposes a real economic cost on workers and on businesses. In response to fears that a gas tax hike would impose costs on workers, one member of Congress sensibly argues that the current "do nothing" state of things amounts to a tax of sorts:

Rep. Jim Oberstar, D-Minn., who heads the House Transportation and Infrastructure Committee, said the $78 billion that travelers lost in wasted time and fuel in 2005 amounts to a "congestion tax."

And of course, he's right. The larger point to be made here is that it's a bit simplistic to argue that a gas tax hike would hurt workers or hurt the economy without taking into account the costs that the current state of things impose on workers. Think about that the next time you're stuck on I-465.

Is Indiana's Constitution to Blame for Property Tax Woes?

Writing in Monday's Indianapolis Star, Mark Akers suggests that the easiest way out of Indiana's current property tax mess would be to just amend the state constitution:

Studying the structure of local government is a worthwhile effort to remedy the property tax issue. But the problem stems from the Indiana Constitution. While no one likes property taxes, prior to the Indiana Supreme Court's decision that the assessed values should be market-based rather than based on depreciated values, property taxes were at least predictable and assessors didn't have to have the skills and knowledge that are now required.
So, while the remedy might include modifying local government structures and giving cities more authority to raise money(Indiana cities are among the most constrained in the U.S.), we should consider changing the constitution to allow the property tax system to work the way we want rather than make the enormous changes to local government that would be required to make enough of a difference.

Akers doesn't say anything about how you'd change the constitution to make this possible, but presumably what he's got in mind is something that effectively says "the state doesn't have to listen to court decisions that say property taxes must be based on the 'market value' of properties. Instead, they can base property taxes on whatever they want to."

Here's what is wrong with Akers' argument, in a nutshell: a properly functioning property tax must be based on market value. No tax can ever be fair unless it's properly measuring the tax base. Imagine if you and your neighbor got the exact same salary from the same company. You would hope that your state income taxes would be basically the same. Now, if your income tax was based on this year's income, while your neighbor's income tax was based on the (much smaller) amount he earned, say, 20 years ago, you'd say that was totally unfair. An updated measure of ability-to-pay is what makes the income tax fair. Ditto for the property tax. You need to know what a home is worth, right now, in order to fairly assess property tax on that home.

Indiana's current property tax woes are causing a lot of pain and unhappiness. But these are exactly the same changes that every other state has gone through when it's modernized its property tax. And it's absolutely the right thing to do in order to achieve a truly fair Indiana property tax. It will be little comfort to state residents to know that their ongoing property tax hikes are largely due to the unwillingness of state lawmakers to fix property tax inequities previously. But that's exactly what they need to know.

Property Tax Rebate Not Placating Hoosier Homeowners

More than a month after Indiana lawmakers passed legislation providing temporary property tax rebates to help offset rapidly rising home values, people are apparently not buying it. The Indianapolis Star notes that several property assessors in Marion County have requested police protection against irate homeowners when their tax bills arrive.

In a sense, these homeowners are right. When your property tax bill goes up 20 percent over a period when you haven't gotten 20 percent richer, the property tax can seem pretty unfair.

But Indiana faces special circumstances. The state has been notoriously bad at accurately assessing property values-- and much of what's happening now is simply rectifying past wrongs.

That doesn't make the tax hikes any more painful for Indiana homeowners-- but it's important to understand that one underlying factor here is that the property tax system is finally working right.

What angry homeowners should know is that even with the improvements in assessment practices, it didn't have to be this way. Lawmakers could have enacted tax changes that shift Indiana's tax system away from the property tax towards some other source. But instead, they chose to leave property tax bills alone and provide highly visible "tax rebates" that won't arrive until weeks, or months, after homeowners have paid their property tax bills.

Lawmakers are probably patting themselves on the back for their PR ploy of sending a check in the mail to aggrieved homeowners-- but the self-congratulation may end soon if this (preventable) voter outrage over rising property taxes continues.

Great New Health Care Program-- Funded by a Puff of Smoke

The good news: low-income Indiana families will have better access to health insurance as a result of new legislation signed into law by Governor Mitch Daniels.
The bad news: it's being paid for with a cigarette tax increase.

Why is this bad news? A history lesson may help explain.
Back in 1987, Indiana lawmakers increased the cigarette tax from 10.5 cents to 15.5 cents per pack. In the first full year after implementing the higher rate, the cigarette tax brought in $116 million. Fourteen years later, in fiscal year 2002, the tax was still being collected at the same 15.5 cent rate-- and tax collections had increased only a tiny bit, to $123 million. That works out to a growth rate of about half of one percent each year.

To put this in context, a good indicator for the cost of any public service is inflation. The cost of most things that government (or any private firm, for that matter) produces tends to go up at least with inflation each year. If the Indiana cigarette tax had grown just at the rate of inflation during this same period, cig tax collections would have been $176 million in 2002, far above the $123 million actually collected.

Put another way, whatever public services the cig tax was paying for in 1987, it was paying for about 2/3 of those services in 2002.

The lesson for today? It's great that Indiana is demonstrating a commitment to funding low-income health insurance. But to the extent the cigarette tax is where the money is supposed to come from, they've tapped a dry(ing) well. As if to drive this point home, here's a quote from a Courier Press article on the cig tax hike:

During a speech Thursday in Evansville, Rep. Suzanne Crouch emphasized the cigarette-tax health care plan is not an entitlement program.
"The number of individuals who can participate (in the plan) is dependent upon the amount of funds that are available," said Crouch, R-Evansville.

D'oh! And here's Gov. Mitch Daniels on what needs to happen next:

Now we must go about the difficult business — harder than you may think — of reaching those who would like to stop smoking with help...

In other words, now that we've hiked the cigarette tax to pay for health care, we're going to use the cigarette tax to get people to stop smoking- -which means less health care.

The funding picture is more complicated than this, of course. There are federal matching dollars involved, which will presumably help the state to adequately fund this important health policy goal:

Increasing the cigarette tax is expected to bring in $206 million more revenue annually. If the federal government approves the plan, money from the tax increase could leverage more federal dollars and generate a combined $750 million to $800 million a year, officials said.

But it's important to remember that the state's own contribution to this pot is going to be a shrinking share of the total-- and that low-income families will bear the brunt of it. Wouldn't it be nice if Indiana could signal its commitment to funding low-income health care by coming up with a reliable funding source?

A "Perfect Storm" for Indiana Homeowners?

Having allocated more than half a billion dollars of state revenue to cutting local property taxes over the next two years, Indiana lawmakers are understandably hoping that the property tax problem has gone away. But a former local government finance officer thinks the state's property tax woes could get worse before they get better. Here's Peter Schnitzler's lede in today's Indianapolis Business Journal:

Indiana’s property-tax “perfect storm” is brewing again. A former head of the Indiana Department of Local Government Finance says some Marion County homeowners soon could see property-tax increases of as much as 50 percent—far higher than government officials previously estimated.

Schnitzler points the finger at two causes of this "perfect storm": the narrowing of the Indiana property tax base by eliminating the "inventory tax" a few years back, and the continuing process of assessment reform.

Both are straightforward, although one of them is unavoidable and, I would argue, desirable. The elimination of the inventory tax means that every local taxing district's property tax base is now smaller-- which in turn means that the tax rate on everything remaining in the reduced tax base (including residential property) has to increase in order to continue to fund education adequately.

Assessment reform absolutely is a driver in the property tax hikes some homes will face, as well: but that mostly just means the system is working as it should. Like many other states, Indiana has a long history of inadequately measuring home value. Property wealth isn't always a great indicator of how "rich" you are, but it's still a measure of wealth that carries some useful information. And if you're going to base a tax on this measure, it would be nice to measure it properly. But Indiana assessors face some real difficulties:

Some older properties haven’t changed hands in decades. As a result, hard data on their true market value is unavailable...The last reassessment was based on property values as of Jan. 1, 1999. This year’s will attempt to update those values to their market worth on Jan. 1, 2005—without physically analyzing every property. The economy went from red hot to ice cold and back to lukewarm during that time. Six years creates a large opportunity for assessment error. It’s compounded by the fact that assessors estimate home values by comparing them with similar properties nearby. In neighborhoods where few houses changed hands, there’s not much data to work with.

There's a lot of room for improvement in this system, and an inevitable result is that some people whose houses were dramatically undervalued for tax purposes will see a tax hike. But in the long run, that's the right answer from a tax fairness perspective. This will come as no comfort to Indiana homeowners facing huge tax hikes, but from an impartial perspective it's the right thing to do.

Schnitzler quotes Marion County Assessor Greg Bowes pointing out, sensibly, that neither of these two elements in Indiana's "perfect storm" must lead inexorably to tax hikes:

Marion County Assessor Greg Bowes pointed out that higher assessments aren’t the
only cause of increases in property-tax bills. Just as important is the amount of spending that local governments approve. If local officials can keep their costs in check, Bowes said, there’s less need to increase property-tax payers’ bills. “It’s not the assessment process that’s the source of your burden. It’s the increase in the appropriations,” Bowes said. “If you want to change the property-tax process, your recourse is voting for legislators and councilors.”

This is true. But the bigger picture is that other parts of the local governments' revenue pie are probably shrinking. State aid to local governments are a big part of this pie, and when state aid shrinks, something else has to make up the money. There are two possible explanations for rapid growth in local property taxes: either locals are getting greedy, or the state is starving them of financial aid. Having allowed Bowes to assert that locals are spending like drunken sailors, it would have been nice to see other local government officials' perspective on the extent to which state cuts in local aid have been responsible for the growth of local revenues and spending.

Taxing Oil Companies: Lessons from Wisconsin?

State lawmakers around the nation are clearly torn on the issue of oil/gas taxes. On the one hand, you see folks like Patrick Bauer and future Indiana gubernatorial candidate Jill Long Thompson arguing that consumers need a cut in gas taxes. On the other, you see lawmakers in Wisconsin and Pennsylvania proposing higher taxes on companies bringing petroleum products into the state.

In each of these case, lawmakers clearly want to do two (potentially contradictory) things simultaneously: make oil companies pay more, and give consumers a break (or at least hold them harmless). Indiana Rep. Bauer bemoaned his ability to tag "gouging" oil companies with higher taxes even as he proposed tax cuts for consumers, and in both Wisconsin and Pennsylvania, lawmakers have drafted bills that would impose a new tax on oil companies while forbidding them to pass the tax through to consumers.

The Wisconsin-Pennsylvania approach is certainly creative. The big question is, how are lawmakers going to enforce it-- and will they even try?

It's easy to enact language forbidding companies to pass on a tax to consumers, but very hard to enforce. For example, suppose Wisconsin's new tax was roughly equivalent to 5 cents for each gallon of gas sold in the state. Now suppose that, one week after this new tax goes into effect, the price of gas in one particular gas station goes up 2 cents per gallon. Can the state impose sanctions on the gas station? Obviously not, because there are a lot of other factors governing weekly changes in gas prices. State taxes are a pretty small part of the gas prices we're paying now. And it could well be that, in the example here, these other factors would tend to drive up the price of gas by 7 cents per gallon in that week. If that were true, the gas station in this example would be perfectly justified in jacking up the price of gas by 2 cents-- they'd be doing exactly what the legislature told them to.

Just as interesting, as ITEP's Jeff McLynch points out, is whether lawmakers will even try to enforce such a provision. Lawmakers of both parties know that you can score cheap political points by knocking big oil for not paying their taxes (and, as various groups have shown in the past, the oil industry richly deserves these knocks), but there's not necessarily all that much political payoff from following through and making sure that companies refrain from passing through the tax hike to consumers. Posturing may be sufficient to win votes.

A better approach, from a federal perspective, would be to eliminate the host of tax subsidies for oil companies that have sprung up over the past quarter century. Since state corporate taxes generally piggyback on the federal corporate base, shoring up the federal base would help states too. That won't win state lawmakers any political points, of course-- but would help ensure that oil companies pay their fair share of state corporate income taxes in a quiet way.

Indiana Property Tax Reform: More to Come?

The ink is barely dry on Indiana's much-ballyhooed property tax rebate legislation, and some elected officials are already saying that a crisis has not been avoided-- merely postponed. Here's Keith Benman's lede in the Northwest Indiana Times:

At least one Northern Indiana state legislator thinks a looming property tax uprising in the rest of the state could prompt Gov. Mitch Daniels to call a special session of the General Assembly to do real property tax reform.

Rep. Chet Dobis says he fears that if lawmakers don't come up with something more permanent fast, angry homeowners might do it for them:

"In a year or so we will be at the point where we will have no choice," Dobis said. "And it will be a push from the bottom, not from the top."

Matt Greller of the state Association of Cities and Counties echoes this viewpoint:

"If anyone is under the impression we solved the property tax issue, I don't think we did," Greller said. "We just put a Band-Aid on it."

Asked to respond to Dobis' concerns, a representative for Gov. Daniels said that "there are no...plans" for a special legislative session to deal with the property tax issue. Stay tuned...

Bauer: Suspend State Sales Tax on Gasoline

Patrick Bauer, the Speaker of the state House of Representatives, wants a temporary suspension of the state's sales tax on gasoline during what he calls "the summer gouging period." Gov. Mitch Daniels is skeptical, and his legal counsel thinks that Daniels probably could not legally suspend the gas tax on his own, as then-Governor Frank O'Bannon did seven years ago.

The price tag for such a cut: about $41 million a month.

The big question: should lawmakers be upset or happy when they've got a gas tax that actually tracks with the price of gas? Strictly from the perspective of ensuring that gas tax revenues are sufficient, in the long run, to fund the public services they're supposed to be paying for, you absolutely want your gas tax to be based on the price of gas, and should be happy when revenues grow with the price. But this apparently isn't Rep. Bauer's perspective...

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).

The 2008 Budget's Property Tax Refund: Smile for the Camera

As the dust clears on Indiana's 2007 legislative session, there's lingering controversy over the way Indiana lawmakers have chosen to provide local property tax cuts.

The mechanism-- a temporary one, in force for just the next two years-- is a tax refund. Sometime after Hoosiers pay their property taxes this year, they will receive a check in the mail with their share of a $300 million property tax cut. Accompanying the check will be a little note:

"A portion of your local property taxes due in 2007 are being refunded due to tax relief provided by the Indiana General Assembly. Your refund is in the amount of $_____."

Just in case homeowners might not get the message, the budget bill that authorizes the rebate also specifies just how big the bold print needs to be on the refund letter: "at least 12 point type."

There's a good reason for the bold print. If writing a big property tax check is a painful experience for Indianans, this bill won't make it any less so. When they receive a rebate later on, they'll be told what it is (and, of course, who to thank for it). But that's no substitute for simply not having to pay the property tax in the first place.

And, if the experience of other states is any guide, the rebate checks will count as taxable income when some Hoosiers file their federal income tax forms next year. (This will only be true for Indiana residents who itemize their deductions and write off their property taxes, and makes perfect sense: if your initial property tax bill is $2,000, and you later get a rebate for $200, your itemized deduction will probably be for the full $2,000-- so you need to count the $200 as taxable income next year just to keep the books in balance.)

There are more substantial reasons to be unhappy about this year's Indiana property tax refund, which I discuss here. But for the moment, it's enough to note that this appears to be a carefully tailored PR move.

Property Tax Hike Forecast: Even Worse

Indiana lawmakers' discussions of property tax reform options this year have been prompted largely by the specter of a looming 15 percent hike in statewide property taxes in the upcoming year. But a legislative report released on Tuesday suggests that the reality is even scarier. Instead of a 15 percent hike, the likely number is closer to 24.

Since the regular legislative session ends on Sunday, this could mean a special legislative session to deal with the impending property tax crisis. Stay tuned...

Is the "Wheel Tax" Part of Indiana's Local Government Solution?

The developing debate over how Indiana local governments ought to be funded has centered, so far, on the local property tax and the conditions under which locals should be allowed to levy income taxes to pay for property tax cuts. But there's a new game in town: Rep. Chet Dobis suggests allowing local governments in northwestern Indiana the option of levying a "wheel tax" of up to $50 per vehicle to pay for an expanded commuter rail system.

As a fellow Dem, Rep. Linda Lawson, helpfully points out, the car tax "is one of the most hated taxes... the people in my community... would be just outraged if we gave them another tax." And that certainly seems to be true wherever you look. Opposition to the car tax almost single-handedly got former Virginia Governor Jim Gilmore elected and helped to give California Governor Gray Davis the boot. And if Connecticut voters aren't currently buying Governor Jodi Rell's plan to repeal that state's car tax, it's not because they like paying taxes on their cars.

But that's not, in itself, a sufficient reason to deny the car tax a place in a state's revenue system. Anti-tax sentiment is easy to channel, and the ease with which the car tax can be vilified is at least partially due to the number of syllables it takes to pronounce it. ("no car tax," "no death tax," "no food tax," all lend themselves very well to soundbites and slogans.)

You can also make a good case that a properly functioning property tax should take account of all kinds of property that most states currently don't tax, whether it's your car or your stock portfolio or that $3,000 Rolex. Property is wealth-- plain and simple. When states decide (as most have) that they're not gonna tax the value of your Rolex or your car or your stock portfolio, what's left is the one kind of "wealth" that is least recognizable as such-- homes. For many people, homes aren't a luxury and they aren't wealth-- at least not usable wealth.

So I've got a fair amount of sympathy for recognizing that the property tax should apply to things other than homes. Having said that, the wheel tax proposal seems like the wrong way to go, for three reasons:

1) The proposed wheel tax would be a flat-dollar amount. Maybe $10, maybe $50. But the biggest Bentley would pay the same tax as the tiniest Toyota. By comparison to the more sensible approach of taxing cars based on their value, the wheel tax proposal would be sharply more regressive-- a much worse deal for low-income families-- because $50 is a much bigger share of income for someone earning $10,000 a year than for someone earning $100,000 a year.

2) Car taxes can be written off on your federal income taxes (if you itemize) if they are based on the value of the car. If they're just a flat dollar amount, they can't. So the choice to impose the flat wheel tax basically means deciding that Indiana doesn't want the federal government to pick up part of the tab. A flat-dollar wheel tax leaves federal money on the table.

3) A "flat-dollar" tax is about as slow-growing a revenue source as you can invent. The only thing that can make revenues go up from year to year is an increase in the number of cars. (By contrast, income and sales tax collections increase, more or less, automatically with inflation.) The amount this tax brings in from each existing car actually shrinks a little bit each year: $50 a year in 2007 is worth a little bit less, after inflation, in 2008, a little bit less in 2009, etc.

As another lawmaker points out, Dobis deserves "all the credit in the world" for bringing up what is being described as a "political third rail." (Seems like Indiana has more third rails than the New York subway...) And it would be a good thing if this proposal resulted in some enlightened deliberation over the future of Indiana property taxes. But it's certainly not the fairest-- or most sustainable-- way to fund Indiana's transportation funding needs.

State May Crack Down on Illegal Gambling

In the wake of House and Senate passage of a bill dramatically expanding Indiana's reliance on slot machines to fund public services, state lawmakers are now threatening to crack down on what is viewed as widespread illegal gaming across the state.

Of course, this makes all the sense in the world. Probably the strongest rationale for legalized gambling is that people are gonna do it anyway, whether it's legal or not, so the state should absolutely regulate it and, yes, profit from it. But that rationale evaporates pretty fast if illegal gaming is allowed to coexist with the legal stuff.

The broader point here is obvious, but worth thinking about: the real rationale for Indiana lawmakers right now as they seek to put 1,500 new slot machines in race tracks around the state is simply that they need the money. Lawmakers have decided to rely on (and officially encourage) what is universally recognized as an addiction-- gambling-- to pay for public services. And the speed with which Indiana legislators are moving to wipe out illegal gambling makes it pretty clear that they're already addicted to this new funding source themselves.

Make no mistake: Indiana legislators may not be saying it explicitly, but they want you to gamble. Indeed, they're banking on it.

How High Are Indiana Property Taxes, Anyway?

Niki Kelly's meandering piece on property tax reform in Sunday's Fort Wayne Journal Gazette brings up an interesting question: just how high are Indiana property taxes, anyway?

Kelly cites three statistics, and doesn't really try to sort out which ones make the most (or the least) sense:

According to U.S. Census Bureau data for fiscal year 2004, Indiana ranked 26th in terms of property tax collections per capita. This statistic includes all property taxes collected from homeowners, businesses and farmers.
According to 2005 statistics from the Tax Foundation in Washington, Indiana is 34th in median property taxes paid on owner-occupied homes, at $1,079 annually.
“On the other hand there are national studies that show our proportion share of property taxes relative to the total tax paid in Indiana is out of balance relative to the nation,” said Rep. Jeff Espich, R-Uniondale.
A recent brief by the Indiana Fiscal Policy Institute shows that property taxes account for about 31.2 percent of all state and local tax revenue – a percentage that Espich says is higher than that of other states.

So which number means the most here? Let's focus here on the Census data.

The Census data takes all the property taxes paid by anyone in each state-- including homeowners, small businesses, big manufacturers, and vacation homeowners who live in other states-- adds them together, and figures out a "per capita" tax amount. In other words, if you divvied up the state's total property tax haul evenly between every state resident, from the youngest baby to the oldest senior, this statistic is what you get.
As used in this article, the Census data has two strikes against it. It doesn't tell us anything about how high residential property taxes in particular are, and it expresses these taxes on a per capita basis. Kelly tells us that Indiana prop taxes are 26th highest on a per capita basis. As it turns out (although she doesn't tell us), that puts Indiana below the national average, with a per capita of $974 compared to a national average of $1,086. But this is to be expected, given that Indianans have less income per-person than the national average. In general, the higher per-capita income in a state, the higher state and local taxes are. So citing this stat doesn't tell us anything meaningful about whether Indiana property taxes are high are low.

This doesn't mean the Census data is worthless-- it just means that the Census data shouldn't be expressed on a per capita basis. A better measure is expressing taxes as a share of personal income, because that gives a good sense of how taxes compare to a state's collective ability to pay them.

As it turns out, (see ITEP's web-based Powerpoint slide here) Indiana property taxes are slightly below average as a share of personal income, too. So as it happens, the per-capita data tells a story that is basically accurate.

We can leave for another day the question of how useful the other statistics cited in Kelly's article are. In fact, none of these stats tell us what we really want to know, which is how Indiana property taxes affect families at different income levels. For that, you have to rely on ITEP's Who Pays report.

Espich Tax Plan: Fort Wayne Journal Gazette Likes It

The question of the day in Indiana is how the state should reduce local property taxes-- and how it should make up the revenue loss. In Sunday's paper, the editorial board of the Fort Wayne Journal Gazette thinks Republican Representative Jeff Espich has the right tax ideas:

[O]nly one plan so far squarely addresses the elephant in the room: school construction costs. Rep. Jeff Espich of Uniondale suggests it’s time to shift those costs from property taxes to a new income tax.

To be clear, it's a local-option income tax Espich is talking about: replacing one local tax with another one. The Journal Gazette thinks (and they're almost certainly right) that Espich's tax swap would make the tax system less unfair and less regionally biased:

Any tax proposal requires a balancing act to achieve fairness, and income taxes are more progressive than property taxes. And Espich said that a study of individual income and assessed valuation showed there is less disparity within a district in income than in property value.

The Gazette also points out, correctly, that simply reducing property taxes across the board (as a local government would likely do if they enacted the income tax option) would constitute a free ride, of sorts, for businesses:

It’s not a perfect plan. It shifts a larger burden from businesses to individuals. But there are more individual taxpayers than there are property taxpayers.

This is all true, as far as it goes. The most obvious (to me) objections to the Espich approach are:

1) there's more than one way to cut property taxes. If shifting from businesses to individuals is a concern, why not take steps to reduce property taxes for homeowners only, so a tax cut for individuals is balanced by a tax hike for individuals?

2) if inequality in local tax bases is a concern (and it should be), moving from an unequally distributed property tax base to a less unequally distributed income tax base is a step forward, but why not move to a statewide income tax increase instead, allowing the state to eliminate unjustified inequities in funding between poorer and wealthier taxing districts?

3) elaborating on point #1, Indiana already spends a lot of money rebating a fraction of everyone's local property taxes in an "across the board" way. A meaningful property tax relief plan should at least explain why the already-existing property tax breaks are sacrosanct. And if they're not, any good property tax reform plan should come up with a way of better targeting these tax breaks.

But Espich deserves kudos for recognizing that the income tax-- in some form-- is a fairer alternative.

Can Nevada Offer a Property Tax Lesson for Indiana?

Property tax debates are a striking regularity in states around the nation-- Indiana is hardly alone in its current focus on this topic. But what's equally striking is that no one seems to be able to point to an example of a state that has confronted property tax reform in a universally acceptable way.

But the Miami Herald's Lisa Arthur thinks she's found the solution to states' property tax woes: just do what Nevada did back in 2005. To hear Arthur tell it, Nevada eliminated pretty much every property tax inequity one could think of:

• Issue: Homeowners were about to be taxed out of their houses.
• Solution: Tax bill annual increases were capped at the lesser of 3 percent or the rate of inflation -- no matter how high a home's value climbs.
• Issue: Commercial property owners would shoulder an unfair tax burden without a cap. And as values on their properties and their taxes rose, they would pass the cost to renters.
• Solution: Tax bill increases were capped at 8 percent annually for commercial property, including rental property. If a landlord could prove rents are at or below the fair market value set by the federal government, they get the 3 percent cap.
• Issue: Snowbirds with second homes would get slammed unfairly if they didn't get the same tax breaks as full-time residents.
• Solution: As long as they don't own another home in Nevada, out-of-staters with second homes get the same 3 percent cap as full-time residents. If they rent the home part of the year, the cap goes to 8 percent. If the rent meets the affordability definition, they get the 3 percent cap.
• Issue: Newcomers to the state and first-time home buyers who bought into a hot market with escalating home prices would get hit with much higher tax bills than longtime homeowners in the same neighborhood.
• Solution: In Nevada, the tax break stays with the property. The new home buyer inherits the seller's tax bill no matter how high the value of the property has climbed or what it sells for.

Put this way, Arthur's got a point. Pretty much every property owner in Nevada has protection against large tax hikes (where "large" means more than 3 percent a year). But Arthur is setting the bar pretty low for a successful property tax reform. Her benchmark appears to be that there's a mechanism restricting the growth of everyone's property taxes to something resembling the growth rate of inflation. Such an oversimplified benchmark overlooks two equally compelling (actually, even MORE compelling) objectives of property tax reform:
1) preserving adequate revenues. Capping everyone's property tax growth at 3 percent will make taxpayers happy, but only until they notice their schools don't have new textbooks anymore.
2) targeting property tax breaks to those who need them. Arthur recognizes the universal refrain of people "being taxed out of their homes," and clearly thinks preventing this is a good goal, but says nothing about the fact that simply capping the growth of everyone's property taxes is a remarkably blunt instrument for achieving this goal. If you're a fixed-income Nevada homeowner whose property taxes were unaffordable before 2005, the 2005 reforms don't help you.

Arthur is right in one important respect: if you cap everyone's property taxes, inequities in property taxes between different property owners will be less noticeable, and complaints about higher property taxes will likely diminish. But the part of the story she misses is that this goal comes with a price: a tax system that is more inadequate over the long run, and one that is even more divorced from ability-to-pay considerations than property taxes normally are. Fairness and adequacy are both important goals-- and the tax cap approach amounts to abandoning both of these goals.

It's understandable that Arthur, and other Floridians, are grasping at straws. Florida's property tax situation seems to be deteriorating by the hour. But here's hoping Indiana (and Florida) policymakers check with a few Nevadans before they adopt Arthur's recommendations.

Farm Property Taxes: Higher, But Still Low

The Palladium-Item reports that Indiana farmers may see their property taxes go up in 2008 due to a new calculation by the Department of Local Government Finance:

The base value of an acre of agricultural land will be $1,140 in 2007 for taxes payable in 2008, up from $880 an acre for the last two years.

This snooze-inducing news is worth dwelling on for a moment because while it sounds bad for farmers, it reflects the workings of a special property tax break that is designed to keep Indiana farmers in business-- and gives anyone interested in property tax reform a window into a little-understood part of the property tax system.

Like virtually every other state, Indiana offers a "use value" tax break for farmers: agricultural land is valued based on the use farmers are putting it to, rather than based on the (almost certainly higher) market value of the land. This is important because in areas where suburban sprawl is creating pressure for new development of farmland, farmers could make a lot of money by selling out. The flip side of this opportunity is that if farmers in these areas were paying property taxes based on what their land was actually worth, they'd have to sell out-- they'd have no choice.

But "use value" means taking a hard look at how productive farmland is and what farmers are getting for their product. And so when farmers are better off, the statewide "use value" goes up. That's exactly what is happening in Indiana right now:

"The new assessed value reflects the changes in the market from 1999 to 2004," DLGF Commissioner Melissa K. Henson said. "Interest rates dropped more than 1 percent, corn and soybean yields increased and prices for both corn and soybeans increased during the six-year period."

So the latest hike in farm assessments reflects the proper workings of a tax break for farmers, not an unprincipled tax grab.

The always-informative Larry DeBoer has more on this issue in his Capital Comments column for January.

Property Tax Repeal Goes Down In Flames-- For the Moment

We called it the "worst property tax reform idea ever" a while back-- and Indiana lawmakers appear to agree, sorta. State Senator Clarence Weatherwax presented his two-pronged plan for property tax "reform" to a Senate committee last week, and got a response that the South Bend Tribune characterized as "lukewarm."

Weatherwax's plan has two components: SJR 16, which would repeal all state and local property taxes, and SB 538, which would establish a new spending limit for Indiana state government. The spending limit would be based on growth in population and inflation. (See this report from the Center on Budget and Policy Priorities for more on why a "population plus inflation" spending limit is too constrictive.)

Sounds pretty simple, right? You set up a spending limit that says any revenues over the "population and inflation" limit can only be used for one purpose: replacing lost property tax revenue. That way, the story goes, local governments aren't completely defunded when the property tax goes away. But the Weatherwax plan turns out to be too simple:

Weatherwax estimated that it also would take a 1 percent increase in the state income tax, a 2 percent increase in the state sales tax and a local option income tax increase to replace property taxes.

But oops, Weatherwax forgot to include these tax hikes in his plan:

When committee members suggested incorporating those increases into SB 538, Weatherwax said he decided to pull both bills from consideration rather than risk defeat.

He has a good reason for doing so--tax hikes can't originate in the Indiana Senate--but that's a problem he needs to overcome before such a plan can ever be taken seriously.

Senator Robert Meeks put his finger on why Weatherwax needs to fix this problem if his plan is ever to be taken seriously: if the easy parts of the plan (capping spending, repealing property tax) went before voters without forcing them to also think about the hard part (hiking other taxes to make up the revenue loss), they'd love it.

Meeks also questioned whether voters would approve a referendum on eliminating property taxes if they knew they would face increases in state income and sales taxes, as well as the possible elimination of some local services. "They would vote for it because they don't know there are consequences, they don't have all the facts," he said.

This is an excellent point, and one that raises important questions about how direct democracy should be used on tax issues. If lawmakers are going to put these questions before voters, they need to make sure they're presenting voters with a fiscally sound package. A package that addresses the easy questions, but leaves no provision for answering the hard ones, doesn't deserve to take up space on the ballot.

House Committee Approves Cig Tax Hike

The House Public Health Committee sent a Valentine to Indiana smokers yesterday, unanimously approving a bill that would almost double the state's cigarette tax from 55.5 cents per pack to $1.10 per pack.

Lawmakers are giving two very different answers about what this proposal is supposed to accomplish. On the one hand, it's apparently going to be the sole funding source for a plan to provide health coverage for low-income Hoosiers. On the other hand, it's supposed to act as a stick to make Indianans stop smoking. Here's what Governor Mitch Daniels said in defense of the proposed cigarette tax hike last week:

"No one's out to injure anybody's business," Daniels said last week. "But reducing the second- highest rate of smoking in America is an important public- health issue in this state. Keeping young people from smoking is a very important objective. "

These are obviously conflicting objectives. If you want the cigarette tax to pay for health care, well, the yield of the tax had better grow each year at least as fast as the cost of paying for health care. But if you want the cigarette tax to act as a deterrent, preventing people from smoking, then really what you're shooting for is a decline in the amount of tax that actually gets collected.

Taken on their own, these are each pretty good goals: health care is good, and smoking is harmful. Encouraging one, and preventing the other, are both good objectives. But if Indiana lawmakers ultimately give the thumbs up to this proposal, one of these objectives simply will not be met.

Reforming Indiana Sales Taxes: Exemptions or Credits?

Indiana's sales taxes are an important reason why the state's tax system is regressive, hitting low-income families especially hard. A new policy brief on the "Fair Tax Indiana" website describes two very different policy options for making the sales tax less unfair.

One option described in the brief is the traditional one currently used by Indiana and many other states: exemptions. Exemptions allow anyone buying (for example) groceries to pay no sales tax on purchases of groceries. Because exemptions are across-the-board reductions in a regressive tax, they make the tax system less unfair overall-- but do so at a large cost because they are made available even to the wealthiest consumers. When states that have enacted a grocery tax exemption find later on that the cuts cost too much, they sometimes end up increasing the sales tax rate on all other taxable items (as North Carolina and New Mexico have done in recent years). It's hard to see why this ends up being a good deal for low-income families.

The second alternative discussed in the brief is a "refundable tax credit," which allows certain taxpayers to apply for a tax rebate. This rebates offer one very important advantage over exemptions: they can be targeted to whichever income groups or family types are deemed most in need of tax relief. The most obvious benefit of this approach is that targeted tax credits cost far less than universal sales tax exemptions.

The main shortcoming of the targeted credit approach? You have to apply for it, while exemptions are granted automatically. And as fans of the Earned Income Tax Credit now, a substantial public-private outreach program is necessary to ensure that low-income families who are eligible for these tax credits will actually apply for them.

Read the policy brief in full right here.

Journal Gazette Assesses Property Tax Unfairness

Following up on the Indiana Fiscal Policy Institute's terrific work on property tax inequities, the editorial board at the Fort Wayne Journal-Gazette is beating the drum too:

Lawmakers can’t continue to dip into the state budget to pay for tax relief, nor can they reshape the state’s tax structure using a system that is fundamentally flawed. Whatever they do in the current session, their first step must be to fix the assessment system.

As the FPI documented in an October 2005 report, there is dramatic inconsistency between the way properties are assessed across jurisdictions, and sometimes even within them: some properties are assessed well below their actual value, while others are taxed at more than their actual worth. Repairing this inequity should be a top priority for the 2007 session: lawmakers can't make the property tax fairer without first ensuring that assessors know how much homes and businesses are really worth. Read the rest of the Journal-Gazette's editorial here.

Making the Property Tax More Like An Income Tax?

Even as Indiana lawmakers continue to scratch their heads over how best to reduce their reliance on local property taxes to fund services, the Indiana Fiscal Policy Institute (FPI) has been beating the drum for the all-important goal of more accurate assessment of property. It was FPI that blew the whistle on the inaccuracies of the property tax system earlier this year with an exhaustive report documenting these inaccuracies, locality by locality. FPI found that some local assessors routinely assess properties at less than their actual worth; others assess higher than actual worth. And in some taxing districts, neighboring homes that should be taxed the same way simply aren't. It's an administrative mess that calls into question the basic fairness of the property tax.

FPI's latest budget brief drives this point home again with an apt comparison to the income tax:

While there are many who wish to provide more relief for property taxpayers, the tax base upon which tax levies are calculated needs to be correct and consistent across the state. The current status of the system is comparable to one in which a taxpayers’ W-2 form (the form on which an individual's salary or wages for income tax purposes is stated) may or may not reflect the actual earnings by that taxpayer in a year. Imagine if your W-2 understated your wages by 30% or more, or, even worse, that W-2 overstated your salary or wages by 30%. That, in fact, is the case, as many properties’ assessed values are up to 30% or more above or below their market value—the value upon which the property tax is supposed to be based.
If such a condition existed in the income tax, the first thing taxpayers would demand is that the W-2s "get fixed." The basic equity and credibility of the income tax system requires that the income upon which we pay taxes is correctly calculated. Why should we, as Hoosiers, expect less from the property tax system?

The comparison is apt. Whatever measure of "ability to pay" a tax is based on, it stands to reason that this measure should be accurate, and if the income tax was as poorly administered as the property tax, people would flip.

And FPI is correct in asserting that the goal should be to make the property tax base as well-administered as the income tax base.

But it's worth dwelling on FPI's property tax-income tax comparison. Sure, cleaning up assessment practices is an important first step toward property tax fairness. But even when the property tax base is measured accurately, it will remain a less fair basis for taxation than is income.

The value of your home represents wealth, to be sure, but for most families increased property tax wealth simply doesn't have the same impact as increased income. When your income goes up from $100,000 to $150,000 from one year to the next (a fanciful example, but one that facilitates comparison to the property tax), you are definitely getting richer by the day. But when your home's assessed value shoots up from $100,000 to $150,000, you're "richer," but in a way that has no meaning for most families. This added value will only be meaningful to you if you plan on selling your house immediately. Otherwise, the main implication of this added value is that your property taxes will go up as a result-- which won't make you feel "richer" at all.

All of which is to say that if Indiana lawmakers could snap their fingers and make the property tax assessment process 100% accurate tomorrow, the property tax would still remain unfair in a way that desperately needs to be fixed. Adding a true "ability to pay" measure to the property tax by creating a real "circuit breaker" tax credit based on your income would be a great first step. (And Indiana lawmakers have NOT done this, whatever they may think.)

Read the rest of the FPI brief here.

The Worst Property Tax Reform Ever

...Would be simply repealing it. And that's exactly what a group of Republican lawmakers are proposing, according to the Star Press. The good news is that supporters of the plan, such as Senator Thomas Weatherwax, are at least a little bit concerned about how to replace the revenue:

Weatherwax recommended state income and sales taxes be raised by one percent each to make up the revenue. Local governments also would be given new options taxes to replace the balance of lost property tax revenue.

But the question remains: why repeal the entire property tax in the first place? There are plenty of reasons to complain about property taxes. They're supposed to be based on home values, and assessors often do a lousy job of figuring out what homes are really worth. Property taxes are notoriously unresponsive to changes in ability to pay: if you lose your job, your property taxes are still gonna be the same (although your income taxes will go down!).

But these are arguments for reform, not repeal. Why would a sober-minded lawmaker ever advocate for outright repeal of one of the three main revenue sources used by the state?

I can think of two reasons. One is that any legislator who's been around long enough has probably observed that they keep passing property tax reforms, and people don't seem to be getting less mad. (To which the response would be that even at this late date, lawmakers haven't enacted a "circuit breaker" tax credit for fixed-income families.)

A second, more devious reason is that some supporters of this idea probably just want less government-- and, lacking sufficient political support for scaling back the public investments Indiana government provides, they're content to "starve the beast." Simply removing all property taxes will inevitably force income and sales tax rates higher (as well as the rates on other minor taxes and fees that Indianans probably don't currently notice so much). The higher the tax rates get on everything else, the angrier taxpayers will get. The end result? Taxes are lower, but citizens are angrier as a result-- which means further tax revolts, which in turn will drive taxes even lower.

As is always true in the world, the real answer is probably somewhere in between these two extremes. Some people are probably quite ready to drown government in a bathtub, while others are simply at their wit's end and seeking to avoid wholesale tax revolt by enacting a tax "reform" that provides obvious and easily understandable relief.

But whatever the motivation, it's wrong. Revenue diversification is unambiguously good: the more revenue sources you have, the less reliant you are on any one source. And the more revenue sources you have, the lower the tax rate can be on each source, allowing you to spread the cost of funding public services more broadly.

Cigarette Tax Hikes: A Cautionary Tale from Alabama

Cigarette tax hikes are once again on the agenda in Indiana in the of Governor Daniels' latest proposal to hike the tax by at least 25 cents per pack. Daniels says he wants to use the money to help fund health care, but has also made noises in the past about using the cigarette tax as a stick to help discourage smoking altogether. Raising revenues and discouraging smoking are both fine ideas, but you can't have both.

The editorial board at the Birmingham News gives a helpful retrospective on Alabama's experience in balancing these objectives when they hiked the cigarette tax a couple of years ago. Back in 2004, Alabama lawmakers said they wanted to hike the cigarette tax for two inherently contradictory reasons: to raise money, and encourage people to stop smoking. The state got more money out of the deal, but doesn't seem to have discouraged smoking at all. But it's worth reading it straight from the horse's mouth:

Since Alabama raised cigarette taxes two years ago, state officials didn't exactly get what they expected.
The hope was that the hike in cigarette taxes, from a near rock-bottom low of 16.5 cents per pack to a still low 42.5 cents, would discourage some people, particularly teenagers, from smoking. At the same time, the higher tax would bring in badly needed money for the state's General Fund budget.
Officials got part of it right. Cigarette taxes did boost the General Fund, now ranking as the third-biggest source of money in the budget. (The bulk of sales and income taxes go into the Education Trust Fund for schools.)
But the notion that higher tobacco taxes would result in fewer smokers hasn't held true. Surveys by the state Department of Public Health show about one-fourth of Alabama adults smoke, the same as before the cigarette tax increase took effect.
Why no effect? Two reasons jump out.
First, Alabama's cigarette tax is still on the low side - 39th lowest in the nation, in fact, certainly not enough of an economic deterrent to lead smokers to kick the habit. The national average for cigarette taxes is 80 cents per pack, nearly double Alabama's. Some 20 states charge $1 or more per pack, while a handful of states tack on $2 or more.
But even a tax of more than $2 a pack might not be enough, health officials say. One study found that to have a real impact on smoking cessation, cigarette taxes must exceed $7 a pack. Raising cigarette taxes to that level isn't going to happen here, or in any other state.
Another reason Alabama hasn't seen a decrease is smoking is that the state is doing little to discourage the habit.
Despite the $162 million the state expects to take in this fiscal year in cigarette taxes and the $94 million it expects as its share of the national tobacco settlement, Alabama spends a minuscule amount each year to discourage smoking.
Only $682,000 is budgeted for this fiscal year for anti-smoking programs, ranking Alabama 46th among the states. Worse, it's only 2.6 percent of what the Centers for Disease Control and Prevention recommends.

The News gets it exactly right. Lawmakers perpetually talk out of both sides of their mouths on this topic, assuring balanced-budget advocates that they can count on cigarette tax revenues to help fund public services and assuring health advocates that their goal is to discourage smoking. Of course, the two goals are at cross-purposes. A moderate cigarette tax hike, such as the one enacted by Alabama two years ago, is most likely just not enough to get people to quit in itself-- which means that all Alabama has accomplished here is pushing even more of the cost of funding public services onto the backs of the low-income Alabamans on whom the cigarette tax falls most heavily.

There are, of course, good reasons to hike cigarette taxes. Smoker impose enormous costs on state health care budgets. If a punitive cigarette tax encourages smokers to quit, the loss in cigarette tax revenue will almost certainly be repaid in the long run through lower health care costs and a healthier workplace and living environment for Indianans.

But Alabama lawmakers, by doing virtually nothing to discourage socially harmful smoking, have made it clear that all they're really interested in is using cigarette tax revenues to avoid making less popular (but more fundamentally important) decisions about fixing the structural flaws in their income, sales and property tax laws. Hoosiers who recognize the need for additional tax revenue-- but are leery about using the cigarette tax to fill that need-- should watch closely to see if the proposed Indiana hike ends up being used in the same way.

Crystal Ball for Indiana Tax Reform in 2007 (Part 1)

Today's Indianapolis Star gives the perspective of two rank-and-file House Republicans on what the 2007 legislative session could have in store. Their fearless prediction is that the cigarette tax hike proposed by Governor Mitch Daniels will go through this year, and that lawmakers will at least take a shot at property tax reform.

Neither lawmaker has much to say (in this article, at least) about how property tax restructuring ought to work. One of them, Jerry Torr, expresses his support for capping property taxes at 2 percent of market value. For more on why this isn't the smartest idea in the property tax playbook, check out this post from the Talking Taxes weblog.