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.