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.