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.