Indiana Governor Mitch Daniels put forth his property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. reform measure Monday in an attempt to alleviate the anger of the masses of Hoosiers who are upset about their rapidly growing property taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. bills. Here’s a summary from the Indianapolis Star:
His proposal, which requires legislative approval, would provide about $1.billion in new property tax relief, in part by:
• Capping residential property taxes at 1 percent of a home’s assessed value, at 2 percent for rental properties and at 3 percent for businesses, all by 2009.
• Adding a homestead deduction of 35 percent, on top of the current maximum of $45,000, also in ’09.
• Increasing the state’s sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. next year to 7 percent from 6 percent.
• Eliminating elected township and county assessors and creating a single appointed assessor in each county.
• Shifting to the state the full cost of school operations and transportation, child welfare and ending local government tax credits.
• Limiting the growth in local spending to growth in a county’s average personal income over a six-year period.
• Subjecting all significant local construction projects to a public referendum.
There is a lot to digest here, and there is some good and bad in the bill. In some cases, whether it is good or bad depends on how cynical one is about the ability of politicians to restrain spending.
Putting a cap on property taxes may sound like a good idea, and such a restraint can have an effect on restraining local government spending in the short run, but it can also lead to a shift to other tax sources while spending does not fall or falls by a less-than-expected amount. Another article in today’s Indianapolis Star discusses exactly this: local governments moving to raise their local income taxes. But Daniels essentially acknowledges that in his proposal, as the plan also limits the growth in local spending based upon average personal income growth. Therefore, counties must control spending and can’t merely shift to other county-level taxes.
However, as is evidenced by this plan’s inclusion of a state sales tax hike, restraining local governments from running their operations will lead to more control over government services and higher taxes at the state level. Therefore, unless some restraint is placed on the state government, in the long run, such a move could wind up raising taxes on Hoosiers because tax competition between localities has been reduced. On the other hand, eliminating local government tax credits (which is essentially tax competition) could actually improve societal welfare because such tax competition is often excessive and is bad tax policy.
Overall, despite this proposal’s flaws, from a glass-half-full perspective and given the political pressure that the propery tax is under right now, Daniels’s plan is much better than those that have been put forth in other states seeking to control the public’s outcry over property taxes.
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