Property Tax Swap Proposed in Indiana

September 18, 2008

Joseph Bishop-Henchman

Joseph Bishop-Henchman

Two Indiana lawmakers are proposing a tax swap plan, whereby the state sales tax would be expanded to all services (except medical and legal), the sales tax rate lowered from 7% to 5.5%, and the remaining revenue used to eliminate non-commercial property taxes.

These property-tax-for-sales-tax plans are pretty popular nowadays, which is unfortunate because they masquerade as tax reductions but really aren’t. If people are angry about property taxes, it usually is because of spending, and revenue-neutral tax shifts do nothing about this. Taxes will still be just as high, albeit paid in a different way (and more by out-of-staters than in-state homeowners).

That said, broadening the base and lowering the rate is a good idea, though it’s probably just a political move to exclude legal and medical services. A revenue-neutral base broadening in this case, though, would get the sales tax rate down to about 3.5 percent-a very competitive rate. Indiana might be better off doing that, instead of using the money to eliminate home property taxes, which would also exacerbate the tax disparity between commercial property and residential property.

More on Indiana here.

Topics

Related Articles

Debt Ceiling Deal Reduces Deficits in the Short Term but Delays a More Comprehensive Budget Reckoning

Ranking Property Taxes on the 2023 State Business Tax Climate Index

Compare Tobacco Tax Data in Your State

Tackling America’s Debt and Deficit Crisis Requires Social Security and Medicare Reform

Testimony: The Role of Corporate Taxation in the European Union’s Future Tax Policy Mix

Tax Burden on Labor in Europe

A 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.

A 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.

A 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.

Base broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability.