Property Tax Swap Proposed in Indiana

September 18, 2008

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.


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