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Tuesday, July 31, 2007

IN government just not getting it....

The situation now in Indiana (or at least Indianapolis) has become one of those rare instances in which the general populace actually agrees with mainstream economists on something (which is something I myself am increasingly rarely doing these days). Protest after protest of people have urged their local and State officials to repeal property taxes in favor of a modest increased income tax and a real progressivity-adjusted increase in the sales tax.

Property taxes are outdated and an inefficient and unfair form of taxation in that it has a tax base that is 'based' on one asset - which just so happens to be the most important asset an individual can have. It is inefficient because it distorts investment decisions and unfair because it hinders people on fixed incomes. But in Indiana, it's not really taxation itself that people don't like (provided its used wisely), and indeed, most people could care less about what kinds of taxes are efficient or not. The reason people are upset in Indiana is due to the poor transition of the property tax calculation and the fact that residences are paying more for relatively few local and State services.

It used to be that property tax was calculated as cost-depreciation. Now (as of a couple years ago), property taxes are based on market assessment of the area of the property. What this has done is it has caused large % increases in property taxes for homeowners in high-value areas, as well as homeowners with older homes (which are often owned by the poor). Combine this with the fact that there are so few market transactions of corporate real property, that commercial and industrial taxes have remained flat - pushing an even greater burden to residences (oh, and the inventory tax was abolished last year which aided that change even more).

But I digress from my main point. It is exciting that people are demanding such a substantial change (which unfortunately in Indiana would require a constitutional amendment). But then, that seems to be hoosiers' MO: wanting to do what is right for the long-term. The problem is that is also hoosiers' MO to hate change. As such, the State is constantly in this catch-22 where people know what they should do, but seldom end up actually doing it. What people want is simple: more efficient government (read CHEAPER) and a repeal of property taxation

This unfortunate dichotomy is explained best by today's recent plan to 'fix' the property tax problem issued by the State's GOP. Here is their plan:

*Taking $100 million of the state's surplus to fund an additional
property tax credit for all homesteads

* Changing the rebate checks, passed by this year's legislature, to

* Extending the filing deadline for homestead credits for this year's
tax bills to Sept. 30 or 45 days before a county issues its final tax
bill to be paid this year, whichever is later;

* Letting local government decide how best to target the $300 million
in property tax relief the legislature approved this year instead of
giving all homeowners those rebate checks

...All short-term fixes. Delving into the State surplus, changing rebates to credits, etc. are all small fixes or to the current issue (and at worst is just passing the buck) but they don't respond to hoosiers' concerns about the philosophy of taxation in general. People want a quick fix, but they also are demanding real change so that their hard-earned property isn't taxed to the point where people can barely afford to live.

That concern is not being met by either party. Democratic House Speaker Bauer, in addition to much of the above GOP solution, wants the State to start financing local child welfare costs for those counties that use local income taxes to replace property taxation to a small degree. But that is just shifting cost from one bureucracy to another - and, secondly, income taxation is not nearly as 'productive' (or fair in my opinion) as sales taxation. In any case, neither plans get at the psychological and sociological issue that different forms of taxation can effect. Taxing a house IS different than taxing a wage or taxing general consumption. It is targetting at its worst. And few legislators seem to get it.

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