Wednesday, January 30, 2008

A Bad Idea Resurfaces

Proponents of a plan to repeal all Indiana property taxes held a rally yesterday. The Courier-Journal reports that about 600 people showed up to push for outright repeal of local property taxes statewide.

As is generally true of folks who want to destroy the village in order to save it, it's not at all clear why outright repeal is the best fix for what ails Indiana property taxes-- or even why it's a good fix.

Eric Miller, whose organization Advance America has been in the lead of the "repeal all property taxes" movement, is quoted simply as saying "You deserve the right to repeal property taxes." Which is undeniably true, but doesn't explain at all why it's a good thing to do.

The state legislature isn't helping matters: the Courier-Journal's Lesley Steadman reports that the Senate voted yesterday to create a study commission on how to repeal local property taxes. This is obviously less harmful than if they'd just gone ahead and voted to repeal them immediately, but is stiull bad enough, because it gives an inherently bad idea more of a platform for discussion than it needs. Let's hope this idea enjoys the fate typically reserved for topics of "tax study commissions"-- residence on a dusty bookshelf.

Wednesday, November 28, 2007

ISTA Gives Thumbs Down to Governor's Tax Plan

Representatives of the Indiana State Teachers Association have announced the ISTA's opposition to a plan, announced last month by Governor Mitch Daniels, that would eliminate property taxes as a source of school funding revenue, and would have the state pick up the schools' general fund tab entirely (they already pay 95% of these costs) using a sales tax hike to pay for it.

ISTA representative Dan Clark offered two reasons for this position.
1) State funding of schools would mean that in times of fiscal shortfalls, schoolchildren would have to compete for scarce state budget dollars with other funding priorities.
2) The property tax is actually pretty useful in its dependability. Because it's less subject to economic fluctuations than the sales tax, you can always depend on it to bring in enough money to pay for needed services, even during the hardest times.

Both points are legit. Indianans need look no further than Wisconsin to see the dangers of states deciding they can afford to pay for an adequate education themselves. Wisconsin has had perpetual trouble living up to their guarantees they've made for assuming the lion's share of school funding costs. And the level of state funding has been a political football even in the good times.

And it's absolutely true that property taxes are a more stable funding source than sales taxes. That is, of course, one of the things that makes people mad about property taxes-- if you lose your job, your property tax bill will still be in the mail next year-- but the glass-half-full way of looking at it is that this is a tax base that isn't going to disappear anytime soon.

There are other reasons to be concerned about the Daniels plan. One could ask why the state wouldn't harness progressive personal income taxes as a way of bankrolling a state takeover of local school funding. And there are basic question of local autonomy and local control that should give any school-age parent pause.

But Clark and the ISTA are right on the money on this one.

Tuesday, November 27, 2007

Mangan: If It's Broken, Throw It Away

If it's broken, throw it away.

That's the word from Patrick Mangan in today's South Bend Tribune. He's referring to Indiana's property tax system, which he believes is the reason why "many hard-working families [have] lost a generation or more of wealth-building capital in homes and investment properties."

Here's the logic, if you can call it that, in a nutshell:

1) We think it's important to "help working families progress to the middle class." (I'm with him so far).

2) There are two "key benchmarks" for achieving this goal: education and homeownership. (Still reasonably with him.)

3) Indiana property taxes are making people lose their homes. (totally plausible, given everything else that's already going on in the state's economy)

4) Therefore, we should repeal all Indiana property taxes paid by individuals at all income levels, as well as the property taxes paid by businesses big and small.

This is, of course, the same recipe anti-tax federal lawmakers used six years ago to engineer the (temporary) repeal of the federal estate tax. If there's anything demonstrably wrong with a tax, the only true reform is repealing the whole thing.

The question Mangan has to answer, and simply doesn't, is this: if the problem is that the property tax makes it harder for lower-income families to move up the ladder by becoming homeowners, why is your solution to offer a tax break for every homeowner in the state? Why not take a hard look at the hodgepodge of property tax breaks the state has enacted over the past thirty five years and try to come up with a cheaper, more rational, better targeted approach to property tax relief for low- and middle-income homeowners and renters?

This is obviously harder, in the short run, than just pulling the plug and repealing the property tax entirely. But it's also a much smarter move.

Mangan argues that we "We need a tax system with fewer moving parts." And there's some truth to this. No one, starting from scratch, would design a property tax system the way Indiana has, with an array of different tax credits for different groups. Homeowners get about five different tax breaks en route to determining their final bill. But again, the grown-up way of dealing with such a problem is a word starting with "R" that isn't "repeal"-- it's reform.

A very sensible approach for rationalizing Indiana's property tax mess is repealing the array of homestead credits and exemptions that currently exists, and replacing the whole mess with a simpler, fairer "circuit breaker" credit that limits the percentage of income that low- and middle-income homeowners and renters must pay in property tax.

If the problem is that low-income families are losing their homes, the circuit breaker can fix it.

It's not obvious that repealing the entire property tax will have the same effect.

Friday, September 21, 2007

A Broader View on "Congestion Charges"

It's hardly news that Indianapolis-area workers spend a lot of time on traffic. But a new report makes news out of this anyway:
Indianapolis-area drivers wasted 43 hours in 2005 due to rush-hour congestion, according to a study released Tuesday by the Texas Transportation Institute, which regularly rates the congestion of metropolitan areas.
There are broadly two ways of fixing this problem: build more roads, or use policy levers to get people to drive less on the most crowded roads. The latter approach means higher gas taxes, higher tolls, or a "congestion charge" of the sort New York City policymakers have been discussing for a while.

Neither of these alternatives is cost-free. Building roads costs money, which has to be raised somehow, and using taxes or tolls to raise the price of driving imposes a burden on working families. But doing nothing imposes big costs, too. As Rep. Peter DeFazio notes, "There is a tremendous cost to doing nothing." An hour sitting on a gridlocked highway is an hour you could have spent earning money--which means that gridlock imposes a real economic cost on workers and on businesses. In response to fears that a gas tax hike would impose costs on workers, one member of Congress sensibly argues that the current "do nothing" state of things amounts to a tax of sorts:
Rep. Jim Oberstar, D-Minn., who heads the House Transportation and Infrastructure Committee, said the $78 billion that travelers lost in wasted time and fuel in 2005 amounts to a "congestion tax."
And of course, he's right. The larger point to be made here is that it's a bit simplistic to argue that a gas tax hike would hurt workers or hurt the economy without taking into account the costs that the current state of things impose on workers. Think about that the next time you're stuck on I-465.

Tuesday, August 14, 2007

Is Indiana's Constitution to Blame for Property Tax Woes?

Writing in Monday's Indianapolis Star, Mark Akers suggests that the easiest way out of Indiana's current property tax mess would be to just amend the state constitution:
Studying the structure of local government is a worthwhile effort to remedy the property tax issue. But the problem stems from the Indiana Constitution. While no one likes property taxes, prior to the Indiana Supreme Court's decision that the assessed values should be market-based rather than based on depreciated values, property taxes were at least predictable and assessors didn't have to have the skills and knowledge that are now required.
So, while the remedy might include modifying local government structures and giving cities more authority to raise money(Indiana cities are among the most constrained in the U.S.), we should consider changing the constitution to allow the property tax system to work the way we want rather than make the enormous changes to local government that would be required to make enough of a difference.
Akers doesn't say anything about how you'd change the constitution to make this possible, but presumably what he's got in mind is something that effectively says "the state doesn't have to listen to court decisions that say property taxes must be based on the 'market value' of properties. Instead, they can base property taxes on whatever they want to."

Here's what is wrong with Akers' argument, in a nutshell: a properly functioning property tax must be based on market value. No tax can ever be fair unless it's properly measuring the tax base. Imagine if you and your neighbor got the exact same salary from the same company. You would hope that your state income taxes would be basically the same. Now, if your income tax was based on this year's income, while your neighbor's income tax was based on the (much smaller) amount he earned, say, 20 years ago, you'd say that was totally unfair. An updated measure of ability-to-pay is what makes the income tax fair. Ditto for the property tax. You need to know what a home is worth, right now, in order to fairly assess property tax on that home.

Indiana's current property tax woes are causing a lot of pain and unhappiness. But these are exactly the same changes that every other state has gone through when it's modernized its property tax. And it's absolutely the right thing to do in order to achieve a truly fair Indiana property tax. It will be little comfort to state residents to know that their ongoing property tax hikes are largely due to the unwillingness of state lawmakers to fix property tax inequities previously. But that's exactly what they need to know.

Tuesday, June 26, 2007

Property Tax Rebate Not Placating Hoosier Homeowners

More than a month after Indiana lawmakers passed legislation providing temporary property tax rebates to help offset rapidly rising home values, people are apparently not buying it. The Indianapolis Star notes that several property assessors in Marion County have requested police protection against irate homeowners when their tax bills arrive.

In a sense, these homeowners are right. When your property tax bill goes up 20 percent over a period when you haven't gotten 20 percent richer, the property tax can seem pretty unfair.

But Indiana faces special circumstances. The state has been notoriously bad at accurately assessing property values-- and much of what's happening now is simply rectifying past wrongs.

That doesn't make the tax hikes any more painful for Indiana homeowners-- but it's important to understand that one underlying factor here is that the property tax system is finally working right.

What angry homeowners should know is that even with the improvements in assessment practices, it didn't have to be this way. Lawmakers could have enacted tax changes that shift Indiana's tax system away from the property tax towards some other source. But instead, they chose to leave property tax bills alone and provide highly visible "tax rebates" that won't arrive until weeks, or months, after homeowners have paid their property tax bills.

Lawmakers are probably patting themselves on the back for their PR ploy of sending a check in the mail to aggrieved homeowners-- but the self-congratulation may end soon if this (preventable) voter outrage over rising property taxes continues.

Tuesday, June 05, 2007

Great New Health Care Program-- Funded by a Puff of Smoke

The good news: low-income Indiana families will have better access to health insurance as a result of new legislation signed into law by Governor Mitch Daniels.
The bad news: it's being paid for with a cigarette tax increase.

Why is this bad news? A history lesson may help explain.
Back in 1987, Indiana lawmakers increased the cigarette tax from 10.5 cents to 15.5 cents per pack. In the first full year after implementing the higher rate, the cigarette tax brought in $116 million. Fourteen years later, in fiscal year 2002, the tax was still being collected at the same 15.5 cent rate-- and tax collections had increased only a tiny bit, to $123 million. That works out to a growth rate of about half of one percent each year.

To put this in context, a good indicator for the cost of any public service is inflation. The cost of most things that government (or any private firm, for that matter) produces tends to go up at least with inflation each year. If the Indiana cigarette tax had grown just at the rate of inflation during this same period, cig tax collections would have been $176 million in 2002, far above the $123 million actually collected.

Put another way, whatever public services the cig tax was paying for in 1987, it was paying for about 2/3 of those services in 2002.

The lesson for today? It's great that Indiana is demonstrating a commitment to funding low-income health insurance. But to the extent the cigarette tax is where the money is supposed to come from, they've tapped a dry(ing) well. As if to drive this point home, here's a quote from a Courier Press article on the cig tax hike:
During a speech Thursday in Evansville, Rep. Suzanne Crouch emphasized the cigarette-tax health care plan is not an entitlement program.
"The number of individuals who can participate (in the plan) is dependent upon the amount of funds that are available," said Crouch, R-Evansville.
D'oh! And here's Gov. Mitch Daniels on what needs to happen next:
Now we must go about the difficult business — harder than you may think — of reaching those who would like to stop smoking with help...
In other words, now that we've hiked the cigarette tax to pay for health care, we're going to use the cigarette tax to get people to stop smoking- -which means less health care.

The funding picture is more complicated than this, of course. There are federal matching dollars involved, which will presumably help the state to adequately fund this important health policy goal:
Increasing the cigarette tax is expected to bring in $206 million more revenue annually. If the federal government approves the plan, money from the tax increase could leverage more federal dollars and generate a combined $750 million to $800 million a year, officials said.
But it's important to remember that the state's own contribution to this pot is going to be a shrinking share of the total-- and that low-income families will bear the brunt of it. Wouldn't it be nice if Indiana could signal its commitment to funding low-income health care by coming up with a reliable funding source?