Indiana’s Shifting Tax Policy

Meranda Watling, writing for the Lafayette Journal & Courier, has an outstanding summary of the tax situation for local government over the past decade. And, even better, one of her sources was Everybody’s Favorite Economist, Larry Deboer.

To summarize even more briefly, the property tax situation became destabilized back in 1998 when, due to the Town of St. John litigation started back in 1993, the Indiana Supreme Court ordered an overhaul of the way Indiana handled its property taxes. (See Dagney Faulk’s “How We Got Here from There.”) The way Indiana handled its assessments was pretty artificial. There were formulas that ended up undervaluing certain properties. For example, expensive old homes had relatively low assessments. (Hence, I believe, the anger among the Indianapolis Meridian crowd.)

Switching to a market based assessment resulted in an upheaval. Those with undervalued assessments suddenly saw a sharp increase in their property tax burden. The General Assembly scrambled with a variety of approaches, including a significant property tax replacement credit for homeowners and property tax caps. Where we stand now, homeowners have a similar tax burden, landlords are paying more, and businesses are paying somewhat less. And, we are shifting from reliance on a fairly predictable property tax to a more volatile sales tax. The shift was assisted by a 16% increase in the sales tax which accompanied the property tax caps.

I think this quote summarizes the feeling of many local officials:

“I’d like to see the whole system stabilized,” said Kim Fox, Tippecanoe School Corp. chief financial officer. “There’s such a push not to increase taxes. But at least make it so we know what we’re getting and it can come in on time.”

Not only have local officials been subjected to uncertainty about what revenues would be available, but also uncertainty as to when they would be available. The desire of some, mostly state level, officials to blame the problem on overspending by local government is unfortunate. There has been a tectonic shift in how we finance government and, since fecal matter runs down hill, the most local levels of government seem to be left cleaning up the mess.

Hopefully the next decade will be marked by a more predictable tax system. I wish I could remember the quote, but there was a Supreme Court Justice who wrote something along the lines of “it is some times more important that the law be clear than that it be entirely correct.” In the tax field, I think that’s often the case. Even where constant wrangling over tax policy leads to slightly better policy, those gains can be more than offset by the lack of predictability.