Not much was said of the Bowen administration’s most significant achievement — reformation of the state’s property tax scheme — which set the stage for property tax caps eventually enshrined in the constitution nearly 40 years later.
But I wondered, as the last strains of a most beautiful rendition of “How Great Thou Art” rang through the Statehouse, whether Bowen’s property-tax reformation will stand the test of time.
The thought is rooted in Indiana’s reliance now on two economically sensitive streams of tax revenue. The state’s 7 percent sales tax, among the nation’s highest, produced nearly half of the Indiana tax revenue in the last fiscal year. The flat-rate personal income tax, among the nation’s lowest, produced a little more than a third of Indiana’s tax take.
Together they accounted for 81 cents of every dollar the state collected in taxes, a trend that will be altered a little when the 5 percent reduction in the personal income tax lawmakers approved this year is phased in.
The other major taxes, on gambling and corporations, are even more sensitive to changes in the economy. Lawmakers and their constituents are OK with this when the economy expands. Even the modest growth of recent years has added nearly $2 billion to the state’s coffers since FY2010.
The downside, of course, is when the economy tanks. The last recession erased nearly $2 billion in state tax revenue between Fiscal Years 2008-10. Tax revenue by nature is intrinsically tied to economic performance, but the stream wasn’t always this sensitive.
It began when the Bowen tax plan was adopted in 1973, which froze property taxes across the state. The state’s sales tax doubled to 4 percent and the law created a new local option income tax to buy-down the property tax rate in adopting counties.
As lawmakers are wont to do, they made lot of changes to the system over the years. There are many more local option income taxes to pay for economic development and public safety in addition to lowering property taxes. Schools and much of local welfare now are funded entirely by the state and not property taxes, which were capped in 2008.
Meantime the General Assembly has worked hard in recent years to earn Indiana plaudits as a low-tax state with cuts to personal and corporate income taxes, elimination of the inheritance tax and trims to other smaller taxes.
Lawmakers have rejiggered the state’s tax revenue as a result of all of these changes, shifting a good portion of the load from property to sales and income taxes. This reliance on economically sensitive taxes ought to raise concern among Hoosiers and their elected officials.
The best taxes are those with a broad base and a low rate. A second priority should be constructing a system that’s relatively stable regardless of the economy’s performance.
Indiana’s system comes up short in both categories.
Property taxes are lower, but the state sales tax is second only to California’s 7.25 percent rate.
There is a budget
surplus, but state pension obligations are increasing, school funding is behind inflation and the backlog in transportation funding is enormous.Local officials with less property tax revenue to fund their budgets
are thwarted by legislators who are loathe to allow anything that might be construed as a tax increase that could be used against them in an election.Fiscal leaders understand these challenges and are working to educate their colleagues in the General Assembly. With $2 billion of federal aid, some tough management decisions and a slowly growing economy the state currently enjoys a strong surplus.
It is the surplus that makes this the perfect time for legislators to seek ways to rebalance the state’s tax structure, to find a way to blend state and local systems in a way that doesn’t leave either too dependent on a good economy to make ends meet.
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