Tax Justice Digest stories about Indiana
The Center on Budget and Policy Priorities recently released a very useful report
summarizing tax expenditure reporting practices in the states, as well
as methods for improving a typical state's tax expenditure report. For
those unfamiliar with the term, a "tax expenditure" is essentially a
special tax break designed to encourage a particular activity or reward
a particular group of taxpayers. Although tax expenditures can in some
cases be an effective means of accomplishing worthwhile goals, they are
also frequently enacted only to satisfy a particular political
constituency, or to allow policymakers to "take action" on an issue
while simultaneously being able to reap the political benefits
associated with cutting taxes.
Tax
expenditure reports are the primary means by which states (and the
federal government) keep track of these provisions. Unfortunately,
most if not all of these reports are plagued by a variety of
inadequacies, such as failing to consider entire groups of tax
expenditures, or not providing frequent and accurate revenue estimates
for these often costly provisions. Shockingly, the CBPP found that
nine states publish no tax expenditure report at all. Those nine
states Alabama, Alaska, Georgia, Indiana, Nevada, New Jersey, New Mexico, South Dakota, and Wyoming,
undoubtedly have the most work to do on this issue. All states,
however, have substantial room for improvement in their tax expenditure
reporting practices.
For a brief overview of tax expenditure reports and the tax expenditure concept more generally, check out this ITEP Policy Brief.
- "Shifting to more stable revenue sources would lead to a more regressive system with slower growth rates. Instead of attempting to rebalance the tax system, they recommend establishing a much larger budget reserve ($2.1 billion for now) to help carry the state through economic downturns."
- "Using one-time surpluses strictly for one-time purposes (like rebuilding the reserves)"
- "Avoiding permanent tax cuts or spending increases unless reserves are filled and shifts have been bought back."
- Ensuring "that policymakers and the public have access to more information to improve the decision-making process. That includes releasing a demographic forecast every biennium and adding inflation back to the expenditure side of the state's budget forecasts."
As these recommendations should make clear, revenue volatility is only a problem if it is not planned for in the budget. Restructuring an entire tax system just to smooth out revenue collections is an extreme example of trying to 'throw the baby out with the bath water'. In fact, as we've pointed out in our policy brief on progressive income taxation, restructuring a tax system with this aim in mind is likely to create even more revenue problems in the long-run.
But while there's much to be excited about in the wisdom behind the Minnesota Commission's recommendations, those ideas have yet to take root everywhere. In Indiana, for example, just this week the Governor called for automatically refunding any tax collections above some pre-determined level, during good economic times. Such a change would directly restrict the flexibility policymakers need to plan for rough budgetary times when things are going well.
Over the past few months, there’s been a movement in Missouri to expand the circuit breaker program that benefits low-income property taxpayers. In addition,
To read more about benefits of the
The revenue loss to government will in large part be offset by a variety of tax increases, meaning the plan is actually more of a tax “swap” than a tax “cut”. The sales tax is raised from 6% to 7% by the bill, and most localities can be expected to raise their flat-rate income taxes to help compensate for the property tax reductions.
Reducing one tax (the property tax) and replacing the revenue with a more regressive tax (an increased sales tax) can often mean that low-income people really face a tax hike rather than a cut. Or, if the tax increases are not enough to replace the lost revenue, this tax "reform" could result in a loss of funding for state and local public services. "Swapping" lower property taxes for higher sales taxes is not a fair deal for working families.
As discussed in a previous Digest, earlier versions of the bill contained modest protections for low-income taxpayers, including an expansion of the earned income tax credit (EITC) and some relief for renters. The final version of the bill did expand and make permanent the EITC, as planned, though the relief to renters was scaled back to a meager 20% of the original proposal.
Under this bill, the state now assumes responsibility for funding a variety of programs previously handled by local governments. Even combining this with the prospect of local income tax increases, however, some local governments are already preparing for budget shortfalls.
A better policy would provide tax relief in a more targeted way (i.e. based on one's income) and would be much less costly. The legislature did pass a constitutional amendment that would move in this direction, but under the state's ratification rules this measure must be approved again by the next legislature before it's put to the voters. But even this plan, while it has the right idea, has some flaws that are outlined in an earlier Digest article.
Committees in both houses of the Indiana legislature this week proposed major changes to the property tax reform legislation first reported in the Digest in early February. A Senate Committee left untouched the heart of the bill, which would pay for across-the-board property tax cuts with a sales tax rate increase, but made several serious changes at the margin that strip even the modest gains in tax fairness for low and middle income residents that the original bill had offered. Most importantly, the proposed increases in the state’s EITC and renter deduction were pared back, eliminating the only two clearly progressive components of the entire proposal.
In contrast to the Senate plan, a new proposal passed by the House Ways and Means Committee departs fundamentally from the Governor’s original plan. The plan endorsed by the House Committee limits homeowner property tax bills to a maximum of 1% of a household’s income. Though income-based “circuit-breakers” such as this one are by far the most effective method for ensuring that nobody’s property tax bill rises beyond their ability-to-pay it, the version endorsed in this instance has an unknown (but likely large) cost, and unlike every other circuit-breaker credit in existence, would be available even to the wealthiest homeowners. The best circuit-breakers exempt very low income individuals from property taxes entirely, and then limit everybody else’s property taxes based on a graduated rate system that may range anywhere from 1% to 9% of income.
Given the constant concerns voiced by Indiana residents since at least July regarding their inability to afford their property tax bills, it is astounding that it took this long for a proposal that directly measures ability-to-pay in calculating property taxes to be given any notable attention. Though in this case the plan is unrealistic and unlikely to pass, adopting an income-based circuit-breaker is especially important in Indiana since its tax system would be made much less fair by the proposed sales tax hike.
Yet another bill attempting to swap a property tax reduction for a sales tax increase is working its way through a state legislature, this time in Indiana. Low-income Hoosiers can expect to lose out not only because of the regressive sales tax hike (from 6% to 7%). They will also find the distribution of $700 million in property tax credits completely divorced from need-based considerations. Further, the expansion of property tax caps (deceptively labeled "circuit breakers") will inevitably create inequities akin to those running rampant in Florida. The bill also caps the taxes that can be levied by Indiana localities in a manner that does not adequately take account of the rising cost of providing public services.
In an effort to offset the myriad regressive implications of the bill, the Indiana legislature also expanded the Earned Income Tax Credit (EITC) and provided some income tax relief to renters. But these comparatively minor steps will not be enough to offset the harm done to low-income Hoosiers. A recent report released by the Indiana Association for Community Economic Development includes a number of recommendations for reforming Indiana’s tax system, most of which are not addressed by the current bill.
As we've told you in past Digests, some Indiana taxpayers are threatening a revolt over property taxes. Rather than considering constructive reforms to the property tax, some anti-tax zealots are using the current situation as a reason to call for its outright elimination. Last week members of the Commission on State Tax and Financing Policy heard about the impact that property tax repeal would have on the state. The Legislative Services Agency (LSA) rightly titled their presentation "Challenges of Change."
Property tax reform continues to make headlines in several states. Some Indiana property taxpayers are revolting against what they perceive to be an unfair system. Recently more than 3,000 Hoosiers signed post cards addressed to their state policymakers urging them to fix the state's property tax mess permanently. In fact, a legislative commission began hearings last month and Governor Mitch Daniels' appointed blue ribbon commission started work this week. The problems are that taxes are not based on a homeowner's ability to pay and that assessments are executed poorly.
Emotions were running high this week in Indiana during the state legislature's public property tax hearing. Hundreds of people showed up to protest in what some say is the beginning of a tax revolt. Protestors were angry over what they see as the unacceptable rise in property tax bills this year. Many speakers called the current property tax system "broken" and advocated drastic cutbacks in school spending, or even a complete repeal of the property tax system. Just this week, Governor Mitch Daniels ordered that property tax levies in four counties remain at their 2006 levels until reassessments are conducted and the list of counties where reassessments will be ordered is expected to grow. Governor Daniels has hinted at a calling a special session to deal primarily with property taxes. Expect this raging debate to continue.
