Indiana: Daniels Proposes Tax Hikes, Reforms

In his State of the State address yesterday, Indiana Governor Mitch Daniels uncorked several tax-related ideas. Daniels wants to hike the cigarette tax, give local governments new revenue-raising options, and reform the property tax assessment process.

On the cigarette tax, Daniels made pretty much the same pitch we heard from Iowa's Tom Vilsack a day earlier. Daniels wants to hike the state's cigarette tax by 25 cents a pack. But unlike Vilsack, who would use these revenues to fund health care, Daniels doesn't seem to be counting his winnings yet:

...no single step we could take would matter more than reducing the percentage of Hoosiers, particularly young Hoosiers, who smoke cigarettes. All the evidence shows that the most effective way to deter young smokers is at the cash register. I ask this Assembly to raise Indiana’s lowest-in-the-Midwest cigarette tax by at least 25 cents a pack.

In other words, it's not about the revenue-- it's about discouraging smoking. This is exactly what you want to hear from any lawmakers proposing a cig hike. Cig taxes have a proven track record of discouraging smoking. Their track record on revenue-raising? Er, not so hot.

The second tax idea from "the Blade" was pretty vague, but probably a good one:

I call on the General Assembly to liberate localities to raise funds from sources other than the overused and unfair property tax. And to begin assuming the costs of caring for endangered and abandoned children at the state level, also reducing property tax burdens in every county.

Even when it's well-administered, the property tax shouldn't be the only tax option available to localities. It's an unfair tax that can fund terrific schools in wealthy districts while funding subpar services in less well-endowed areas. Augmenting the property tax with a new local-option income tax (as some lawmakers tried unsuccessfully to do last year) could help equalize resources between poor and wealthy districts. And funding more services at the state level, as Daniels suggested here, would almost certainly have an equalizing effect. So this seems like good stuff.

The third prong of Daniels' tax manifesto is unambiguously a good thing: he wants to professionalize the process by which property is assessed for tax purposes.

Scattered authority produces bizarre tax assessments in which identical houses just blocks apart are taxed at widely different levels... I ask the local officials of our state to endorse and help effect the end of the archaic township assessment system and the transfer of this failed process to the level of our 92 counties.

He's proposing this for a good reason: a recent study by the Indiana Fiscal Policy Institute found a troubling lack of uniformity in assessment standards and quality between the many local governments in charge of this process in Indiana. Tax "fairness" is sometimes in the eye of the beholder--but almost anyone can agree that, as Daniels says, similar properties should be valued similarly. Period. Unpredictability in the assessment process breeds suspicion of the tax system and of local governments.

Of course, Daniels remains "the Blade," as he was known during his budget-slashing days as director of the federal OMB. So you're not gonna hear him talk about making the state's income tax more progressive (of the six states with flat-rate income taxes, Indiana is the only one that's not constitutionally required to be that way). You'll see nothing in his speech about the chronic unfairness of Indiana's tax system as it affects lower- and middle-income taxpayers. And you won't hear a peep about the decline of the state's corporate income tax due to clever tax avoidance schemes.

But Daniels' critique of the state's messy local property tax system is dead on. And if he wants to hike a regressive tax-- well, at least he's doing it for the right reason.