January 26, 2007

The Worst Property Tax Reform Ever

...Would be simply repealing it. And that's exactly what a group of Indiana Republican lawmakers are proposing, according to the Star Press. The good news is that supporters of the plan, such as Senator Thomas Weatherwax, are at least a little bit concerned about how to replace the revenue:
Weatherwax recommended state income and sales taxes be raised by one percent each to make up the revenue. Local governments also would be given new options taxes to replace the balance of lost property tax revenue.
But the question remains: why repeal the entire property tax in the first place? There are plenty of reasons to complain about property taxes. They're supposed to be based on home values, and assessors often do a lousy job of figuring out what homes are really worth. Property taxes are notoriously unresponsive to changes in ability to pay: if you lose your job, your property taxes are still gonna be the same (although your income taxes will go down!).

But these are arguments for reform, not repeal. Why would a sober-minded lawmaker ever advocate for outright repeal of one of the three main revenue sources used by the state?

I can think of two reasons. One is that any legislator who's been around long enough has probably observed that they keep passing property tax reforms, and people don't seem to be getting less mad. (To which the response would be that even at this late date, lawmakers haven't enacted a "circuit breaker" tax credit for fixed-income families.)

A second, more devious reason is that some supporters of this idea probably just want less government-- and, lacking sufficient political support for scaling back the public investments Indiana government provides, they're content to "starve the beast." Simply removing all property taxes will inevitably force income and sales tax rates higher (as well as the rates on other minor taxes and fees that Indianans probably don't currently notice so much). The higher the tax rates get on everything else, the angrier taxpayers will get. The end result? Taxes are lower, but citizens are angrier as a result-- which means further tax revolts, which in turn will drive taxes even lower.

As is always true in the world, the real answer is probably somewhere in between these two extremes. Some people are probably quite ready to drown government in a bathtub, while others are simply at their wit's end and seeking to avoid wholesale tax revolt by enacting a tax "reform" that provides obvious and easily understandable relief.

But whatever the motivation, it's wrong. Revenue diversification is unambiguously good: the more revenue sources you have, the less reliant you are on any one source. And the more revenue sources you have, the lower the tax rate can be on each source, allowing you to spread the cost of funding public services more broadly.


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