February 19, 2007

Indiana Property Tax Repeal Effort Stalls (For the Moment)

We called it the "worst property tax reform idea ever" a while back-- and Indiana lawmakers appear to agree, sorta. State Senator Clarence Weatherwax presented his two-pronged plan for Indiana property tax "reform" to a Senate committee last week, and got a response that the South Bend Tribune characterized as "lukewarm."

Weatherwax's plan has two components: SJR 16, which would repeal all state and local property taxes, and SB 538, which would establish a new spending limit for Indiana state government. The spending limit would be based on growth in population and inflation. (See this report from the Center on Budget and Policy Priorities for more on why a "population plus inflation" spending limit is too constrictive.)

Sounds pretty simple, right? You set up a spending limit that says any revenues over the "population and inflation" limit can only be used for one purpose: replacing lost property tax revenue. That way, the story goes, local governments aren't completely defunded when the property tax goes away. But the Weatherwax plan turns out to be too simple:
Weatherwax estimated that it also would take a 1 percent increase in the state income tax, a 2 percent increase in the state sales tax and a local option income tax increase to replace property taxes.
But oops, Weatherwax forgot to include these tax hikes in his plan:
When committee members suggested incorporating those increases into SB 538, Weatherwax said he decided to pull both bills from consideration rather than risk defeat.
He has a good reason for doing so--tax hikes can't originate in the Indiana Senate--but that's a problem he needs to overcome before such a plan can ever be taken seriously.

Senator Robert Meeks put his finger on why Weatherwax needs to fix this problem if his plan is ever to be taken seriously: if the easy parts of the plan (capping spending, repealing property tax) went before voters without forcing them to also think about the hard part (hiking other taxes to make up the revenue loss), they'd love it.
Meeks also questioned whether voters would approve a referendum on eliminating property taxes if they knew they would face increases in state income and sales taxes, as well as the possible elimination of some local services. "They would vote for it because they don't know there are consequences, they don't have all the facts," he said.
This is an excellent point, and one that raises important questions about how direct democracy should be used on tax issues. If lawmakers are going to put these questions before voters, they need to make sure they're presenting voters with a fiscally sound package. A package that addresses the easy questions, but leaves no provision for answering the hard ones, doesn't deserve to take up space on the ballot.


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