April 03, 2007

Indiana: A Local Property-Income Tax Swap?

The tax question of the day in Indiana is how the state should reduce local property taxes-- and how it should make up the revenue loss. In Sunday's paper, the editorial board of the Fort Wayne Journal Gazette thinks Republican Representative Jeff Espich has the right tax ideas:
[O]nly one plan so far squarely addresses the elephant in the room: school construction costs. Rep. Jeff Espich of Uniondale suggests it’s time to shift those costs from property taxes to a new income tax.
To be clear, it's a local-option income tax Espich is talking about: replacing one local tax with another one. The Journal Gazette thinks (and they're almost certainly right) that Espich's tax swap would make the tax system less unfair and less regionally biased:
Any tax proposal requires a balancing act to achieve fairness, and income taxes are more progressive than property taxes. And Espich said that a study of individual income and assessed valuation showed there is less disparity within a district in income than in property value.
The Gazette also points out, correctly, that simply reducing property taxes across the board (as a local government would likely do if they enacted the income tax option) would constitute a free ride, of sorts, for businesses:
It’s not a perfect plan. It shifts a larger burden from businesses to individuals. But there are more individual taxpayers than there are property taxpayers.
This is all true, as far as it goes. The most obvious (to me) objections to the Espich approach are:

1) there's more than one way to cut property taxes. If shifting from businesses to individuals is a concern, why not take steps to reduce property taxes for homeowners only, so a tax cut for individuals is balanced by a tax hike for individuals?

2) if inequality in local tax bases is a concern (and it should be), moving from an unequally distributed property tax base to a less unequally distributed income tax base is a step forward, but why not move to a statewide income tax increase instead, allowing the state to eliminate unjustified inequities in funding between poorer and wealthier taxing districts?

3) elaborating on point #1, Indiana already spends a lot of money rebating a fraction of everyone's local property taxes in an "across the board" way. A meaningful property tax relief plan should at least explain why the already-existing property tax breaks are sacrosanct. And if they're not, any good property tax reform plan should come up with a way of better targeting these tax breaks.

But Espich deserves kudos for recognizing that the income tax-- in some form-- is a fairer alternative. Other states considering how to deal with skyrocketing property tax assessments would do well to at least consider the Espich approach.


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