Let’s Limit State Spending as Well as Property Taxes

November 5, 2007

Indiana Writers Group column for Nov. 7 and thereafter
700 words

By Andrea Neal

    INDIANAPOLIS — Under Gov. Mitch Daniels’ tax plan released last month, property taxes would be capped at 1 percent of a home’s assessed value. In exchange, the sales tax would go from 6 to 7 percent. For me, this would be a great deal. My property tax bill would go down $1,300 a year while I’d spend about $200 more in sales taxes.
    It’s not a good deal for everybody, of course. The business community is mad that its tax cap would be set at 3 percent of assessed valuation, two points higher than the residential ceiling. Hard core tax protesters still want to see the property tax abolished. Local government officials don’t like language in the governor’s plan that limits their spending. Some homeowners will not get the projected average property tax cut of 33 percent, and they’ll be unhappy too.
    As tax reform plans go, however, this one should have bipartisan appeal. It would mean permanent property tax relief because it would remove school operating funds and child welfare costs from the property tax altogether. Those are two big-ticket items that Democrats and Republicans have been trying to shift to state funding for years. It would put the brakes on local spending, which could not grow faster than a county's personal income growth over a six-year period unless approved by taxpayers in a referendum. It would also give taxpayers final say over all significant local construction projects.
    The biggest flaw: While local spending is limited, there’s no similar language capping state spending. As Indiana shifts away from property taxes, lawmakers must realize that pressure to spend will continue to build at the state level. A shift in taxation from local property taxes to the state sales and income taxes will more closely link public school funding to the state's economy. Lobbyists will keep asking for more. And there’s nothing to stop lawmakers from raising the sales tax again to 8 percent or the income tax from 3.4 to 4 percent or higher. As long as lawmakers are considering spending restraints for local bodies, they should consider state limits too.
    According to research prompted by the property tax revolts of the 1970s and 1980s, the most effective tax reforms are those that simultaneously attack both symptom (high taxes) and cause (high spending).
    Consider the property tax proposition passed by the voters of Massachusetts in 1980. Prop 2 ½ limited annual increases in any municipality's tax levies to 2 ½ percent, and capped property taxes to 2 ½ percent of market value. If necessary to fund desirable projects, voters could override spending caps in a referendum.
    At the time, opponents predicted one of two things: Either state taxes would have to go up or local governments, schools in particular, would starve. In reality, per-pupil expenditures in Massachusetts rose faster than the national average and the income tax rate stayed stable.
    A more famous example is Proposition 13, passed by California voters in 1978. The measure reduced local property taxes by 57 percent and was followed the following year by Proposition 4, which limited state and local government expenditures from tax sources. The limit’s formula is based on population and the cost of living.
    More than a dozen other states have tax and spending limitations written into law or enacted by voters in referenda. Indiana voters don’t have the authority to put such measures on the ballot, and lawmakers are reluctant to self-impose them.
    “The opposition to tax and expenditure limitations is enormous,” says the free market Cato Institute. “Opponents charge that restraining the growth of taxes and spending is impossible without doing things like taking cops off the beat and firefighters out of the firehouse. Other critics make precisely the opposite complaint . . . charging that (limitations) are ineffective and
do not limit the growth of taxes and spending as promised.”
    Cato studies indicate that carefully crafted spending caps “can and do limit the growth of state taxes and spending.” That’s why state lawmakers need to consider restraints for themselves as well as their municipal colleagues. The goal here is to reduce the tax burden, not just to shift it from property taxes to other sources that appear on the surface to be less painful.

Andrea Neal is a teacher at St. Richard’s School in Indianapolis and adjunct scholar at the Indiana Policy Review Foundation. Contact her at aneal@inpolicy.org.

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