Killing Property Tax Could Backfire on Hoosiers

January 14, 2008

Indiana Writers Group column for release Jan. 16 and thereafter (710 words)

by Andrea Neal

You’ve got to give lawmakers credit for attacking property tax reform with a vengeance in the opening days of the 2008 General Assembly. But there’s political danger ahead if the debate turns into an all-or-nothing proposition.

On one side: the abolitionists. These folks want to ride the wave of anti-tax sentiment that erupted across the state after the last reassessment. They’re backing Senate Joint Resolution 8, authored by Sens. Brent Waltz, R-Greenwood, and Mike Young, R-Indianapolis, which would change the Constitution to prohibit property taxes, at least for residential property owners. The $2.9 billion in lost revenue would be made up through a combination of higher income, sales and use taxes.

On the other side: the cappers. These folks support Gov. Mitch Daniels’ proposal for a constitutional amendment that would cap property taxes at 1 percent of a home’s assessed value. Under this plan, property taxes would continue to fund many local services, but not big-ticket items like child welfare and the school general fund. To afford this, the sales tax would be raised from 6 to 7 percent.

The danger: One side will view its plan as a superior solution and, this being an election year, label the other side as obstructionists or foot draggers. If that happens, Hoosiers can kiss property tax reform goodbye.

There is a compromise that would make abolition of property taxes possible down the road, while in the meantime protecting homeowners from the hefty tax hikes that hit our mailboxes last summer. Watchdog Indiana, an Internet-based advocacy group directed by Aaron Smith, has presented the compromise language to House and Senate committees, but has yet to get much response.

Too bad, because his idea is close to ideal.

Under Article 10 of the Constitution, the General Assembly has no choice but to collect property taxes. It must “provide, by law, for a uniform and equal rate of property assessment and taxation.” Smith’s language would amend the constitution to make property taxes optional rather than mandatory. If lawmakers chose to collect them, they would have to “exempt the tangible base from tax liability that exceeds 1 percent of the assessed value of the property that is the basis for the determination of property taxes.” That’s the 1 percent cap.

“It makes perfect sense,” Smith contends. “If the citizens truly want elimination, my words give the General Assembly the option to pursue it in a measured fashion that could yield the very best results rather than rush to judgment in a short session.”

This really is a compromise that forces the cappers and abolitionists to meet halfway. The problem with the Daniels’ plan now is that it maintains the constitutional basis for property taxation, no matter the wishes of public or policymakers. The problem with the Waltz-Young plan is that it prevents future use of property taxes even if lawmakers decide they are needed.

“No state has completely eliminated property taxes,” Smith explained in testimony last week to the Senate Rules and Legislative Procedures Committee. “Therefore, all the unintended consequences from the elimination of property taxes cannot be identified. The General Assembly needs the option to reimpose property taxes if unintended consequences from property tax elimination make it necessary to do so.”

Smith’s idea is all the more sensible considering the hurdles that constitutional amendments must clear before taking effect. They must be approved by two consecutive general assemblies and the voters in a general election. Who knows if the people’s support for property tax abolition would wane if they were faced with 2 to 3 percent increases in the income tax? The discretionary language suggested by Smith seems more likely to attract consensus as the amendment proceeds.

The Young-Waltz plan most certainly would make permanent higher income and sales taxes. Five years from now, if citizens decided they preferred the stability of property taxes, they’d have to go through the amendment process once again.

A 1 percent cap eliminates the most egregious element of Indiana’s tax system — the unpredictable and potentially dramatic increases that Hoosiers can face following reassessment. But forcing the elimination issue during a short session could sabotage everything. The Watchdog Indiana compromise may give abolitionists and cappers the best of both worlds.

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



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