The Wages of Big Government Are High Taxes

January 21, 2008

Indiana Writers Group column for Jan. 23 and thereafter

by Eric Schansberg, Ph.D.

Here is a point to keep in mind as the property-tax debate approaches conclusion: Applying a number of significant changes to a complex policy may or may not have the desired outcomes. This General Assembly, then, is debating a tax gamble as much as a tax policy.

Given the tax caps reiterated last week by Gov. Mitch Daniels in his state-of-the-state message, it is estimated that property-tax revenues could fall by $380 million, or about five percent of total local spending. In all, 66 of Indiana’s 92 counties would be affected. Most would be affected modestly but there are notable exceptions: Lake County spending would be cut by 27 percent or would require a four-percent increase in the Local Option Income Tax (LOIT); Delaware County and St. Joseph County would need to cut spending by 10 to 11 percent (or impose a LOIT of more than one percent); Cass, Knox, Montgomery and Madison counties would need to cut spending by six to seven percent (or impose a LOIT of less than one percent).

It is proposed that we just get rid of property taxes, replacing the revenue with other sources. Although this may be attractive politically — and perhaps even economically — articles in the upcoming issue of The Indiana Policy Review make the point that moving to other taxes might be troublesome. For example, raising the sales tax from six percent to seven percent is, itself, a 17-percent increase in the sales-tax rate.

Along the same lines, it’s worth noting that no state has come close to eliminating property taxes. This is not surprising, given that they account for, on average, one-third of state and local tax revenues.All of that said, people simply don’t like property taxes. And that is true not just in Indiana. Nationwide, local and state property-tax revenues increased by 28 percent from 2000-2006 (after inflation). Many states have passed or have considered passing legislation to cap property taxes.Ultimately, dissatisfaction with taxes — or a particular tax — has at least four explanations:

• First, there might be relative satisfaction with the amount of taxes paid but dissatisfaction with the manner in which they are collected. This seems to be a significant issue with property taxes. Above and beyond the amounts being paid, there is considerable frustration with a process that is seemingly incompetent at times and not particularly transparent. Moreover, 35 years of political “solutions” have increased skepticism. Growing cynicism about Indiana's tax mechanism and the related political process has undermined what is typically a stable and unexciting source of state and local revenue.

• Second, taxes might disproportionately burden some taxpayers to the point they are politically activated. At least on the surface this seems to be at most a modest concern in this context. The property-tax base is quite broad, as is the distribution of beneficiaries from state-government spending. That said, clearly, many property owners would benefit from a tax regime that reduces property taxes while increasing sales or income taxes.

• Third, out of ignorance, people might dislike taxes without fully understanding that taxes are required to pay for government programs. One gets a sense of this from some of the “repeal the property tax” folk. It would be great fun to get rid of property taxes — and who wouldn’t love lower taxes? But if government spending doesn’t decrease — and there’s been precious little talk of that in an election year — then revenue-neutrality is required, and, consequently, lower property taxes must be offset by higher taxes of some other sort. It is not at all clear that this would be a net improvement. Worse, it’s not clear that all of those who want to reduce or repeal property taxes have wrestled appropriately with this vital question.

• Finally, for a variety of ethical and practical reasons, people might be dissatisfied with both taxes and the size of government. There is good reason for this dissatisfaction. At the national level, "Tax Freedom Day" for Hoosiers is now April 23. (This is better than the national average of April 30, but it’s not exciting to work nearly four months to pay one’s annual taxes.) And for Hoosiers, their state and local tax burden is an average of $3,387 — or 10.7 percent of their per-capita income (25th in the nation). That’s a lot of money, especially for the working poor and the middle class.

For those Hoosiers who want a large government, there are no easy ways to raise the money to finance it. There are no efficient ways to raise it, either. And of course, finding an equitable way to raise so much money is particularly difficult — at least in the eyes of those being taxed.

So property taxes are only a symptom of the larger problems that go along with trying to fund large-scale government — and fund it through the activity of politicians, interest groups and a public that hasn't the time or energy to pay much attention to the inequities and inefficiencies of political behavior.

D. Eric Schansberg, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation and editor of Schansblog.com, is a professor of Economics at Indiana University at New Albany. Nothing written here is to be construed as reflecting the views of the Indiana Policy Review Foundation or as an attempt to aid or hinder the passage of any bill before the legislature or to further any political campaign.



Comments...

Leave a Reply

Your email address will not be published. Required fields are marked *