Huston: Indiana’s Two-Faced Tax System

May 19, 2015

by Tom Huston

Indiana has developed a two-tier tax structure that reflects a political ingenuity that only money could buy and only George F. Babbitt could rationalize (from the book “Babbitt” by Sinclair Lewis). The word “Babbitt” means a “person and especially a business or professional man who conforms unthinkingly to prevailing middle-class standards.”

The first tier is the traditional tax scheme pursuant to which residents pay income, sales, property and other taxes for the purpose of funding state and local governments. The mix of taxes and the relative rates are grounds for legitimate debate, but overall it is a system that inflicts less pain on individuals than is true in most states, and which may or may not (depending on your partisan perspective) enhance economic competitiveness, which Republican legislators define as low corporate tax rates and which is one step above godliness in the Chamber of Commerce scale of values.

The second tier of taxation is what may be defined as a negative tax system, one in which the state pays the taxpayer rather than the taxpayer paying the state. This is not to be confused with the negative tax or guaranteed annual income proposed by Nobel laureate Milton Friedman 60 years ago. What we have here is payola on a scale so vast but so little noted that it receives less attention than the number of beep-outs in a Kanye West concert.

This negative tax system employs handouts, subsidies and payoffs in the form of free land, property tax abatement, tax credits, interest-free loans, tax-increment financing and other legal graft to reward friends, pick winners and undermine free enterprise. The payola is justified as economic development that generates competitiveness that, as every Indiana Chamber of Commerce legislator of the year understands, is one step above godliness. The beneficiaries of these incentives are large corporations, owners of professional sports teams, real-estate developers, political insiders and members of the Lucky Sperm Club who are smart enough to hire the best-connected lobbyists, make the largest political contributions, hand out the most free tickets to sporting events, treat Matt Tully to lunch and dinner, and sponsor fundraisers in a gambling hall that no member of the Indiana legislature has yet figured out is a gambling hall.

Tax grafting by mayors, governors and state legislators grows every year as more little piglets struggle to get on the public teat. Here we see Chamber of Commerce competitiveness in full flower. Competition among the rich to get richer is one of those sausage-making scenes that you don’t really want to witness up close, but it is an inevitable part of economic life. Ugly but necessary, we closely regulate the manner in which the butcher goes about making sausage. Although equally ugly, we don’t do diddly about politicians skinning the have-nots for the benefit of the haves.

In the beginning, most of these economic-development “incentives” were tied to job creation. A new or expanding business would be awarded tax abatement or other tax benefits based on the promise of creating a specified number of new jobs within a designated period. Often these jobs didn’t materialize, but at least the rationale for the program was rooted in some claimed economic benefit to the community. The Rolls-Royce subsidy detailed by the Indianapolis Star on Sunday breaks new ground in that Indiana taxpayers will write a $17,000,000 check to a British-owned, multi-billion dollar corporation without that corporation pledging to create a single new job in Indiana. On top of this largess, the Ballard administration has awarded millions of dollars in property-tax abatement to Rolls-Royce without any undertaking by the latter to create one new job in Indianapolis. Essentially, Indiana taxpayers are paying Rolls-Royce to continue to do business in the state.

The proponents of these subsidies will insist that they are a reasonable price to pay to keep the jobs that Rolls-Royce presently has in Indianapolis. This is the rope-a-dope standard justification for economic-development spending. Politicians argue that if government doesn’t cave in the face of what is at root extortion, workers will lose their jobs. On the corporate side, it is deemed executive negligence if a CEO doesn’t seek to extort from government as much as he/she possibly can. This is a scene out of the Godfather played out every day in county seats across the state.

Barack Obama upped the ante on economic-development spending when he measured the success of his stimulus program not by how many jobs it demonstrably created but by how many jobs it allegedly saved. Hoosier Republicans from Gov. Mike Pence to Mayor Jim Brainard have latched on to this policy of economic make-believe and have backed it up with other people’s tax dollars.

How do you decide whom ought to be paid by taxpayers in gratitude for their willingness to employ Indiana workers? How do you decide how much they should be paid? Ed Peace, Rolls-Royce lobbyist and former member of Congress from Indiana’s old 7th District, bids $20,000,000; Brandt Hershman, chairman of the Senate Tax and Fiscal Policy Committee, makes a counteroffer at $15,000,000; and the House sponsor suggests a compromise at $17,000,000? Why not $10,000,000 or $30,000,000? Why Rolls-Royce and not a dozen Indiana-based manufacturers that, in the aggregate, will this year invest millions in new equipment and continue to employ thousands of Indiana residents?

There is simply no objective, rational economic basis for making these sorts of decisions, so they are all ultimately political decisions. Politics is what feeds the beast of lobbyists, political consultants, fundraisers and hangers-on. That is what drives legislators to favor this interest over that one. It is what justifies trade missions paid by private interests that consist of insiders taking their spouses on a fun trip to China. The whole concept of state-sponsored economic development is a fraud and delusion. If you want to encourage economic development, establish a fair tax and regulatory regime and get out of the way.

Tom Charles Huston, A.B., J.D., an adjunct scholar of the Indiana Policy Review who resides in Indianapolis, served as an officer in the United States Army assigned to the Defense Intelligence Agency and as associate counsel to the president of the United States.



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