Friday, February 29, 2008

The madness of Indiana politics (property taxes)

I live in Indiana, which certainly has some goofy politics and culture. In a low tax state, one in which when I moved to in 1987, my property tax bill was $186 per year. We were reassessed and our bill was reduced to just $83 per year. I wondered if the police or fire dept would even come if we called given that miniscule tax bill.

Of course, the reason for this ridiculously low tax bill was because the local assessors were not assessing property correctly. In short, businesses were getting soaked while homeowners were not paying their share.

Along comes the Indiana Supreme Court responding to a lawsuit by one or more businesses and the state was given 10 years to fix the problem. All property needed to be assessed on its market value.

After 8 years, the reassessment came and boom, folks taxes went UP. No sense among Hoosiers that they had been paying way too little tax, instead, the call went up for property tax caps. And to eliminate property taxes altogether. The latter seemed ridiculous in relflexive conservative Indiana.

Yet, the Democrats who contol the Indiana house, just threw out property tax caps indeed, they threw out property tax altogether and substituted a property tax based on ability to pay. Isn’t that called an income tax?

Not sure how that is going to work with business.

And why isn’t this seen as an increase in income tax?

Imagine the possibilities. I should put my mothers name on my house, her income is so low, I’d probably be paying just a few dollars instead of he $2600 a year based on the value of my home.

Why, why, why do we not want to tax property, just work?

So, there will be extremely rich folks who live off muni bonds nad capital gains who will have a rather low income, pay a couple of $100 on their multi-million dollar home.


Robert Guell said...

I am going to violate the first principle of a Blog at make this commentary VERY LONG. I will try to make the cogent points first so when you get bored you can just stop reading.

Let’s start with the factual errors: First, income taxes are on income, not just payroll. Indiana Dems are suggesting a property tax cap based on your AGI (which would include cap gains and bond interest). Second, Tom can’t escape this tax by deeding his property to his mother because his mother doesn’t live with him (it is a “homestead” cap).

Indiana Republicans are focusing their caps on the value of the property at least in part because residential property taxes are a problem. They do not meet one of the basic criteria for a good tax. That is they are NOT relatively inexpensive to impose fairly. Wildly different assessments are made on essentially identical property because property that isn’t recently sold has no hard “market” value. Someone has to guess what a house would sell for if it was on the market. Since you CAN’T know that without going in the house, you have to guess based on what you can see outside it. Eliminating the (homestead portion of the) residential property tax would reduce the expense of collecting this tax greatly because assessors (elected, as they are now or appointed as they would be in the Daniels’ approach,) would be able to concentrate on rental and business property only.

Where the GOP loses me is that they want to substitute a tax I can deduct from my Federal Income tax with one that I can’t. If they give me a $4000 property tax cut and raise sales taxes so that I pay $4000 more there, I lose $1000 because I have to pay $1000 more in Federal Income Taxes. If this is a revenue neutral switch, they should substitute an income tax instead. This is REALLY easy for Indiana to collect. They just change the percentage on an already existing form and use an already existing enforcement mechanism.

When you look at the total tax burden, “reflexively conservative” Indiana has been taking an increasing percentage of Gross State Income. The most recent problem has many sources. The reassessment, the elimination of the Inventory Tax, and the Taj Mahal building spree of Indianapolis area school districts. Carmel, Fishers, Avon, and Center Grove High Schools are either new or greatly expanded in recent years to deal with more students. If they had only expanded capacity that would be one thing, but my years as a traveling swim parent tell me that these schools are not like your old high school. They are palaces. Teachers’ unions may love them but Taxpayers’ Unions don’t. That is why the removal of school construction from the caps makes the caps meaningless.

I could go on and on and on…..

Robert Guell
Professor of Economics
Indiana State University

Tom Steiger, Professor of Sociology said...

I wonder what proportion of homeowners (since what doesn't seem to get discussed is what property taxes on productive property will do with income capped property taxes) income comes from capital gains and "tax free muni bonds". In Indiana, I doubt very much, so the notion that we are increasingly taxing work is appropriate. Indeed, we talk far more about reducing taxes on nonwork based income than we do on income. both corporate taxes and the taxes on "windfalls" such as capital gains and interest (rents if you will) have been significantly reduced since 1980.

My mother's legal address is my home. How would the authorities know whether she resided there or not? Once she is "better" she will return from the nursing home. Are my neighbors going to turn me in? Mom also files an income tax return every year. Her income is about 15% of what mine is. Her cap would be much, much, lower than mine. Unethical? You betcha, illegal, doesn't matter, how much enforcement are you going to pay for to collect the tax difference? Surely an economist understands unintended consequences.

The assessment problem is a kinard. Banks have absolutely no problem conducting assessment of the value of real estate since they loan money all the time. And then there are market transactions, I'll bet, on average, at least every 30 years on homes. So, the argument that it is hard to get the market value of real estate is very thin, even in sedentary Indiana. Heck, in volatile times, why not use a 5 year average of value or even a 10 year average? that would reduce the volatility problem.

Property taxes have been artificially low on homeowners in Indiana because the taxes were NOT based on market value. Now they are. It is the sudden jolt that has people up in arms and our politicians are unwilling to lead, instead, they want to give the people what they want, even if it is nuts.

I wonder what the courts would have come up with had the legislature not acted?

Blog Directory - Blogged The Steiger Counter at Blogged