By the time you read this article, there will likely be less than two weeks left in the 2002 legislative session. In that time, we will be expected to come up with a plan that has the potential to be the biggest change in the Indiana tax code in a century or more. All this in a session that is only about ten weeks in length. Does it make you nervous? It should.
What am I talking about? By now, most people know that the Governor and Lt. Governor have come up with a major tax proposal that they say will resolve three pressing problems for the state: 1) the revenue shortfall currently being experienced by the State: 2) the need to deal with the looming property tax reassessment that threatens to increase homeowner’s property taxes significantly; and 3) the fact that Indiana’s tax code is woefully out of date, and, most experts agree, is causing our state to fall further and further behind in the creation of the jobs that will drive the economy of our nation in the next 50 years or so. Thus, there is an argument that it is time to restructure our tax code right now by becoming less reliant upon property taxes.
Some of this probably sounds good, and it should. We do need to do something to turn our state’s economy around. The one thing that government can do is to make the tax code business and job friendly. Proposals to eliminate the inventory tax; eliminate the business and individual personal property tax; and eliminate the use of property taxes as the source of funds for the school general fund (the basic source of dollars used to operate a school) are good ideas. However, they require new taxes to replace the old ones. You see, property taxes and the inventory tax are local revenues. The state cannot simply eliminate these taxes without replacing them with a new revenue source, because to do that would wipe out our schools and a number of services provided by local government. Thus, we need to find a new revenue source to replace these property taxes. That means, for businesses, some form of new tax or an increase in other taxes already paid. For individuals, that means proposals such as increasing the state sales tax by one percent or more.
While the goal is noble and right, the timing couldn’t be worse. Our state is in a recession, and a lot of people have lost jobs. To propose tax restructuring such as an increase in the sales tax, even where the revenues will be used to replace the hated and heinous property tax, is a tough call in this environment.
Further, we definitely need to do something to offset the court ordered property tax re-assessment that is scheduled to take place by next year. As previously explained in this column, the courts have found that Indiana’s property tax system is unconstitutional because it unfairly favors residential real estate over business real estate. The courts have ordered that the tax system must be uniform and equal in the way it treats all real estate. Thus, new rules and regulations have been prepared under court direction that will mean higher property taxes for homeowners. Local assessors have been ordered by the court to finish their reassessment of all real estate within their counties by no later than March of this year.
The State legislature intends to step in and help homeowners with these potential property tax increases. However, because of the current budget shortfall, there is no existing money to help. Thus, new money must be created to help offset the expected increase in homeowner’s property taxes. And that means some new revenue source of some sort must be found. Where to get this money remains a subject of much debate. This debate may well be decided in the next two weeks, or it might be put off until next year. And why would a delay happen? Because local assessors around the state are telling the legislature that the March 2002 deadline is impossible to meet. Many say that they will not get their work done until the end of the year, at best. Thus, it may make little difference what the legislature does if the state cannot get proper figures from the counties in order to conduct the reassessment. A decision will have to be made in the next two weeks to determine whether the money to help offset the additional property taxes is raised now or next year.
I personally believe that we should delay until next year, simply because we are being asked to raise money without a clear idea of how much we will need. It seems crazy to me that we would be going down this road blindly, but that is currently the case.
Finally, the Governor is asking for more money so we can deal with the current budget shortfall of approximately $700 million dollars. It is hard to believe that we were crowing about a $2 billion dollar surplus not more than two years ago. Without belaboring what happened to the surplus, the fact is that we are short of money, and the situation is expected to get worse before it gets better.
Many of my constituents, when asked what to do about this, say we should simply tighten our belts and ride out these tough times as best we can. They are leery of raising taxes to deal with this problem. Frankly, so am I. I believe the Governor’s office has been a very poor manager of the State’s resources. Millions upon millions of dollars have been squandered through poor management decisions. Also, my fiscal leaders in the Senate tell me that we can find the money to take care of education and Medicaid without causing these entities to suffer any major cuts.
If this is true, and if we are also better off waiting to reassess property taxes until next year, then the only reason to be talking about shifting taxes is to stimulate economic growth in Indiana. This makes some sense. If we simply focus on trying to reduce our reliance upon property taxes, and trying to do away with job killing taxes like the inventory tax, we could do a lot of good for our State.
This is my hope: 1. That we can resist the temptation to raise taxes to deal with the current budget shortfall, and instead, work hard to find every possible reduction in spending without causing any real cuts to education or the key areas of the Medicaid program. 2. That we can agree to delay the reassessment for one year until we have a good idea of how much money needs to be raised. 3. That we find a way to help our state’s economy get back on the right road by restructuring taxes in such a way as to reduce our reliance upon property taxes. This means cutting property taxes, but it may mean raising the sales tax, since a new source of revenue must be raised to take the place of the property taxes.
Whether this goal can be achieved depends upon whether other legislators share my vision of what needs to get done. What I hope my fellow legislators agree upon is that this is not the time to be foisting new taxes upon our citizens when so many are struggling to survive, and tightening up their own belts. The only reason to support new tax increases is if we can use them to cut your property taxes, and eliminate taxes like the inventory tax. That would be a revenue neutral tax restructuring which could pay big dividends to our state’s economy in the future. Translated, it could mean many new and better paying jobs for our citizens by permanently cutting the worst tax known to mankind: the property tax.
Wish us well. It will be a wild two weeks, and much will be riding on it for all of us.
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