Property Taxes: Try to Reform or Hope to Repeal?

My latest op-ed piece, published in the (Jeff/NA) News-Tribune and probably in newspapers state-wide later this week...

Recently I had breakfast with two prominent advocates for Eric Miller’s plan to repeal property taxes. They were interested to learn about some deficiencies with the plan and their consultant’s report on the plan. That same day we traveled to Salem for a public forum sponsored by the Chamber of Commerce and Farm Bureau in Washington County hosted by Sen. Brent Steele and Rep. Dennie Oxley.

With a front-row seat to see Indiana’s frustration with property taxes and the opportunity to hear legislators speak about the Daniels and Miller plans, I learned a lot that day. So, here are some further reflections on property taxes and the efforts to reform or repeal them. Let’s start with the Daniels plan.

• The concerns we’ve heard about reductions in local spending — resulting from the property tax caps — are not surprising. Politicians talking strategically and trying to preserve spending is not all that surprising either. When we’re told that cutting basic services is their first option, we should recognize a political ploy. Note also that locals can preserve higher levels of spending — by raising revenues through a local-county income tax to offset lower property taxes.

• It seems likely that the Daniels plan will be challenged and found unconstitutional. The courts might well decide that different caps for residential, rental and business property are not equitable. In particular, the House version of the plan — with its amendment to provide a two percent cap for agricultural (business) land — seems particularly prone to a challenge

• A cap does not deal with the property tax’s inherent problems. It is still difficult to properly assess property “value.” (This problem is avoided with a “transfer tax” on property.) There is still an incentive for assessments to be set artificially high and then to worry about any (costly) appeals later. And there will be an even greater tendency for reassessments to adjust upwards. Capping the rate does not mean a cap on the revenues.

Given these problems, what about the Miller plan to repeal property taxes? Shouldn’t we just take the property tax behind the barn and shoot it? Perhaps. But there are also significant problems with the current version of the Miller plan. (At least for now, the point is moot, since the repeal of property taxes has been sent to a “summer study committee.”)

• I like Miller’s idea of capping state government spending. But until 2012, in order to accumulate money in a “property tax elimination fund,” the plan would allow taxes to continue rising at a higher rate. This would be tough on the economy. And this economic handicap is not addressed in their consultant’s report on the plan.

• Will the government leave the “property tax elimination fund” alone — especially if we’re in difficult economic times?

• Lowering overall taxes on business will be popular — at least with business. But adding another (smaller) tax on business may prove difficult. The plan would have more credibility if it at least spelled out some possibilities — instead of merely saying that the details will be “left up to the legislature.”

• Finally, without property taxes, what mechanism will be used to send money back to the counties? Will it be based on population, costs, assessments or something else? It is not inherently obvious that an easy political solution will be found for this potentially thorny question.

The funny thing is that economists view property taxes as a relatively attractive way to raise revenues — at least on paper. They are a relatively stable revenue source compared to income and sales taxes. Their elimination would result in higher rates on a narrower base — not a good thing. And property taxes should provide more local control than state income and sales taxes.

But again that’s just on paper. Indiana’s last 35 years with property taxes have been a growing disaster. It’s not clear what would improve the mess.

Interestingly, a slower economy may be a problem for both plans. It makes Daniels’ spending cuts more painful and Miller’s revenue projections even dicier. In any case, it’s not clear that the Daniels plan will put an end to the nightmare — and at least for now, it’s not clear that the Miller plan is a dreamy alternative.