Tuesday, December 4, 2007

property vs. sales taxes in Indiana

A nice article from Lesley Stedman Weidenbener in the C-J-- an overview of the effects of lessening one tax (property) and increasing another (sales).

In a "revenue-neutral" world, these are the trade-offs we necessarily face. People always want easy solutions, but with government spending this much, the money has to come out of someone's pocket! If you don't like the taxes, then vote for politicians who will spend less of your money.

Glittering in a case at Koerber's Fine Jewelry in New Albany, the $2,600 diamond pendant is something that store owner Felecia Koerber worries will be harder to sell if Gov. Mitch Daniels' idea to raise the state's sales tax becomes law.

The Hearts on Fire pendant would cost a buyer $2,756 today -- once Indiana's 6 percent sales tax is tacked onto the price. But if the tax increases to 7 percent as Daniels proposes, the pendant would cost $2,782. Is the difference enough to make a customer drive to Kentucky or Ohio, where the sales tax is 6 percent, or buy from a competitor on the Internet? Maybe, Koerber says.

"For a lot of people, it would just be the principle of it," she said. "There are very few consumers out there who can just pay whatever. Everyone is conscious on the price point."

But Gus Vissing, owner of Vissing Dodge in Jeffersonville, said he thinks the sales-tax increase is a good idea because Daniels wants to use the money to cut homeowners' property-tax bills by about a third. That would put more money in the pockets of potential customers, he said.

"Property owners buy cars more often than non-property owners," Vissing said. "And they need a reduction in those taxes."

With a 7 percent sales tax, Indiana would join Mississippi, New Jersey, Rhode Island and Tennessee as states having the nation's highest sales-tax rate, according to the Federation of Tax Administrators. However, some states -- Indiana neighbors Ohio and Illinois, among them -- allow local sales taxes in addition to the 6 percent state rate.

At the end of the day, we know the qualitative impact of a tax increase, but we don't know, quantitatively, how much effect it would have.

Notice, also, that both examples are for big-ticket items. Even with larger purchases, a 1% increase only bumps up the price modestly.

But beyond the economics, psychology and marketing come into play.

President Michael Dalby is crafting a survey to send to members to gauge their response to property- and sales-tax proposals, including some ideas to raise the sales tax even higher to eventually eliminate property taxes.

"Our gut feeling is that they might be able to hang with a 1 percentage point increase," Dalby said. "But start talking 2 percent or more and it starts to get a little more troubling."

John Fischer, director of Corridors of Opportunity in Louisville, a city initiative to expand neighborhood retail businesses, thinks even 1 percentage point could make a difference.

Many Louisville residents with few options for shopping in their own neighborhoods cross the bridge to Indiana to buy everyday goods such as groceries, Fischer said, as well as big-ticket items like cars. That would likely end if the Indiana sales tax increased to 7 percent, he said.

"I don't know whether it would be people doing the hard math or not," Fisher said. "It may just be psychological."


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