Governor Mitch Daniels of Indiana finally got the property tax reforms he wanted. The central components of the plan, signed by the Governor on Wednesday, cap property taxes at 1% of the value of a home, 2% of the value of rental property, and 3% of the value of business property.
The revenue loss to government will in large part be offset by a variety of tax increases, meaning the plan is actually more of a tax "swap" than a tax "cut". The sales tax is raised from 6% to 7% by the bill, and most localities can be expected to raise their flat-rate income taxes to help compensate for the property tax reductions.
Reducing one tax (the property tax) and replacing the revenue with a more regressive tax (an increased sales tax) can often mean that low-income people really face a tax hike rather than a cut. Or, if the tax increases are not enough to replace the lost revenue, this tax "reform" could result in a loss of funding for state and local public services. "Swapping" lower property taxes for higher sales taxes is not a fair deal for working families.
As discussed in a previous Digest, earlier versions of the bill contained modest protections for low-income taxpayers, including an expansion of the earned income tax credit (EITC) and some relief for renters. The final version of the bill did expand and make permanent the EITC, as planned, though the relief to renters was scaled back to a meager 20% of the original proposal.
Under this bill, the state now assumes responsibility for funding a variety of programs previously handled by local governments. Even combining this with the prospect of local income tax increases, however, some local governments are already preparing for budget shortfalls.
A better policy would provide tax relief in a more targeted way (i.e. based on one's income) and would be much less costly. The legislature did pass a constitutional amendment that would move in this direction, but under the state's ratification rules this measure must be approved again by the next legislature before it's put to the voters. But even this plan, while it has the right idea, has some flaws that are outlined in an earlier Digest article.