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Give Indiana Farm Bureau credit. While some unhappy property taxpayers are harassing elected officials or staging protests with giant tea bags, the advocate for Indiana farm families has produced its own plan. It’s imperfect, but it adds to the much-needed debate over the state’s troubled property-tax system.
Farm Bureau recommends Indiana raise sales and income taxes to offset $2.1 billion that property taxes now generate. That would require boosting the sales-tax rate from 6 percent to 7 percent and the individual income-tax rate from 3.4 percent to 4.4 percent.
Under the proposal, the state would pick up all general-fund expenses for schools and relieve county government of the cost of child welfare and the courts. To counter the argument that sales- and income-tax revenues are not stable, Farm Bureau rightly proposes a rainy day fund for schools. If an economic downturn creates a shortfall in tax revenues, the money could be tapped to pay school salaries, insurance and utilities.
“This program gives relief to everyone,” said Farm Bureau President Don Villwock in announcing the plan. That’s certainly a strength of the proposal, but it must be weighed carefully. Individual taxpayers might find that the shift to sales and income taxes will ultimately cost them more. The sales-tax increase, for example, would lift Indiana’s rate above all neighboring states. That could have repercussions for some Indiana businesses, particularly those that sell high-ticket items, such as cars.
The proposed income-tax increase maintains the flat tax – which taxes both high- and low-income taxpayers at the same rate. For some upper-income homeowners, the break on property taxes could present a much greater windfall than the increase in income taxes. Low-income homeowners who now benefit from exemptions and credits could face a proportionately higher burden with the income-tax increase.
The Farm Bureau proposal also overlooks a primary factor in property tax rates: school construction costs. Rep. Jeff Espich, the Uniondale Republican, released a plan last spring that included a School Construction Income Tax. Such a tax would be adopted by a local school board and apply only to taxpayers within the school district boundaries.
“When we looked at the data, we found that over the last five years, 37 percent of property tax growth is due to school-construction debt,” Espich said at the time. “It’s the kind of tax growth that both hurts and antagonizes. As we looked at trying to solve the property tax problem, we realized if we don’t fix (school construction tax growth), we realized you aren’t going to solve any of it.”
Espich, whose district includes part of the Southwest Allen County Schools district, also pointed out that a study of individual income and assessed valuation showed there is less disparity within a district in income than in property value.
Like the Farm Bureau proposal, his plan is imperfect. Although it spreads the burden for construction costs, it could exacerbate current inequities in school buildings.
But both plans represent a more reasoned approach than what too many property tax critics have taken. Farm Bureau, which has historically opposed property taxes outright, even took the unprecedented step of changing its position on property-tax reform to craft the proposal released this week. A task force made the recommended change to delegates at a statewide meeting last month, urging them to trade property tax “elimination” for “reduction.”
The compromise the organization’s representatives made are the sort of compromises policymakers must be prepared to make as the debate continues. A legislative panel and Gov. Mitch Daniels’ tax reform commission are working on their own proposals, but ideas from groups like Farm Bureau are invaluable as a starting point.
