June 2001
INDIANA'S TAX STRUCTURE IS OUT OF BALANCE
In preparation for a seminar scheduled for the near future, the Plymouth Chamber invited State Senator Bill Alexa to review Indiana's tax structure plans and its possible impact.
Tax experts agree that government should review its tax system at least every ten to fifteen years. The last time Indiana reformed its property, sales and income tax structure was in 1973. Over the years, our tax structure has grown out of balance. After much discussion, Governor O'Bannon is considering a fall special session for the General Assembly to address comprehensive tax reform.
Why Restructure?
Why should we restructure taxes now? There are several reasons to tackle these very complex issues at this time. First, the court-ordered property tax reassessment is currently underway and the results of that reassessment will show up in mailboxes in 2003. Without property tax reductions that mitigate reassessment's impact, the increase for residential taxpayers will be substantial. Assuming the Shelter Allowance holds up to a court challenge, the statewide average increase on residential properties will be 7%. Without the Shelter Allowance, the average increase could be more than 30%.
A complicated, inequitable and antiquated corporate tax system is the second reason to restructure taxes. The current tax code is not conducive to economic growth and in many ways acts as a barrier to economic investment in Indiana. Our current tax structure worked well in the twentieth century, but it is totally inappropriate to allow us to compete successfully in today's global economy or to carry us into the 21st century.
During the past three years, the Governor and the General Assembly granted $1.4 billion in various tax cuts, creating a revenue and expenditure deficit. This structural crisis is the third reason to restructure taxes now. The first group of tax cuts includes property tax reductions totaling approximately $400 million per year. Because property taxes fund local government and schools, this lost revenue must be reimbursed to local government and schools. This creates a growing expenditure in the state budget each and every year.
The second group includes tax cuts that directly reduce the revenue flow to the state by approximately $300 million per year, primarily in the Individual Income Tax category. All of these tax reductions were implemented without raising one penny of replacement revenue. The state paid for these cuts from the budget surplus - politically expedient, perhaps, but irresponsible - and now the structural deficit must be repaired.
A Plan for the Future
During last session, four members of the Senate developed a bipartisan proposal for consideration during the needed debate on tax reform. There are several parts to this revenue neutral proposal - each one important and each one dependent upon the other. The proposal is an attempt by myself, Senator Vi Simpson, Senator Lindel Hume, and Senator Bob Meeks to set out some ideas for discussion - and it is just that - a proposal.
Some of the options for comprehensive tax restructuring contained in the proposal include:
(1) Removing the school general and transportation funds and the welfare levies from the property tax, a $2.374 billion tax cut. Together these two taxes account for about one-third of all property taxes.
(2) Replacing property tax cuts with an increase in sales tax combined with a repeal of the Property Tax Replacement Credit and other revenue options.
(3) Eliminating taxes on inventory, personal property, and gross business income that impede economic investment in Indiana and replacing those cuts with alternative business taxes based upon profits and/or worth.
(4) Changing Indiana's Individual Income tax by calculating state income tax as a percentage of a taxpayer's federal income tax liability, making it fairer and simpler.
Changes like these would significantly cut property taxes for both individual taxpayers and businesses. They would also promote equity and fairness in the tax code, and simplify Indiana's tax structure. Most importantly, these changes would remove from the tax code barriers to economic growth and would promote economic investment.
Engaging in discussions that lead to comprehensive tax reform will be complicated, and the road will be filled with political potholes. Everyone must have a place at the table and participate in the discussion. It is not a clichè to say, however, that the economic future of Indiana will depend upon the courage shown by the Governor and the General Assembly during the next few months as we embark upon this important task together.
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