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From Governing’s
Except in Indiana. That state, with a little impetus from the courts, has done more than talk. It has accomplished a substantial rewriting of its tax code. One might argue that there was little choice, once the Indiana Supreme Court mandated a new property assessment system. The court said assessments certified by the State Tax Board had been unrelated to real property values. A new process was mandated, based on actual market value, and the legislature approved one, to begin collection in 2003. But in doing that, legislators created a serious political problem. Assessments were certain to rise with the new system. If rates remained stable, property owners would face an increase in their tax bills averaging 33 percent.
Business property taxes would skyrocket, too, and there were fears that some companies might simply leave the state. “We were off the economic development recruiting list because nobody knew what the tax would be,” says Patrick J. Kiely, president of the Indiana Manufacturers Association. Many businesses were already dissatisfied with the state’s taxes on tangible supplies, inventory and gross receipts, because these sometimes resulted in liability even if a firm had no net income during a given year. A hefty property tax boost, it was said, might be the last straw. Lieutenant Governor Joe Kernan pulled together a nonpartisan group to study the system and make recommendations for comprehensive change. The group, comprised of six professionals from outside government, met for five months and released a draft plan in preparation for the 2002 legislative session. It recommended property tax relief through a shift in school funding from local to state sources; elimination of inventory and gross receipts taxes; increasing the sales tax; and a move to a graduated tax on personal income, replacing the flat-rate tax. The commission’s recommendations were the backbone of the reform package that passed the legislature last June. Under the new rules, the state assumes 60 percent of the property tax burden, allowing a 12.8 percent drop in the average homeowner’s bill. In addition, the homestead exemption doubles from 10 percent to 20 percent of assessed value. The regressivity of the system has been reduced by an increase in the earned income tax credit. The state does not prepare a tax expenditure report, which would show the cost of forgone sales taxes. In-state experts say, though, that Indiana’s no better or worse than its neighbors, which means there’s room for improvement. As for businesses, the gross receipts tax was eliminated as of January 1 and the inventory tax is being phased out over the next few years. Although the main corporate income tax rate was raised from 7.75 percent to 8.5 percent to offset some of the other revenue losses, the research and development credit was doubled, and now stands at 10 percent. “Those things will provide a better tax climate for economic development,” says Bill Sheldrake, president of the Indiana Fiscal Policy Institute. Unfortunately, the legislature didn’t include an automatic review of the new credits in its plan. “I think a reassessment should happen in four or five years,” Sheldrake says, “but there’s nothing in statute.” To fill the rest of the hole left behind by the property and business tax cuts, the legislature voted to raise the cigarette tax by nearly 40 cents, to 55 cents per pack; change the formula for some gambling taxes; and raise the general sales tax a penny, to 6 percent. The graduated income tax proposal didn’t succeed. The package as a whole will increase state revenues by about $500 million a year, and it couldn’t come at a better time. Indiana’s revenues started to decline in 2001, and the trend continued last year. To help balance the 2003 budget, the state transferred money from its gaming funds and delayed $373 million in payments to K-12 and higher education. Despite the revenue increase, Indiana still faces a potential budget gap of $760 million for 2004 — about 7 percent of its general fund. Indiana’s Revenue Department has been a technological pioneer with its use of “2-D” barcodes, which allow the electronic transmission of data from paper returns and have cut processing costs by as much as 90 percent. Electronic options for individual income tax filing are popular; just 47 percent of returns are filed on paper, compared with 86 percent four years ago. But similar options for corporate taxes lag. The department has a data warehouse but hasn’t used it to aid auditing; the recent completion of an integrated tax information system may help reduce the current $630 million backlog in accounts receivable. The package that passed in Indiana can’t be used as a model for other states — for one thing, the court decision on property assessments created an urgency that would have been hard to get otherwise. Even so, the Hoosier experience suggests that genuine reform may be more possible than it sometimes seems — even amid all the pressures of economic decline and big budget deficits. “Indiana looked at the particular handicaps in its business tax climate and tried to address those,” Sheldrake sums up. “That’s appropriate behavior for any state.” Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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ver the past few months, the notion of tax reform has risen above the level of academic discourse and become part of the day-to-day discussion in much of the country. But in most places, that’s all it has been — discussion. Tax reform is to current American politics as the weather was to Mark Twain: Everybody talks about it; nobody does anything.