"The Legislature is back in Session. Hold onto your wallets and lock your doors!" For years, this was the old saying whenever the Legislature reconvened for the new year. Unfortunately, this year, there may be some truth to the saying. As we approach the beginning of January, and with it the 2-month session, the calls from the Governor for a tax increase are getting louder and louder.
There is little doubt that the State is facing some serious fiscal problems. The impact of the Recession, which hit Indiana sooner than other states, combined with the global economic downturn following the September 11th terrorist attacks, has been extremely painful for the State treasury. The once mighty surplus, which stood at over 2 Billion dollars just two years ago, is now all but gone. In its place are mounting monthly deficits which threaten to put the State in a position where it can no longer meet its obligations.
In addition to the budget shortfall, the State must finally deal with the long-delayed property tax reassessment that is due to hit homeowner's mailboxes in the Spring of 2003. This reassessment is like no other in memory as a result of the Supreme Court's order that the State's former method of assessing property was unconstitutional. The Court found that businesses were paying a disproportionate share of property taxes. Our constitution says that all property must be assessed at a "uniform and equal rate". The Court said this wasn't happening, and that the rules had to change. Because of this finding, homeowners will pay a larger percentage of the overall property tax burden than in previous years. Current estimates are that this could mean an increase of up to 20% or more to residential property taxes.
Everyone, no matter their political persuasion, agrees that something must be done about these two problems. However, there is a significant difference of opinion as to what the answer should be.
Clearly, the Governor and Lt. Governor have decided that a major tax increase is required. There are two proposals on the table: one to deal with the budget shortfall, and one to help cover the cost of reassessment to homeowners.
The Budget Plan is known as the O'Bannon-Kernan Balanced Budget Plan. It proposes that the State raise taxes by about $700 million for the current budget cycle, and leave the State with almost $1 billion in combined balances and reserves (ie, a surplus) on June 30, 2003. Doing the math, that means they believe we would have a surplus of $300 million by that date if we raised no taxes at all!
The plan includes five different tax/fee increases (increase cigarette tax $.50 per pack; increase gaming tax admissions tax by $2.00; various fee increases; suspension of homeowner income tax deduction; suspension of the business add-back deduction; and suspension of personal property tax credit in 2004), spending delays for K-12 public schools and higher education, and various other internal measures, including some spending cuts. The plan will raise income taxes on individual homeowners and businesses as a result of the elimination of the above-noted tax credits.
Many of our Republican leaders in the Legislature believe that if the Governor manages the Budget through the use of dedicated funds and spending cuts, the State can move through the current budget cycle without reducing funding for either education or health care, and most importantly, without raising taxes!! After all, the State has been spending at three times the rate of inflation every year that the O'Bannon administration has been in office. If we stop these uncontrolled spending habits, and finally manage the Budget with fiscal restraint, we can get through this budget crisis without burdening our taxpayers with even more taxes.
The issue of the reassessment problem is a little different. Clearly, if the State is going to help homeowners, we will have to find some additional money to do it. However, raising taxes this upcoming Session, when we don't know what the actual impact of the reassessment will be upon homeowners, is premature.
The Governor says we have to raise taxes now, and has brought forward the O'Bannon-Kernan 21st Century Tax Plan. The plan would raise sales taxes from 5% to 6%; raise income taxes from a 3.4% rate to either a 3.9% rate or a 4.4% rate, depending on your family's income; and create a brand new business franchise tax. In fairness, however, there are proposals to reduce property taxes, though only half of Indiana's homeowners would see the reduction. The plan would cut the school general fund property tax by 50%; increase the homestead credit; eliminate the inventory tax; and remove welfare levys from the county budgets.
The goal of this plan is to keep the property taxes of homeowners from going up. That's right: the net effect of all these new taxes will simply keep you from having a property tax increase! And then, only for about half of Hoosier homeowners. In addition, the plan would rake in far more money than actually needed to take care of the property tax increases. In anyone's language, that makes it excessive.
I give the Governor credit for proposing a bold plan. However, I disagree with the timing of the proposal, as well as with its size and scope. We can afford to wait and see the actual impact of the Reassessment before going down the road of permanent and sweeping new taxes. Let's see how much we really have to raise to help homeowners, and then raise only enough revenue to do so. Lets tap other funds available to the State before we raise our taxes, such as the Tobacco Settlement Fund, which brings in $160 million per year, and is currently being spent for the most part on smoking abatement programs. Lets make sure that we are running the State efficiently (which has not been the case in the past), and that we have explored every other avenue before burdening our citizens with yet more taxes.
Eventually, we will have to come together in a bi-partisan manner to find a solution. However, rushing in with major tax increases at this time is premature, and would have negative impact upon the pocketbooks of Hoosier citizens at a time when they can least afford it.