Last issue, I discussed the fiscal crisis currently confronting our state, and tried to explain how we got into this mess. This issue, I promised to provide some of the answers that are being discussed. Indeed, since I last wrote to you, the Governor has unveiled his long-awaited proposal to deal with both the current fiscal shortfalls and the upcoming property tax reassessment. Lets discuss just what the Governor has proposed.
Governor O'Bannon asked Lt. Governor Kernan to put together a task force this summer to explore how to deal with the State's cash shortfall and the upcoming property tax reassessment that threatens to increase property taxes by as much as 20% on homeowners. The Lieutenant Governor is running for Governor in 2004, and to be honest, if things aren't better by then, he fears his chances for election will be damaged. Fair or not, those in charge can take the credit in the good times, but also have to take the blame when things get tough. That is the burden of leadership.
The Lieutenant Governor has therefore decided to go for broke, and propose a major transformation of the Indiana tax code. The most striking proposals are to reduce the reliance of local government on property taxes. Among the proposals is to take the general fund levy of our schools (which is by far the largest part of their funding source), to take the obligation for welfare payments off the backs of local governments, and to eliminate the inventory tax. All of these ideas have been proposed for a number of years by the Republican controlled Senate, but have failed to get anywhere in the Democrat controlled House, nor has the Governor shown any interest in the idea of property tax reform either. However, necessity is the mother of invention, and these tough fiscal times have caused the Governor to take another look at property tax reform.
Property taxes are the most unfair, and the most antiquated, of all taxes. They were created when one's wealth was determined by the amount of land you owned, and how much livestock you had on it. Obviously, our economic system has changed dramatically from the time when we were an agrarian economy, yet our tax structure has not changed to reflect that fact.
Another unfair aspect of property taxes is that no matter what your income, no matter how bad a year it might be, your property taxes never go down. The amount of your income taxes are proportionate to what you earn. If you've had less overtime this year, you pay less taxes as well. The sales taxes you pay are according to what you have decided to purchase. You buy fewer items this year, you pay less sales tax. But not property taxes, which seem to steadily increase year after year, no matter what the economic circumstances. This is especially tough on senior citizens, who often are living on fixed incomes, and cannot absorb the ever-increasing portion of their budget that property taxes represent.
The Governor's proposal would shift a portion of the property tax burden we now pay to other taxes. He would, specifically propose the following in return for lowering property taxes:
•Increase sales taxes from 5% to 6%.
•Increase the personal income tax from a flat tax of 3.4% to a progressive system where the first $90,000 would be taxed at 3.9%, with all income greater than $90,000 being taxed at 4.4%.
Businesses would see the Corporate Gross Income tax eliminated, as well as the previously mentioned inventory tax, in return for a new franchise business tax, as well as an increase in the Supplemental Net Income Tax.
There would also be some economic development initiatives, such as research and development tax credits.
What is amazing about this proposal is that with all of this change in the tax code and the new revenue we would be paying, none of this money would apparently go toward the current shortfall in state funding. All of this would be aimed at dealing with both the upcoming property tax reassessment, as well improving the state's dismal record of economic development. This means that unless the economy makes a dramatic turnaround, the State will either go broke or we will have to come up with one of two solutions: drastically cut State programs, including education, or increase funding.
I do not advocate raising people's taxes if we can find other ways to deal with the State's budget shortfall. One way is to put a cap on all future state spending. We have been spending at a shamefully high level (approximately three times the rate of inflation), and this needs to stop now. Another way is to better manage the budget, which has been, in my opinion, badly mismanaged by the current Administration.
Since the Governor does not want to cut funding, and has previously stated that we need more revenue to deal with the budget shortfall, I suspect he will quietly be asking the Legislature to increase gambling taxes on the Riverboats. The payback for increased gaming taxes is to allow the Riverboats to dock full time rather than "sail" every two hours as they currently do. This is what the Riverboats want, since they claim that in Lake County, they are losing business to Illinois, which has recently allowed its Boats to dock full time, thereby making it more attractive to gamblers.
This addiction to gambling taxes is a Catch-22. The more the State relies upon them, the more we need to support gambling to make sure we keep the dollars flowing to the State coffers. Yet there is a good argument that the more we promote gambling, the greater the number of individuals and their families who will be financially hurt by the process. You see, there are no true winners at the gaming tables, except the casinos. This is why the Governor would rather not be the one to propose even greater State reliance upon gambling, even though I believe he personally wants to see it occur.