Proceed on tax reform, but with caution

Scott Tibbs
Published by the Hoosier Project, 10-21-2001

Proceed on tax reform, but with caution

Indiana Governor Frank O'Bannon has put forth his proposal for restructuring Indiana's tax system. While changes to the tax system need to be made, Hoosiers should look carefully at this plan as it moves through the Legislature.

Lieutenant Governor Joe Kernan has been given the assignment of promoting the tax reform plan, and many have legitimate questions as to why he was chosen for this. It would be logical to assume that the announcement and promotion of such a major plan should go through the Governor, not the Lieutenant Governor. After all, it is O'Bannon, not Kernan, who would be signing the plan, if passed by the Legislature, into law, and it is O'Bannon that was elected by the majority of Hoosier voters just one year ago. It appears that placing Kernan at the forefront of promoting the plan is a method to increase his name identification with Hoosier voters and give him an accomplishment to run on in his widely expected campaign for Governor in 2004.

It is unfortunate that the O'Bannon administration would take such an important moment in Indiana history and exploit it for partisan political purposes. A property tax reassessment, ordered by the courts after Indiana's current method of property assessment was found unconstitutional, effects the lives of Hoosiers in too serious a way for O'Bannon and Kernan to be using it as a taxpayer-financed campaign commercial.

The plan itself has a few good points, but Hoosiers should be wary of others. This plan takes the step of finally eliminating the inventory tax. This tax discourages economic development in Indiana. Multiple candidates pointed out in the 2000 elections that Indiana is geographically positioned to be the warehousing and distribution center for the Midwest, which would greatly benefit our economy, especially in these lean times. The inventory tax discourages business from taking advantage of this opportunity. It is also a good idea to reduce reliance on the property tax, which is a repressive and regressive tax. A tax system that relies on a fixed levy that will be collected regardless of ability to pay is an inherently unfair system.

While the property tax restructuring is aimed at reducing the impact of the property tax hike many Hoosiers face, it still leaves people in older homes out in the cold. These taxpayers will still face a significant property tax hike, which must be addressed. Many senior citizens live in older homes they have long since paid off, but also live on a fixed income and have difficulty paying their property taxes. The impact of tax reassessment on these Hoosiers must be addressed before the plan is put into action.

Kernan has claimed that this tax restructuring is "revenue neutral", but his claim is not true. Hoosiers should be aware that this plan represents a net tax increase of $300 million a year, which is awfully convenient given the budgetary shortfall O'Bannon has presided over, estimated at between $400 and $600 million.

The plan also implements an unprecedented graduated income tax in Indiana. While the idea of a flat tax has been pushed to the back burner nationally, it was a hot topic a few years ago, and even congressional Democrats like Richard Gephardt, who balk at a completely flat tax, have proposed making the federal income tax system "flatter". Even if we are taking baby steps, we are moving forward nationally away from punishing people for earning more money. Indiana, under O'Bannon and Kernan, is moving backward.

O'Bannon also wants to raise the cigarette tax. This move would be a politically correct way to place the burden of Indiana's fiscal irresponsibility on a single industry, but such a tax would likely fall disproportionally on Indiana's poor. It could also have an impact on some businesses on the Indiana-Michigan border, which benefit from Michigan's significantly higher tobacco taxes when Michigan residents travel to Indiana to buy cigarettes.

House Minority Leader Brian Bosma (R-Indianapolis) and State Senator Steve Johnson (R-Kokomo) also questioned the lack of focus on curbing state spending. The Indianapolis Star reported on August 28 that state spending has increased by 6.6% every year since 1995, at a time when inflation was well below that. If O'Bannon and Kernan (as well as House Speaker John Gregg) are serious about solving Indiana's severe budget crunch, they must look seriously at where the state can reduce spending.

With all 100 House members and 25 of 50 Senators facing re-election next year, this could easily degenerate into partisan political bickering and positioning for November. Given this scenario it is unfortunate that this plan was not unveiled and debated in this year's long session, in an off year three years away from the next Governor's race. Our representatives in Indianapolis missed a golden opportunity by not addressing tax reform early this year, especially since it was painfully obvious that reform was needed long before the session started.

Republican legislators have said they are open to the Democratic Governor's plan, promising only a debate on the details of it. Hoosiers should watch this debate carefully, because the end results of it will impact their wallet significantly.