EDITORIAL: State tax system needs thorough review before more tax cuts occur

A study by the respected credit-rating agency Standard & Poor’s concluded that as the richest Americans have gotten richer during the past 30 years, states have seen a slowdown in their revenue streams to fund schools, road construction and public services. The impact of the income disparity hits Indiana particularly hard. The short-sighted nature of the state’s taxing decisions has intensified the problem.

In 2008, Indiana lawmakers raised the sales tax from 6 to 7 percent. Revenue from that tax increase was intended to offset the lost revenue from the implementation of property tax caps, now written into the Indiana constitution. Unlike property taxes, the sales tax affects the wealthy to a lesser degree than middle- or low-income people, who use a larger percentage of their paychecks to buy goods and services.

The changes seem to reveal priorities. Indiana’s 7-percent sales tax is the second-highest in America, trailing only California’s 7.5 percent and tied with four other states. By contrast, state lawmakers have cut, and continue to reduce, corporate taxes.

Besides the effect the high sales tax has on work-a-day Hoosiers, it also created an unpredictable fiscal atmosphere for cities and towns, schools and universities that now count on those funds. Because a sales tax is tied to consumer spending, the revenues it generates plunge when the economy falters. Hoosiers and Americans overall, as The Associated Press report last Monday detailed, have grown more reluctant to spend as median household incomes have remained stagnant for the past 30 years. Thus, funds for education, infrastructure and social services get scarcer. That is the current situation.

“[The sales tax is] by far the largest source of revenue for the state, and it’s so economically sensitive that if the economy’s not doing well, it shows up pretty quickly in the state’s revenue,” John Ketzenberger, president of the Indiana Fiscal Policy Institute, told The AP.

Is the state’s economy doing well? Gov. Mike Pence told the Times of Northwest Indiana last month the state’s economy is “on the move” and a “success story.” Wouldn’t that signal robust sales tax revenues?

In reality, the state economy is doing well, for some. The Standard & Poor’s report showed that since 1979, the gap has been widening between the wealthiest Americans and the rest of the country. The affluent, S&P noted, tend to save a larger percentage of their income and spend it on untaxed services, so states won’t experience a significant boost in revenues when incomes of the well-to-do grow.

Indiana’s average annual tax revenue growth has fallen every decade since ‘79. That growth dropped to 4.35 percent between 2000 and 2009, and then to 3.24 percent as property tax caps hit. Indiana’s leaders see that as a desirable trend. In fact, a legislative summer study commission is eyeing the possibility of eliminating the business property tax, which would further cut revenue to cities. Luke Kenley, the Republican chairman of the Senate Appropriations Committee, told the commission to instead study the entire tax system.

Let’s hope they follow Kenley’s directive.