Indiana's identity has been shaped by tax policy

In 1852, Indiana passed its first property tax levy to support local schools.

Since then, the state's tax structure has grown in scope as well as complexity. Many feel taxation has spun out of control, and state officials from the governor on down are working to reform Indiana's entire system of government.

In October, Gov. Mitch Daniels presented his plan to reform property taxes during a televised address. On Dec. 11, the Indiana Commission on Local Government Reform released a study calling for major adjustments in the governmental structure.

"I support the thrust of this very much," Daniels said of the report. "You want to know why property taxes are too high, here's the answer. You want to know how we're going to get property taxes down and keep them that way, here's the road map."

Throughout its history, taxation has been critical in shaping the identity of Indiana.

Currently, a mixture of sales tax, state personal income tax, state excise tax, corporate income tax and license fees support state government. Property tax is the primary funding stream of local government and schools.

"Throughout the 20th century and now into the 21st, taxation has been and continues to be, critical to the structures of wealth and opportunity in the United States," said Ajay K. Mehrota, associate professor of law at Indiana University.

THE EARLY DAYS

What we now know as Indiana was part of the Northwest Territory - which included Ohio, Illinois, Michigan, Wisconsin and part of Minnesota - until 1809. On June 29, 1816, Indiana adopted its first constitution and was admitted to the union as the 19th state on Dec. 11, 1816.

In its early days, Indiana sacrificed some of its assets to benefit the state as a whole and, eventually, the entire region.

"An early example was the 1821 act creating an ambitious state highway system: two dozen roads to link all parts of Indiana to the new capital at Indianapolis, paid for by the sale of public lands. The law's purpose was both democratic and economic," wrote David J. Bodenhamer and Randall T. Shepard in their book, "The History of Indiana Law: Law Society & Politics in the Midwest."

In 1880, the state's population had reached nearly 2 million and the ensuing 20 years would see the creation of numerous state agencies. Examination boards were created, licensing boards, a natural resource conservation agency and social health and welfare agencies.

Transportation would continue to be a central focus of the state, which officially adopted the motto "The Crossroads of America" in 1937. In 1923, a state gasoline tax of 2 cents per gallon was introduced, helping to fund the State Highway Commission.

Now, many citizens feel, Indiana must eliminate government positions to continue building infrastructure to attract investment.

"Remove the (taxing) authority of any office or entity who historically has little or no oversight or transparency," said Indianapolis resident Melyssa Donaghy. "Townships, libraries, airports, etcetera, spend an awful lot of money that is approved with little or no oversight or even public notice."

STATE REORGANIZED

In 1933, Indiana government was reorganized with all state agencies grouped into departments while the power of the governor's office was strengthened. The same year, the General Assembly instituted the personal income tax, which would serve as the state's principal source of income until 1963.

Perhaps the greatest change in Indiana tax policy came in 1947 when the Department of Revenue was created to consolidate the administration of major tax laws. Today, the department collects the state individual income, hazardous waste land disposal, corporate income, alcoholic beverage, retail sales, motor fuel, commercial motor vehicle, inheritance, petroleum severance and cigarette taxes, as well as various local taxes for counties, including food and beverage, admissions, innkeepers', economic development, income, local option income and auto rental excise taxes. It administers the financial institutions tax, the solid waste management fee, the underground tank storage fee, aircraft registration and dealer fees, employment agency fees and the replacement tire fee.

"One of the major problems with our present local government taxing system is the fact that too many units of government have taxing authority," said former state senator Morris Mills. "There is no way of prioritizing local spending. Each unit with taxing authority - and there may be five or six in any given area - rightly thinks they are performing an essential and-or worthy service, thus levy taxes accordingly."

Since the switch to a market-based system of property value assessment in 2006, the Indiana Department of Local Government Finance has requested a new set of data from county assessors in order to set tax rates. The DLGF has even threatened sanctions against assessors who do not submit the required information in a timely manner.

"The end goal is to ensure that no Hoosier is paying more than their fair share of property taxes," said DLGF Executive Director Cheryl Musgrave. "That can only be accomplished when policymakers can make informed decisions based on complete, accurate data."

PROPERTY TAX DELAYS

Depending on whom you ask, either the state or the local governments are to blame for property tax billing delays. Others blame outside influence for corrupting the political process.

"Property tax assessments are being manipulated by interest groups," said Anderson landlord Herb O'Neill, who saw the property taxes on one property rise 250 percent in five years. "The best thing we could possibly do is shift this into sales tax and you pay, right then. It's supposed to be a level playing field, that's my gripe."

State Rep. Jack Lutz, R-District 36, insists that something needs to change. Examining the current structure for inefficiencies is as good a place as any to start, he said.

"The roles of state and local governments are adapting to deliver services in new and more efficient ways. I look forward to a thorough review and debate of the plan in the coming weeks," Lutz said in a statement."

The state tax structure changed again in 1963 with the introduction of two new taxes to supplement the gross income tax. In response to recession, the individual income tax and sales tax increased from 1.9 percent to 3.4 percent between 1980 and 1985.

"I would like to state that we have boards that have taxing authority that are not elected by the people," said Al Hornaday, Brown Township (Morgan County) Trustee. "They are appointed and just do not have the insight into how many different items our tax dollars support. They have tunnel vision on their projects."

But not everyone agrees that reducing local government is the way to cure what ails Indiana's tax system. The loss of industrial tax base has certainly damaged the bottom lines of local units and the sub-prime lending crisis has served only to exacerbate the situation.

Madison County Commissioner Paul Wilson, D-South District, described the commission's proposal as "fairly monumental." He said one of the advantages of county government is that it creates continuity through staggered elections, rather than turning over department heads with each new administration.

"It almost makes county government mirror city government," Wilson said of the report. "A lot of those offices were established by the Indiana Constitution, which has been functioning for 156 years and I think part of the vision had to do with checks and balances."