By Evansville Courier & Press staff and wire reports
NDIANAPOLIS - Property taxes in Indiana could be eliminated if the state's sales tax was increased from 6 percent to 13.2 percent or by raising the individual income tax from 3.4 percent to 9 percent, a property tax reform panel was told Monday.
Each of the options could raise the $6.2 billion that property taxes are bringing in this year to pay for local governments and schools, according to an analysis the Legislative Services Agency presented to the Commission on State Tax and Financing Policy.
The panel of lawmakers and outside tax experts is exploring ways of reducing local government's reliance on property taxes, and may have recommendations for the Legislature to consider as early as its organization day, Nov. 20.
A variety of factors is expected to increase property taxes on homeowners 24 percent on average statewide this year. Lawmakers allocated $300 million in property tax relief to homeowners, which is expected to lower the average increase to about 8 percent. They also gave counties the option of increasing local income taxes to reduce property taxes, but only eight of the state's 92 counties so far have opted to do that.
Legislative Services Agency analyst Diane Powers told the group eliminating property taxes was "no easy task." The two biggest sources of state funding are sales taxes and individual income taxes, so the agency looked to those as possible pools of replacement revenue for property taxes.
Powers said lawmakers could cut property taxes in half if they increased the flat 3.4 percent individual income tax rate by an additional 2.6 percent, making the rate 6 percent. To replace property tax levies completely, the income tax rate would have to be raised by 5.6 percent for a new rate of 9 percent. The 6 percent sales tax rate could be raised to 9.5 percent to cut property taxes in half, or to 13.2 percent to eliminate them, she said.
Another option would be to raise the sales tax rate to 11.1 percent and apply the sales tax to all services except medical ones. Most services are exempt from the Indiana sales tax.
Commission chairman Sen. Luke Kenley, R-Noblesville, said it was one thing to talk about eliminating property taxes, but another to actually do it.
"The purpose of this commission is to find real answers to real problems and measure factually whether we can get there or not," he said.
The commission's hearings take place as the Indiana Department of Local Government Finance, or DLGF, is reviewing disparities between residential reassessments, which went up significantly, and industrial and commercial reassessments, which hardly changed in some counties. DLGF commissioner Cheryl Musgrave has requested three sets of assessment data from all 92 counties. She said last week that while 95 percent of the data had been submitted, only one county - Pulaski in northwest Indiana - was fully compliant. Musgrave issued letters to counties, warning that all the data had to be turned in by Oct. 15, or the DLGF could withhold its approvals of budgets and bond issues.
Meanwhile, conservative activist and lobbyist Eric Miller testified at the Kenley tax commission Monday and presented a plan that calls for a state constitutional amendment abolishing property taxes, which he said could be replaced by raising sales and income taxes.
The earliest the amendment process could be completed is November 2010.
Bluffton Mayor Ted Ellis, a former president of the Indiana Association of Cities and Towns, told the commission that property taxes should retain a place in local funding because they are less susceptible to the volatility of economic cycles.
"Property taxes are as certain a revenue as there is," Ellis said. "That certainly gives us the opportunity to issue bonds at the lowest possible rate."