By Tim Vandennack, Truth Staff
tvandenack@etruth.com
GOSHEN -- Sandra Murphy isn't too worried if lawmakers increase the state sales tax rate to help rein in property taxes.
"It's all right with me. Everyone across the board then pays," said the Elkhart retiree, emerging from Wal-Mart here after purchasing a pair of sweat pants. "If you buy something you're going to pay."
Gary Elliott, however, a used car salesman at USA-1 Auto Sales in Elkhart, has reservations. While hiking the sales tax from 6 percent to 7 percent, as recently pitched by Gov. Mitch Daniels, might have a light impact on many retail transactions, it would place a particular burden on those making big-ticket buys, like autos.
"It's just going to raise their payment, put a hardship on people," he said.
Debate rages on how best to fix Indiana's system of property taxation, target of ire by many homeowners following spikes of 24 percent, on average, in their 2007 property tax bills. Through it all, though, a constant in the varied plans to reform the system seems to be calls for a sales tax hike to allow for a corresponding dip in property taxes.
"There's no good tax but there are less-bad ones and the sales tax seems to be that type to the general public," said State Sen. Joe Zakas, R-Granger.
Many, like Murphy, cite the seeming equitable nature of the tax, the fact that everyone is subject to it without exception.
Nonetheless, such sentiment hardly means a sales tax increase is inevitable in the next legislative session, where property tax debate is expected to loom large.
"The only foregone conclusion is that the Legislature is going to meet in January," said Kyle Hannon, vice president of public policy for the Greater Elkhart Chamber of Commerce. "Then who knows."
Still, lawmakers are giving such change increasing credence, as evidenced by the governor's plan.
The trade-off of a 1-percentage-point sales tax hike for property tax relief "is a good one," Daniels said during a stop in Elkhart late last month to tout his plan. He had also considered a jump in the state's income tax rate in crafting his plan, but feared that sort of change would have harmed Indiana's economic growth prospects.
In addition to the sales tax hike, which would generate $928 million per year to start with, Daniels' proposal calls for caps on property taxes for homeowners, landlords and businesses and an end to the funding of school operating costs via property taxes.
Property Tax Replacement Credit funds would be redirected to help cover the school costs, capital projects would be subject to voter referendum as a means of checking excess public spending and county assessors would be appointed instead of elected.
'Drips and drabs'
One of the selling points for hiking the sales tax rate, increased from 5 to 6 percent in 2002 and from 4 percent to 5 percent in 1983, is the sense that it is not discriminatory. Any and all shoppers would have to pay it, not just one segment of the population, like homeowners or business operators.
"I think it's a fair way," said Murphy, the Wal-Mart shopper.
Moreover, Larry DeBoer, a Purdue University public policy expert, notes the perceived inobtrusiveness of the tax. The tax on a $10 purchase would increase 10 cents to 70 cents under Daniels' plan while that on a $100 purchase would go up $1 to $7.
"People seem to like the idea of paying (taxes) in little drips and drabs," he said, contrasting that with the larger installments typically necessary to cover property tax bills.
Though no cause for cheer, some say a 1-percentage-point increase is small enough that it shouldn't drag down sales, particularly since it would impact all Indiana retailers equally.
Elliott, whose lot typically sells autos in the $8,000 to $18,000 range, suspects most car buyers would grit their teeth and manage. The 1-percent increase would increase the sales tax on an $8,000 car from $480 to $560 and on an $18,000 vehicle from $1,080 to $1,260.
Gary Johnson, an auto salesman down the road from Elliott at Lochmandy Motors, says any hike over 1 percent "would hurt." He trembled at the notion of a 7-point spike to 13 percent, mentioned by lawmakers only to illustrate the sort of sales tax hike that would be necessary to fully do away with property taxes.
Otherwise, shoppers typically internalize hikes in sales taxes, interest rates and gas prices and, after an initial slowdown in their buying, resume their spending patterns, he said. Even so, he proposes taxing groceries at the normal 6-percent rate -- unprepared edibles currently aren't taxed -- forestalling the need for any hike at all.
Even fears of retail leakage to Michigan, a short jaunt away, aren't too strong. The sales tax rate in the neighboring state is 6 percent.
Hannon, the Elkhart chamber official, thinks gasoline prices, if nothing else, would keep people from getting in their cars to shop in Michigan. Buying $200 in goods there if the rate were hiked here would result in a savings of just $2, an amount that would likely be wiped out by gas costs, he said.
Meanwhile, Indiana residents buying cars in Michigan would still have to make up the difference between the Michigan sales tax rate and the Indiana one, if it's increased, when titling their new vehicles here, according to Indiana Bureau of Motor Vehicles spokesman Dennis Rosebrough.
A regressive tax
Despite it all, plenty of question marks persist.
Dave Foutz, a member of the Elkhart County Council and an economics teacher at Elkhart Memorial High School, alludes to the regressive nature of the sales tax. Because it is the same for everybody, regardless of income level, it would take a larger relative chunk out of the pocketbook of lower income people compared to the wealthy.
The sales tax "is a bigger bite when someone is making only $25,000 or $30,000 a year as opposed to someone who makes $75,000 or $100,000," he said.
Beyond that, some want to be sure that raising the sales tax in conjunction with whatever other changes truly results in property tax reform.
"If I'm not going to pay on the house but pay on (retail purchases), what's the difference?" said Jill Stutsman of Goshen, loading up her van with several jumbo-sized bags of water softening salt after a day of shopping. It's not true reform, she added, if you just reduce one tax and raise another.
With that in mind, Zakas, the state senator, said the impact of any sales tax hike must be thoroughly analyzed. He's even game for consideration of a plan that would let locales implement their own sales taxes, a proposal decried by some because of the potential for causing retail leakage between Indiana counties with differing rates.
"I think there's going to be a lot of convincing needed in order for people to feel comfortable that (extra sales tax revenue) will be for property tax replacement," he said.
Likewise, Hannon said any fix involving a sales tax hike must keep the Indiana economy on an even keel.
"It's a balance -- which way is going to keep the economy chugging?" he said.