OPINION: Silly Indiana tax cut proposals

We are well into election season, so we are bombarded with talk of slashing taxes. Nearly all of this is electioneering nonsense that won’t come to pass.

There’s almost nothing new under the sun in the way of tax-and-spending policy, so almost every proposal will come with reams of examples to compare it to and plenty of data on the experiences of other states. One way to do this is to skim through some of the proposals that have been floated in recent weeks.

One proposal that has been making the rounds is to eliminate property taxes for Hoosiers who are over age 65 or have served 10 years in the military. Another proposal would freeze assessments at the purchase price of the home. These come from the Beckwith and Rainwater campaigns. These proposals are likely to be popular, at least in the Hicks household, where this would immediately eliminate property taxes on my home.

The authors of these proposals didn’t make any claims about the purpose. So, I can only speculate why such a cut would be structured. But I can draw some clear conclusions about what it might or might not do to the economy.

There’s nothing in that proposal that would grow population, employment, GDP or household incomes. In fact, population growth tends to cluster in high-tax places. In Indiana, the 10 counites with the highest effective property tax rates alone accounted for 27,105 new residents since 2020, a whopping 61.3 percent of the state’s entire population growth. The 10 counties with the lowest effective property tax rates saw only 878 new residents, or less than 2 percent of the state’s growth.

I know many readers will recoil at this challenge to a long-held notion that lower taxes cause growth. However, it is a cold, hard fact that both population and employment growth is positively correlated with tax rates on income and property.

In Indiana, a 1 percent increase in the average tax rate leads to a 2 percent increase in population growth. That is simple mathematics.

No one quite says, “That place has higher taxes; I want to move there.” Despite what many politicians appear to believe, though, households are sophisticated economic agents. Most families are capable of assessing tax rates and the quality and quantity of local public services. They look for the best fit of home, schools, safety, and traffic they can find. On average, they are moving to higher-tax places.

These are places where families judge themselves better off. If you live in a state where families are moving from low- to high-tax regions, your state is underinvesting in local amenities such as schools, parks, and public safety.

Indiana is such a state, and cutting taxes for elders and veterans would worsen the problem. Here’s why.

Indiana’s property taxes are budget-based. So, if the legislature excludes a particularly meritorious set of taxpayers—such as economics professors who are also retired soldiers—someone else pays that tax or services get cut.

So, if this tax proposal becomes law, my property taxes will drop by 100 percent, but my neighbors will all pay more. Probably a lot more.

Statewide, roughly 1 in 5 households would be excluded from property taxes in this scenario. Moreover, the value of housing stock owned by older Hoosiers is higher than that of younger families. So, this proposal could shift a third of property taxes to younger, poorer residents.

I say ‘could’ because some of those properties will be at the property tax caps. These caps make Indiana’s property tax rates among the lowest in the nation. So, in some communities, we would expect cuts to other local services. For every dollar lost to these cuts, about 42 cents will be funding for schools, with most of the remainder coming from the budgets of cities and counties.

That would mean less, perhaps much less, available money for fire protection, police, and parks. You know, the types of things families judge a community by when considering whether to relocate there.

And there’s the rub on all this.

Tax cuts will be welcomed by us old-timey veterans, but that will do precious little to influence household relocation. Indiana is already an older-than-average state that doesn’t charge income tax on military pay or retirement. Our challenge isn’t getting people like me to move here. Our challenge is getting young people—our children, grandchildren and their friends—to live here.

A tax cut on seniors and veterans will have two clear effects. It will result in higher taxes on younger families and reduce public spending on schools, parks, police and fire departments. There are other effects as well. If you suppose that action will benefit the state’s economy, or encourage more families to move here, I am sorry. You are daft.

Selective cuts in property taxes will also affect housing markets. This will be particularly true of a proposed assessment freeze. Older residents will be disinclined to relocate to lower-cost housing if they pay no property taxes.

California tried a version of this more than 40 years ago, and it has clobbered housing options for young people, strangled public services and helped destroy neighborhoods.

I could go on and on about this proposal, but I stop here to congratulate you. Because, if you made it this far, you’ve thought more about the effect of this tax proposal than its authors.

I would encourage everyone to ask folks who might support these tax cuts if they are fine making it harder for their kids and grandkids to build a life in Indiana. If they say no, send them this column.

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