Larry DeBoer is professor of agricultural economics at Purdue University. His column appears in Indiana newspapers.
The headline read, “Hoosiers’ taxes rise as income goes down.” The story told of the Tax Foundation’s finding that Indiana taxes had increased from 8.4 percent of income in 2001 to 9.5 percent of income in 2011. Like many, I thought, “You've got to be kidding!”
Our Legislature has passed big tax reforms, we've voted for constitutional amendments, we've seen property tax cuts, income tax cuts, corporate tax cuts. And our tax burden has gone up? How?
The Tax Foundation crunched a lot of numbers to come up with its result. The numbers can’t be un-crunched exactly to figure them out, but let’s look at some of the data they used. In particular, let’s look at the Census Bureau’s State and Local Government Finance numbers (at www.census.gov/govs/local).
If tax collections rise faster than income, the tax burden as a percentage of income also will rise. According to the Tax Foundation, from 2001 to 2009 Indiana’s tax burden percentage rose from 8.4 percent to 10.0 percent. From 2009 to 2011 it fell back to 9.5 percent.
From 2002 to 2009 Indiana personal income rose by 22 percent. Property taxes and state income taxes also increased 22 percent. Those two taxes did not contribute to an increase in the tax burden percentage.
But sales taxes increased 63 percent. Indiana’s sales tax rate rose from 5 percent to 7 percent from 2002 to 2009. That’s a 40 percent rate increase.
While state income tax growth matched income growth between 2002 and 2009, local income taxes increased 59 percent. In 2002, 85 counties had local income taxes with an average rate of 1 percent. By 2009, 91 counties had the taxes, with an average rate of 1.4 percent. Many of these new taxes reduced property taxes, but some increased tax revenue.
With all this property tax reduction, why did property taxes rise as fast as income from 2002 to 2009? It might be borrowing for new construction. Property taxes for debt service are outside the tax controls. Those taxes rose 75 percent during the seven years, which offset a good bit of property tax relief.
Part of the reason for the rise in the tax burden percentage was the drop in income during the recession. Total income fell 3.2 percent in 2009, the very year the tax percentage was highest.
The Tax Foundation says Indiana’s tax burden, measured in dollars, began to drop in 2009, and the tax burden percentage decreased in 2010 and 2011. Property taxes fell as the tax caps took effect. Corporate taxes fell, too. In 2011 the corporate tax rate cuts hadn't started yet, so the reduction probably is due to the fall in corporate profits with the recession. Motor fuel taxes fell, too, as cars became more fuel-efficient and high gasoline prices discouraged purchases.
The income drop in 2009 will restrain maximum property tax levy growth through 2016. Taxable sales probably won’t rise as fast as income as people replenish their savings and pay down debt. Corporate tax cuts began in 2012 and will continue through 2021. The state income tax is due to be cut between 2015 and 2017.
The Tax Foundation found a decline in Indiana’s tax burden percentage in 2010 and 2011. They’ll probably find more declines in years to come.