Saturday, June 27, 2009


The next state budget passed by the Indiana General Assembly will be Taxpayer Friendly if it (1) provides sufficient resources for good government AND (2) protects Hoosier working families from state and local tax increases.

Two starkly different state budgets have been proposed in the current special session of the General Assembly - a two-year budget by the Indiana Senate under the leadership of President Protempore David Long that follows the guidelines of Governor Mitch Daniels, and one-year budget by the Indiana House as directed by Speaker B. Patrick Bauer. A spreadsheet analysis of each budget can be found online at http://www.finplaneducation.net/senatehouse_ssb_0911.htm.

Providing sufficient resources for good government is difficult during these challenging economic times - the nation's longest recession since the Great Depression. To help replace declining revenues, both the Senate and House budgets use (or intend to use) about $2.7 billion of federal stimulus funds for various education, infrastructure, Medicaid, and transportation spending initiatives. The use of these federal stimulus dollars is acceptable in the present uncertain economic environment IF tax increases do not become necessary to support recurring expenses that will now be covered by the non-recurring federal stimulus funds.

The Watchdog Indiana rule-of-thumb is that a tax increase in a subsequent budget can be avoided if all the state’s reserve funds on June 30 of the last budget year total at least 50 percent more than any structural deficit. A structural deficit is created when recurring budget spending is supported by non-recurring revenues - when appropriations that repeat year-after-year are not fully supported by current revenues, but rely on non-recurring revenues such as federal stimulus funds and reserve funds.

The House budget is Taxpayer UNfriendly because on June 30, 2010, the alarmingly high structural deficit of $1.3797 billion is fully half a billion dollars more than the state's total reserves of $877.8 million. There is little chance that revenue collections in the 2011 fiscal year will recover sufficiently to cover the structural deficit. Even though there will be an additional $289.2 million in Medicaid federal stimulus funds available for the 2011 fiscal year, a House budget structural deficit that is half a billion dollars more than the state's reserves WILL result in a 2011 tax increase.

The Senate budget is much more Taxpayer Friendly than the House Budget because on June 30, 2011, the Senate budget has a reserve funds balance of $1.0036 billion, which is 36 percent MORE than the structural deficit of $740.3 million. If revenue collections from current tax sources do not increase in line with historical levels, the state's reserves together with spending discretion by the Governor can be used to avoid a tax increase after 2011.

The K-12 education provisions in the Senate budget are Taxpayer Friendly. The Senate budget provides a spending increase for every student, and those school districts with increasing enrollments will get more state money while school districts with declining numbers of students will receive less state funding. Current law phases out per student state funding for school districts with declining enrollments over a five-year period, and phases in over five years the per student funding for school districts with increasing enrollments. Governor Daniels proposed that the five-year per student phase-outs and phase-ins be eliminated. Because some school expenses continue in school districts with declining enrollments, the Senate budget properly provides a compromise three-year period of per student phase-outs and phase-ins.

The K-12 education provisions in the House budget are Taxpayer UNfriendly. The House budget unwisely gives every school district more state funding, even those school districts with declining enrollments. The House budget reflects a philosophy that it is improper for K-12 teachers to protect their jobs by foregoing pay increases during this historic economic recession. Other government employees have had their pay frozen at a time when so many Hoosiers are experiencing income reductions and job losses. The average K-12 teacher in Indiana has a $49,569 salary with good benefits, while the median income for all the members of a Hoosier working family is $47,074. Indiana has the seventh highest teacher salaries in the nation when adjusted for cost of living. Teachers will hardly suffer if they miss one pay increase to help protect the funding of their K-12 school districts.

The Senate budget is also Taxpayer Friendly because it covers both the 2010 and 2011 fiscal years. A two-year budget provides the fiscal discipline needed to help protect Hoosier working families from the unneeded tax increases that single-interest lobbyists would demand each year if one-year budgets were unwisely adopted.

The House budget is Taxpayer UNfriendly because it covers the 2010 fiscal year only.

Some additional noteworthy Taxpayer Friendly and Taxpayer UNfriendly provisions in the Senate and House budgets are listed below (under my name). It must be noted that the long list of Taxpayer UNfriendly provisions in the House budget favors tax spenders and developers at the expense of those who pay taxes.

The same Bauer Obstruction Team that is blocking passage of the constitutional property tax caps in Senate Joint Resolution 1 is trying to use the House budget to set up a tax increase on Hoosier working families during the midst of a prolonged recession.

The bottom line is that a special session YES vote for the Senate budget is Taxpayer Friendly, while a special session NO vote against the Senate budget is Taxpayer UNfriendly.

Please ACT NOW and let your State Senator and State Representative know that you expect them to vote for the Taxpayer Friendly Senate budget! Contact information for your State Senator and State Representative public servants can be found at http://www.finplaneducation.net/general_assembly_ratings.htm.

Watchdog Indiana calls on Senator Long to improve the Senate budget further by reducing the use of the Tuition Reserve Fund in the 2010 fiscal year from $305 million to $231 million and in the 2011 fiscal year from $305 million to $262 million. Taking this action, together with eliminating the $74 million transfer from the General Fund to the Tuition Reserve Fund in the 2010 fiscal year and reducing K-12 spending by $43 million in the 2011 fiscal year, will enable the state’s reserve funds of $1.0466 billion on June 30, 2011, to be a Taxpayer Friendly 50 percent more than the structural deficit of $697.3 million. If the Bauer Obstruction Team wants the use of the Tuition Reserve Fund returned to $305 million in both the 2010 and 2011 fiscal years, insist that they allow a vote in the House on the Taxpayer Friendly constitutional property tax caps in Senate Joint Resolution 1.

From Aaron Smith at Watchdog Indiana

Blunt Proof of the Feasibility to Permanently Abolish Property Tax

Media Contacts:
Melyssa Donaghy 317-938-8913
Max Katz 765-409-6669

Hoosiers For Fair Taxation, Senator Delph, Representative Noe, Representative Elrod and many other legislators along with Stop Indiana, attorney John Price, Eric Miller's Advance America, and the Statewide Taxpayer Alliance know that property tax abolishment, without substantial increases in sales tax and income tax, is realistic and possible. The economist Dr. Bill Styring's 2/2/2 Plan demonstrates that the state of Indiana can completely replace property tax without changing the state's current spending habits.

Dr. Styring's plan does not account for positive changes in Indiana's economy that will undoubtedly follow the elimination of property tax such as heavy real estate investment and increased consumer spending due to increased statewide disposable income. The real estate investment in Indiana alone would cause such an economic boom that it could likely end our abandoned property and foreclosure crisis. Property tax elimination would also likely cause a surge in Indiana's population as more people locate to Indiana to take advantage of real estate purchase opportunities without the burden of property tax. With the population surge would come more sales and income taxes.

The General Assembly does not have to adopt a specific plan until the year 2011. In the meantime, we recommend that the General Assembly approves the 27steps outlined in the report prepared by the Sheperd Kernan commission. While the Governor's commission cannot forecast the savings to the state once the plan is implemented, there is no doubt that the savings would be substantial--perhaps equivalent to the the entire property tax burden currently placed on Indiana's homeowners because our legislators have not had the political will to liberate Indiana's governing structure and her taxpayers from the 19th century.

Our citizen networks will work to replace all legislators who do not support property tax repeal in the November 2008 election.

The 2/2/2 Plan, to replace property taxes in Indiana based upon the latest revenue forecast (07/08 fiscal, estimate):

1) Current IN sales tax (state level rate of 6%): $5.601 billion2% increase would yield an additional $1.867 billion

2) Current corporate profits tax: ~$2 billion

2% increase would yield an additional $.286 billion ($286M)

3) A 2% statewide average of the COIT would yield $2.705 billion to cover local civil units of gov.

By adding these three together ($1.867 billion + $.286 billion + $2.705 billion), a total of $4.858 billion is realized; enough revenue to replace property taxes.

Indiana has a 70-plus year history of attempts to lower property taxes by raising other, non-property taxes. In every case these have failed miserably. The new taxes, or higher rates on old taxes, remain in place. And, in short order, property taxes rise back to their old levels, poised to roar even higher.

--1933. General Assembly imposes two new taxes: an individual gross income tax and a corporate gross income tax. The morgue of the Indianapolis Star indicates that the political leadership at the time said this was for property tax relief (1933 was the pits of the Great Depression, and people were losing their homes. Home prices declined by over 40% in the 1929-1933 period). Property tax relief was nonexistent. The state used the money to bail out the state's own finances.

--1963. General Assembly imposes a new sales tax at a rate of 2% and changes the 1933 individual gross income tax (from 1933) to an adjusted gross income tax (the one we have now) at a rate of 2%. Again, the ostensible reason was for property tax relief and again little PTR was forthcoming.

--1967. Those 1963 tax changes were raising more money than projected. The GA decides to give back 8% of sales and income tax revenue to local government for property tax relief. Local units spent the money. No PTR.

--1973. Gov. Otis Bowen launches the most determined PTR offensive yet. The sales tax goes to 4% and a new corporate supplemental net income (profits) tax is imposed. Strict property tax levy controls are imposed. It works... for a time. By 1980, property taxes adjusted for inflation are some 30% lower than in 1973. When Bowen leaves office the levy controls are relaxed. By the end of the decade, property taxes (adjusted for inflation) are back to 1973 levels. The doubling of the sales tax rate from 2% to 4% remains in place, along with the new corporate SNIT.

--2002. More fiddling with the sales tax in the hope of property tax relief. The results of this are obvious, or we wouldn't be debating the current property tax mess. All of this suggests that unless the property tax is totally ripped up by constitutional amendment, the assessment and collection mechanism dismantled, it will grow back. The PTR-inspired hikes in other taxes remain. That is our history. It is a terrible deal for taxpayers.

2. A vote in the 2008 legislative session for a constitutional amendment to repeal property taxes does not amend the constitution. It merely starts the amendment process. Amendments must be passed by two consecutively elected General Assemblies, then submitted to a referendum. Thus any amendment passed by the '08 Assembly must be passed by either the 2009 or 2010 legislatures, then submitted to the voters at the 2010 general election. The General Assembly does not need to decide on a "replacement revenue" package until the 2011 session.

3. What might such a "replacement revenue" package look like? The particular answer will come from the 2011 General Assembly and cannot be determined now (if for no other reason than forecasting state level taxes and property taxes out that far would be a most unreliable exercise. No one need be locked into any particular plan just yet. However, as an illustration that a replacement plan is feasible and less scary than many fear (we don't need to be talking about a 12% or 13% sales tax ... in fact, we should not be), consider just this one possibility.

Local sales taxes are generally very bad policy, for a whole host of reasons too numerous to mention in this short sketch. Sales and corporate taxes are best levied at the state level. It happens that roughly a 2% increase in the sales tax and a 2% increase in the corporate profits tax roughly take care of school propertytaxes. The loss of local control by the state assuming school property taxes is minimal. About the onlylocal control left is on building projects.

For local civil units, a statewide average increase in the individual adjusted gross income tax of about 2% suffices to replace local civil government property taxes, higher than 2% in some units, less than 2% in others.

Thus, a "2-2-2" plan~2% sales and 2% corporate profits at the state level for schools and a 2% average on personal income taxes for civil units—is about what would be needed. This is merely a ballpark projection to 2011.

There may be better plans, it's really a policy question for the General Assembly: do you want to make the trade of something like this in exchange for no-property-taxes-forever-on-anything? Everyone understands "zero."

4. Are there "practical problems? Of course. The two identified are how to make the civil government transition from a property tax base to an income tax base, and how to handle debt backed by property taxes. Without elaborating, the former can be handled using locator software (Map quest-type programs). The debt problem might be handled by treating the current state paid PTRC's as in lieu of property taxes (which they are) and paying PT-backed debt service from each unit's own PTRC.

Conclusion: Total elimination of the property tax via constitutional amendment is the only way to give property tax relief that will stick. The other tax action necessary to achieve this goal—in 2011-are large but not so scary as "a 13% sales tax." They are feasible. The question is for the General Assembly. Are we going to once again go down that 70-odd year path of failed PTR policies or are we going to rip the property tax up by the roots?

Posted by Hoosiers For Fair Taxation on Friday, January 4, 2008.