I continue to be amazed at the slide in thoughtful policymaking in Indiana. Gov. Mike Braun’s incoherent property tax musings — I hesitate to call them a proposal — offer yet one more example. We are a long, long way from the age of Mitch Daniels, and it’s worth reviewing how far we’ve fallen.
In summer 2024, a Beckwith-Braun property tax plan was revealed late on a Friday, and it went through six modifications before Sunday dinner. Faithful readers of this column will recall that state Rep. J.D. Prescott scampered to my office to solicit assistance in derailing his own party’s tax plan.
He didn’t care about what it might do to schools, fire departments or parks. His concern was the likely effect on his family business. To be honest, I don’t blame him. It was a disaster.
That plan eventually morphed into Senate Enrolled Act 1, which is now slashing local government budgets across the state. It has already defunded police and fire departments, libraries and parks, and earned the anger of local elected officials from both parties.
SEA 1 was the biggest tax cut to businesses in state history and the second-biggest business tax cut in the U.S. in the 21st century. It is closely behind the Kansas tax fiasco of 2012, which delivered that red-state governor’s office to the Democratic Party.
Since SEA 1 went into effect, Hoosier businesses have cut more than 13,000 jobs. It’s too early to disentangle how many of those job losses are due to bad national policies or the automation subsidies in SEA 1. It’s safe to say that it is a bit of both.
For many reasons, the property tax cuts for businesses will do nothing for economic growth. They will not make taxes fairer or more stable. And one of the many things SEA 1 failed to do was to deliver meaningful property tax cuts to citizens. That means the brain trust of the Beckwith-Braun tax team has been hard at work with an even worse proposal.
Braun has said he wants to eliminate property taxes for anyone who is retired or has paid off their mortgage. To understand how absurdly bad that idea is, you must take a moment to understand what our property taxes are for, what SEA 1 is doing to local taxes and the nature of the economic mess Indiana faces.
Property taxes fund school building maintenance and transportation costs, police, fire, parks, libraries and dozens of other intensely local activities. We all use these services. Their quality determines the value of our property and, hence, our wealth. I know there are many folks who don’t think they use schools or police or fire departments. I just don’t know how to excuse that ignorance.
Property taxes are almost a perfect tax because home value is largely determined by the quality of local government. Good local government makes homes worth more and reduces the rate of taxes, while making homeowners wealthier. It is a virtuous cycle.
When you exempt businesses, veterans or retirees from paying those taxes, you remove the feedback loop to good local government. You also push the burden of taxes onto younger, inherently less wealthy families in two important ways.
First, as SEA 1 does, it causes other types of taxes to increase. In the case of our current law, that means local income taxes will rise, probably significantly. SEA 1 will be the biggest shift of tax burden from older to younger families in state history, and it will take only three to five years for this to fully play out.
This is also why more than 1 in 3 school corporations are asking for referendums this year.
Second, and more importantly, it means cuts to public services, which are most important to younger Hoosiers, and which play a big role in their residency decisions. That means the value of a community decreases.
Now, I know there are folks who think that almost no taxes or government are attractive and would wish to move to such a place. There just aren’t enough of you to matter.
The folks voting with their feet want good local public services: great schools, safe streets and walkable neighborhoods with parks. Very few Hoosier cities or towns offer these in abundance, which is why most of Indiana will lose population for the next several decades.
But it gets worse. The back-of-the-envelope cost to local governments of eliminating taxes for retirees and those without mortgages is somewhere between $1.8 billion and $2.5 billion per year. That is four to six times higher than the SEA 1 cuts, which are already causing deep cuts to local services.
It’s worth noting that local government employment, as a share of total jobs, is already lower now than in any year since we started keeping data in 1969. When folks say local government is bloated, they are lying or ignorant.
Braun’s proposal would lead to tax revenue cuts greater than the failed Kansas experiment of 2012. Perhaps this is why the loudest critics of this plan come from Republican elected officials who can do arithmetic.
However, the biggest problem with this tax plan is that it worsens the state’s looming demographic problem.
Indiana today is facing its worst brain drain in history, and it’s among the worst states nationwide. We are losing college graduates (both native Hoosiers and those who attend college from out of state) at a record rate. This is an accelerating problem that will make Indiana a far older and less well-educated state by 2040.
To be honest, I suspect we’ve made enough policy mistakes over the past decade that we will be unable to reverse brain drain for any of the next four or five decades. These are vexing problems that even attentive policymakers have a hard time reversing. But, at the very least, it is time to stop enacting extreme policies that worsen the problem.
Given its reception, Braun’s proposal probably won’t even make it to the Statehouse in the next legislative session. It is just that bad. What it should do instead is spark a serious discussion about Indiana’s policy pathway.
At some point, we need tax policies that attempt to remedy our economic problems rather than worsening them.
Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University.
This article originally appeared on Muncie Star Press: Hicks: Braun’s incoherent tax plan
Reporting by Michael Hicks, Muncie Star Press / Muncie Star Press
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By Michael Hicks, Muncie Star Press | USA TODAY Network
