Recently I heard a state representative and a state senator discuss the activities of the 2014 Indiana legislature. Both men are intelligent, articulate and seem concerned about the well-being of our state and their constituents.
After listening to them, I wondered how much they and their colleagues thought about the implications of the General Assembly’s most recent attack on local government.
The legislature uses several means to weaken local government:
First, the unfunded mandate is popular. The state tells local governments (counties, cities, towns, school districts, libraries, special districts) what they must do but provides no money to carry out the designated activity.
Second, limiting local powers is common. Property tax caps, limitations on levies, restrictions on local gun laws and the denial of sales tax sharing are examples.
Third, the permission to do something possibly unwise and potentially unpopular is a specialty. Local option income taxes replacing local inventory taxes come to mind.
This third method set the stage for lowering business property taxes in the most recent session. It was typical legislative sleight of hand, supported by the governor.
The legislators recognized reducing or eliminating business personal property taxes cuts about $1 billion from local government revenues. Therefore, they set a 2015 date for this provision to take effect. The same solons also approved a measure allowing local governments to offer firms 20 years of real property tax abatement.
They did not mandate the end to business personal property taxes. They did not require 20 years of real property tax abatement. They let the individual localities slit their own throats in the competitive battles to come between neighboring communities.
This is seen by the legislature as good government, allowing local officials to decide how to benefit businesses by raising taxes/fees on local residents or by cutting services. It takes the lobbying pressure off state officeholders and puts it on local politicians.
Where do these shenanigans leave local economic developers? To start, we have to ask: Why do we have local economic development?
Local residential property taxes alone do not support necessary government services to local residents. Hence, communities seek to attract businesses to help share the expenses for services they and their employees use. If businesses are exempt from all or part of property taxes on land, buildings, inventory and equipment, why try to bring new firms to town or encourage existing firms to expand?
Jobs? Local income taxes are currently minor supplements to local budgets. We would need extraordinary wages and salaries, taxed at much higher rates, to offset the giveaways being set up by the General Assembly.
In addition, many, sometimes most, employees of a company live outside the district where they work. Are we prepared for a complex set of commuter taxes?
Undoubtedly, the legislative study committee set up to find a solution to this problem will file a report. We can only wonder what magic trick they will endorse.
Morton Marcus is an economist, formerly with the Indiana University Kelley School of Business. Send comments to firstname.lastname@example.org.