The big tax questions: A matter of balance

July 03, 2012

A Balanced Tax Policy: One Key to Indiana’s Economic Future

July 1, 2012; My View, The Indianapolis Star
By Kathy Davis and David Lewis
 
It’s campaign season, so we’re hearing about taxes. Already, Indiana candidates have proposed cuts to corporate income taxes, gasoline taxes, inheritance taxes and more. 
 
We’d all like to pay less, but if you accept Oliver Wendell Holmes, Jr.’s proposition that “taxes are the price we pay for civilization,” then the equally important question is, “What do Indiana citizens need from governments and how do we deliver that fairly, efficiently and effectively over time?”
 
While taxes are often the most maligned part of government, they must support systems and infrastructure that are vital to quality of life, business development and job creation.
 
Despite the Great Recession, Indiana is in a tenuous but manageable fiscal position. Its tax rates are competitive.
 
But to compete regionally, nationally and globally now and in the future, our tax structure must be dependable, consistent and simple with a diverse and broad tax base. Taxing jurisdictions – some dating back to the state’s founding nearly 200 years ago – must adapt to reflect contemporary goals and realities.
 
A strategic tax system also must help Indiana address multiple challenges: hundreds of thousands of lost jobs; below-national-average incomes and income growth; Baby Boom retirements that will leave fewer workers supporting more people; a multibillion-dollar backlog of state payments for unemployment benefits and teacher pensions; a road network that’s surpassed its useful 30-year life span; geographic disparities between urban and rural economies; increased fiscal pressure on local governments, and more.
 
These are the issues that we, our fellow commission members and the staff of the IU Public Policy Institute have been weighing over the past two years. We concluded that for Indiana to be a desirable destination for individuals and businesses, our tax system must:
 
                  Enable economic growth via business and individual well being.
                  Take a balanced approach to taxation with broad bases and low rates.
                  Create consistency, clarity and effectiveness through a purposeful structure and operation of state and local government.
                  Recognize regional differences in approaches to economic growth.
                  Emphasize a long-term strategy for infrastructure preservation and enhancement.
                  Facilitate consistency in its treatment and expectations of businesses and individuals as a precursor to economic growth.
 
We’re now sharing our strategic and tactical recommendations with current officeholders as well as candidates for governor and the General Assembly. We hope they’ll take these ideas into consideration when advocating and advancing effective tax policy.
 
Among our recommendations:
 
Preserving an attractive business climate
                  Maintain a balance among income, sales and property tax revenues.
                  Keep the tax base broad so rates can be low.
                  Limit tax incentives and tax breaks to initiatives of highest priority and expected return on investment.
                  Retain the current individual income tax rate.
                  Retain the current, recently reduced corporate income tax rate.
                  Review tax credits, deductions and exemptions.
                  Consider how to reduce the state sales-tax rate by broadening the sales tax base on a revenue-neutral basis to include more services.
                  Conduct a comprehensive evaluation of the impact of the 2008 property-tax reforms.
                  Continue efforts to reduce reliance on business-equipment-and-machinery tax revenue.
                  Encourage regional planning and projects, and allow regional taxing districts.
                  Help city centers by sharing a modest portion of local-option income tax revenues between counties of residence and counties of work.
                  Provide sufficient resources to the Department of Revenue to enforce collection of the sales tax on Internet purchases.
                  Standardize tax treatment of not-for-profit organizations.
 
Structure of government
                  Evaluate the organization of state and local government, service delivery, spans of control and organization layers.
                  Promote joint purchasing and other inter-local agreements between local government units.
                  Reform and consolidate state and local government to improve service delivery with maximum efficiency, transparency and accountability.
 
Spending and investment
                  Consider increasing the gas tax to align with neighboring states and index it to inflation to preserve the existing system of roads and bridges.
                  Use tolls to finance road expansion projects.
                  Develop a state plan for water, energy, information and transit infrastructure.
                  To maintain a strong source of innovation, devise a sustainable strategy for funding higher education.
 
Bottom line: When considering candidates, the big question isn’t “How much would you cut my least-favorite tax?” but “What balance of taxes would you employ at what level to enhance Indiana’s future?”
 
The full report is available online at http://www.policyinstitute.iu.edu/PolicyChoices/.
 
Davis, a former Indiana lieutenant governor, is owner of Davis Design Group. Lewis is vice president for global taxes and chief tax executive for Eli Lilly and Company. They co-chaired the Tax and Fiscal Policy Commission for the IU Public Policy Institute’s Policy Choices project. The Institute is part of IU’s School of Public and Environmental Affairs at IUPUI.