Hoosier Taxation

Michele McNeil reports in Education Week:

Indiana Gov. Mitch Daniels, a Republican, who is facing re-election this year along with the entire House and some of the Senate in that state, has made property-tax relief his top priority this legislative year and wants to remove funding for schools’ general operating budgets from the property-tax rolls. That plan, coupled with a legislative proposal to fund the costs of student transportation—except the purchase of school buses—with state dollars and not property taxes, would mean a $1.3 billion annual shift of school costs to the state. The state, in turn, would raise the 6 percent sales tax by a percentage point, and use other money set aside for property-tax relief to make up the lost funding to schools.

This isn't a very good idea. The Indiana general fund property tax functions essentially like a state--not local--property tax, in that the state sets local property tax rates, then determines the total amount of general fund revenue school districts get, and then fills in the difference between that amount and what the local property tax raises with state money, which comes from combination of sales and income taxes. When property values rise, the state benefits in the form of reduced obligations to school general funds; when property values fall the state is on the hook for the lost revenue. School budgets aren't affected either way. That creates a fairly stable three-legged property/sales/income revenue stool for local schools, with the volatility of one source being offset by the others. If the Daniels proposal is enacted, they'll be down to two legs and subject to increased risk of sales tax volatility tied to the business cycle, which is precisely what the Ed Week article describes happening in Florida.

In other words, this isn't really an education issue at all, it's just a question of whether the state of Indiana wants to change its revenue mix in a way that relies more on sales taxes and less on property taxes. Another consequence woudl be redistributing some of the tax burden down the income ladder, since poor people consume their entire income, more or less by definition, and thus pay sales taxes on it, while wealthier people invest part of their income in stuff like property, which would be taxed at a lower rate.