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Capital Comments by Larry DeBoer - Tax Burden

Professor of Agricultural Economics, Purdue University

The headline said “Hoosiers’ taxes rise as income goes down.” The story told of the Tax Foundation’s finding that Indiana taxes had increased from 8.4 percent of income in 2001 to 9.5 percent of income in 2011. Like many, I thought, “You’ve got to be kidding!”

Our Legislature has passed big tax reforms, we’ve voted for constitutional amendments, we’ve seen property tax cuts, income tax cuts, corporate tax cuts. And our tax burden has gone up? How?

The Tax Foundation crunched a lot of numbers to come up with their result (look for their 2011 Tax Burden Ranking atwww.taxfoundation.org). Their numbers can’t be un-crunched exactly to figure them out, but let’s look at some of the data they used. In particular, let’s look at the Census Bureau’s State and Local Government Finance numbers.

If tax collections rise faster than income, the tax burden as a percentage of income also will rise. According to the Tax Foundation, from 2001 to 2009 Indiana’s tax burden percentage rose from 8.4 percent to 10.0 percent. From 2009 to 2011 it fell back to 9.5 percent. The census data are available for 2002, 2009 and 2011, so let’s look at those years.

From 2002 to 2009 Indiana personal income rose by 22 percent. During those years both property taxes and state income taxes also increased 22 percent. Those two taxes did not contribute to an increase in the tax burden percentage.

But sales taxes increased 63 percent. Indiana’s sales tax rate rose from 5 percent to 7 percent from 2002 to 2009. That’s a 40 percent rate increase. Add a 22 percent rise in taxable purchases out of that income increase and you’ve got the sales tax increase. Most extra sales taxes reduced property taxes, but part of the 2002 tax hike added to state revenues to offset the 2001 recession.

While state income tax growth matched income growth between 2002 and 2009, local income taxes increased 59 percent. In 2002, 85 counties had local income taxes with an average rate of 1 percent. By 2009, 91 counties had the taxes, with an average rate of 1.4 percent. Many of these new taxes were used to reduce property taxes, but some increased tax revenue.

With all this property tax reduction, why did property taxes rise even as fast as income from 2002 to 2009? It might be borrowing for new construction. Property taxes for debt service are outside the tax controls. Those taxes rose 75 percent during the seven years, which offset a good bit of property tax relief. Debt service tax increases slowed a lot after 2008 with the new referendum requirement.

Part of the reason for the rise in the tax burden percentage was the drop in income during the recession. Total income fell 3.2 percent in 2009, the very year that the tax percentage was highest. The property tax has a delayed response to recession. The state sets a maximum property tax levy for each local government. The annual increase in this maximum is based on a six-year average of income growth, with a two-year lag. So maximum levy growth in 2009 was based on average income growth from 2002 to 2007. Property taxes kept growing in 2009, even as income fell. But the 2009 income drop started to cut property tax growth in 2011. 

The Tax Foundation says that Indiana’s tax burden, measured in dollars, began to drop in 2009, and the tax burden percentage decreased in 2010 and 2011. Property taxes fell as the tax caps took effect. Corporate taxes fell, too. In 2011 the corporate tax rate cuts hadn’t started yet, so the reduction probably is due to the fall in corporate profits with the recession. Motor fuel taxes fell, too, as cars became more fuel-efficient and high gasoline prices discouraged purchases. 

The income drop in 2009 will restrain maximum property tax levy growth through 2016. Taxable sales probably won’t rise as fast as income as people replenish their savings and pay down debt. Corporate tax cuts began in 2012 and will continue through 2021. The state income tax is due to be cut between 2015 and 2017. 

The Tax Foundation found a decline in Indiana’s tax burden percentage in 2010 and 2011. They’ll probably find more declines in years to come.