STATEHOUSE DISPATCH: Tax reform to take center stage on Organization Day

In this column 10 years ago, we told you that, typically, our “short” electionyear legislative sessions are swift and relatively sweet. With the biennial budget the priority of the long, odd-year sessions, significant fiscal matters are usually untouched in the short, even-year session. Major issues that threaten to divide often are left undebated as the two major political parties avoid issues making them look bad in the eyes of voters.

Only a decade ago, lawmakers prepared to enter just such a session, and they were downright giddy. The December fiscal forecast showed the expected state surplus of $1.1 billion would swell almost $500 million above expectations, and lawmakers were eager to return to Indianapolis to reopen the budget and boost spending.

That moment of a decade past was, however, the last of an economic boom era. Just two years later, the state had run out of room to spend additional money, beginning a depressing streak of years of cuts to existing programs and a dearth of new ones.

And that has been the norm ever since.

Much of the problem has been due to national economic conditions, and it is often said that, due to Indiana’s traditional reliance on manufacturing jobs (particularly those related to the automobile industry and large consumer goods), when the economy sneezes, Indiana catches a cold. With the economy now ailing, Indiana is even sicker, and the fiscal medicine that governors over the past several years have administered to help Hoosiers recover hasn’t served to effectively beat the bug.

Complicating things is the tax structure the state has operated under. Heavily dependent upon the property tax, the state found itself in a conundrum when court rulings called into question the legality of the application of the property tax.

Officials used the opportunity to restructure taxes earlier in the decade, bumping up some taxes to lower property taxes to stave off a huge real-dollar impact on homeowners.

But as the decade wore on, the state shifted more costs to the local levels, local spending patterns continued, assessment practices became more difficult to explain and justify, and “trending” adjusted upward the taxes on most homesteads across the state.

A projected average residential property tax increase of less than 15 percent suddenly rose to an estimated 25 percent as the 2007 legislative session was drawing to a close, making property tax relief of critical importance to lawmakers. They quickly passed legislation granting slot machine licenses to the state’s two horse-racing tracks simply to gain some $500 million in short-term property tax relief, avoiding serious public policy discussions about expanding gambling.

After lawmakers returned home, they discovered that many homeowners (particularly those in Indianapolis and Marion County) were seeing property tax bills that dwarfed even the highest estimated increases. The summer months featured unprecedented taxpayer rallies and protests in communities from Lake Michigan to the Ohio River.

Summer legislative study committees focused on long-term structural reform, and Gov. Mitch Daniels was forced to turn his attention to the issue as well.

Daniels unveiled a tax-reform package last month that has been largely wellreceived by homeowners and lawmakers of both parties, but which has proven to be anathema to business, industrial and agricultural interests, which would see some of the tax burden shifted from homeowners to their respective constituencies.

School and local government officials are also skeptical. They would face additional layers of approval for assorted spending: a countywide review board in the case of local government units, and voter approval for major school projects (and for some local capital projects as well).

Against this backdrop, lawmakers return Nov. 20 for Organization Day. While this usually is simply a ceremonial occasion in non-election years, this month it will be an opportunity for legislative leaders to deliver marching orders to their members on tax reform.

The Senate will hold assorted committee hearings on some 10 elements of the governor’s plan and related items between Organization Day and the early January full-fledged kickoff of the session. The House will hold hearings on a bipartisan bill offered by the leaders of the House Ways and Means Committee that effectively consolidates all the elements of the gubernatorial plan.

The early hearings will allow quick action on a comprehensive tax package, the top priority of lawmakers in 2008. With modest legislatively authorized property tax rebate checks likely landing in mailboxes as the tax debate is highlighted around the state early next year, and the next round of tax bills hitting most homeowners just a few weeks before primary elections, there will be considerable public pressure on lawmakers.

With control of the House at stake again next November (Democrats control it 51-49, following two years of GOP 52-48 control), the political pressure for major structural reform is an imperative.