There is a not very well-kept secret about the $22.7 billion budget passed last month by the Indiana General Assembly and signed into law by Gov. Frank O'Bannon.
It doesn't add up.
The budget proposes spending more money than the state expects to collect. With Indiana's budget deficit already at $850 million, legislators may have to return, perhaps as soon as this fall, to figure out a way to fend off a full-blown fiscal crisis.
The state has already made deep and painful cuts in services like child care help for low-income parents, and has left critical state agencies understaffed. The decision to flat-line expenditures in the Medicaid health care program will likely make it harder for the disabled to get doctors and for the elderly to get home-based care.
With revenue slumping and state services already cut to the bone, what else can lawmakers do? Well, here's an idea, one that state budget analysts say is being proposed by over half of the country's budget-writing governors this year: raise taxes.
During the last session of the Indiana General Assembly, the Indiana Coalition on Housing and Homeless Issues (ICHHI) proposed several options for increasing revenue. They deserve a look:
- Expand the sales tax to include services. You pay taxes when you buy Lysol, but your neighbor doesn't pay taxes when she pays for her cleaning service. Former Republican Lt. Gov. John Mutz has proposed that Indiana can collect up to $1 billion in revenue each year just by catching up to other states that tax a wide array of services. The average state taxes 17 services like car washing, private club membership, pet grooming and dry cleaning. Indiana taxes only six.
- Enact a temporary surcharge on the wealthiest taxpayers. According to the Center on Budget and Policy Priorities, Indiana would generate $358 million by raising the income tax rate by just 1 percent for taxpayers with an annual gross income of more than $100,000.
- Enact a graduated income tax. Remember Steve Forbes, the guy who based a 1996 Republican presidential bid on his rich-get-richer flat tax scheme? Forbes is out of the political scene and the federal tax system remains progressive, but the flat tax is alive and well in Indiana. Only five other states have a flat rate income tax. What that means is that Christel DeHaan and Jim Irsay are in the same Indiana income tax bracket, 3.4 percent, as you and I are.
- Close corporate loopholes. Indiana corporations can avoid state taxes by shifting paper ownership of trademarks or patents to a secondary corporation located in another state, and by declaring profits as nonbusiness income. "Indiana is undoubtedly losing a lot of revenue because of these loopholes," says Michael Mazerov of the Center on Budget and Policy Priorities.
These proposals don't impact us all equally. Nor should they. Wealthy Hoosiers who have enjoyed a comparatively easy ride will be the ones most inconvenienced by taxing poodle shampoos and putting a graduated step in our income tax rate. "Right now, Indiana has a very regressive tax structure," Mazerov says, citing rankings placing our state as one of the most aggressive in the nation at taxing the poor and most timid at taxing the rich.
So even the conservative Indianapolis Star editorial page called last month for the General Assembly to increase state income taxes instead of cutting Medicaid services. Since wealthy people make up just a small minority of voters, lawmakers should be willing to take the political risk of making their burden a bit more equitable.
But ICHHI's policy analyst Lisa Travis says that no lawmaker, including the governor, has yet been willing to seriously consider their tax raising proposals. "Everyone acknowledged the fiscal situation was a real problem, but no one at the Statehouse wants to be the one to lead the way on raising taxes," she says.Why not? One reason is the corrosive effect of the legalized bribery we call our campaign finance system.
Common Cause of Indiana's Julia Vaughn says that tax policy is influenced by lawmakers' need to beg for political contributions from wealthy individuals and corporations. "There are more low- and middle-income voters than upper-income voters," Vaughn says. "But this is one of those areas where there is a conflict between the needs of the funders of campaigns and the needs of the voters."
The political stigma associated with raising taxes is another reason politicians see cutting services as a preferred option. IUPUI political science professor and Public Opinion Laboratory director Brian Vargus says Indiana definitely needs to raise tax revenue, but lawmakers fear a backlash if they do. "When can you think of the last time a politician said, 'If elected, I'll raise your taxes?'" Vargus asks. "I can think of one: Walter Mondale in 1984. He was right, but he carried only one state."
But there is new evidence that the political cost of raising taxes can be managed, especially when the increase is directed at citizens who have been getting by with an awfully light burden for an awfully long time. A poll released last month for National Public Radio shows that, for a majority of voters, their biggest gripe about taxes is not the amount they pay. Nor is it the complexity of the tax system. The poll respondents' biggest concern is that wealthy people do not pay their fair share of taxes.
In Indiana, they are right. And now is the time to fix that.
Fran Quigley is a contributing editor to NUVO, where this article originally appeared - ...