What's the economic impact of legislative inaction?

• Position: Indiana Indicators - Brief Article

The state legislature has adjourned and the first serious proposals for comprehensive tax reform in Indiana in 28 years were left on the table. That outcome has triggered an avalanche of opinions in the business media of late, many of which have been none-too-kind to our political leadership.

Despite the hope and promise of changes long-sought by many, we awake to a reality in Indiana where our dependence on property, sales and income taxes remains essentially as it has been for the last 30 years. We also face changes in assessment rules that will alter individual and business property-tax burdens in ways that are not yet precisely known. The question is what is the likely economic impact of this situation?

Some of the rhetoric of the recently concluded legislative debate suggests that we are sailing into disaster. In the short run, at least, that overstates the case. The status quo of Indiana taxation, including the unpopular inventory and corporate gross receipts taxes, is just that--a status quo. The argument for changing these taxes is based on longer-run considerations, like those pointed out in the recent Indiana Fiscal Policy Institute study of our state's falling per capita income ranking. Fixing or ignoring the problems associated with these taxes won't show up in a meaningful way until we get a few years down the road.

Looming in the immediate future, however, are the changes in property-tax assessment rules that are scheduled to go into effect in the next tax year. With the potential for increase in many homeowner tax bills, these may be political dynamite, but from an economic point of view, they appear to be much more tame.

For one thing, tax increases for homeowners are offset by decreases for many businesses. Thus we become a less attractive state to own housing, but a more attractive one in which to run a business. A similar sort of balance could occur among homeowners as well. Since newer homes are already assessed closer to market value than older ones, there might be a shift from old to new homes that could end up providing a mild stimulus to residential construction.

When it comes down to the intangibles, there are both short-term costs and benefits to the legislature's inaction on taxes in 2002. On the minus side is the uncertainty that has been prolonged on all issues dealing with taxation. If there is anything that is more disliked by investors than taxes, it is uncertainty over taxes, and until the pressure for...