Indiana Debates Where the Tax Axe Should Fall

Economic developers have argued historically that low business taxes contribute to more economic growth. Studies in Indiana suggest that may not be entirely the case, since the state has enjoyed a relative tax advantage over many of its state competitors and still has not seen robust growth. Some in Indiana argue that the tax burden has shifted to individuals and many are not happy to be paying more taxes each year.

Sound like a familiar debate? It is. Guess what? You are going to hear a lot more about these issues as businesses and individuals both seek to dodge the tax bullet as the economy continues to sputter along and state and local government revenue shortfalls grow. Somebody has to pay more in the future. Who's it going to be?

Tax policy changes are quite complex since changes made in one area have implications for other tax policy areas. More than a few states have conducted massive tax studies to determine if their tax mix and distribution policies are in line with where society and the economy are headed. Most of these studies point to serious misalignments that need to be fixed. The problem is right now nobody has the will or financial where-with-all to do anything. One thing is for sure. Local and state governments are hungry for revenue right now and they will be gunning for more revenues from everyone, even at the expense of economic development. Essential government services, such as public education and infrastructure, are not only important to citizens--they also benefit businesses.

The merry-go-round continues. Where it stops nobody knows. Our advice is to exercise care in addressing these issues. Examine various economic and fiscal growth scenarios. Do not lock and load on just one picture of the future--chances are good it will be wrong.

What future ideas should we consider? For economic development, taxes on production are ill-advised in most states, including those states relying heavily upon consumption-based taxes (retail sales taxes).

Strategies that diversify tax revenue sources are a good bet, even in those states with a good mix now. Should and will the Internet be taxed? I believe it will if traditional tax sources continue to struggle.

Governmental consolidation makes a great deal of sense, even if local politicos don't want it. We cannot afford to support the current public administration landscape as it is configured.

Privatization is a good bet if service quality and costs can be maintained. Look first to private contract management of public services, not unlike the model already used in Indianapolis.

Where should we put the emphasis on future incentives? Clearly, they should be placed on "productive" growth, innovation by businesses, and entrepreneurship by individuals. These are logical economic drivers to back, which will have a positive long-term impact on the economy.

Finally, we need to get an improved handle on the cost of growth to everyone, including citizens, communities and businesses. Wherever possible, we need to drive down the costs of growth.

Go here to read how Indiana is looking at these issues.