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Tuesday, January 26, 2010

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I'm generally with you on state governments. Most of them have not done well and don't seem to understand the problems they face. Also, their political structures make it difficult for them to implement forward looking policies, though that's not a problem for only state government.

On the other hand, I don't think states are uniquely incompetent. Indiana has a mostly funded ten year transportation program. The biggest problem has been red tape and lead time getting projects built, not money. The state has given little money to mass transit, but that's not a unique situation. Very few states nationally have taken the lead role in metro transit systems. Indiana is getting hit on revenues, but has held to a balanced budget without either tax increases or major spending cuts.

I don't support constitutional tax caps there either. However, that is an instructive case. No one would be proposing it without a series of tax disasters that emanated from local government, notably skyrocketing tax bills in Indianapolis, including both residential property taxes and a 65% increase in the city's income tax rate.

Economist Michael Hicks at Ball State hit the nail on the head in describing this when he noted that there seems to be no linkage between taxes in and services out. Local governments expanded expenses at a rate greater than inflation, but services actually declined. With services degrading despite significant increases in taxes, it's no wonder the public rebelled. (Incidentally, the state did, as part of the tax cap deal, bail out all the underfunded municipal pension systems in the state - a huge windfall to cities). The tax cap was part of a tax restructuring deal whereby sales taxes were rates and property taxes capped.

Incidentally, a friend of mine traces the property tax revolt movement to demographics. As baby boomers age and retire, they have proportionally less income and purchases to tax, but more property. In effect, property tax reform is about baby boomers shifting the tax burden to younger people and away from themselves.

I've just discovered your site, by way of Mike Knutson and Reimagine Rural. Thank you for the great questions you are asking and the discussion you are leading here.

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