Abstract
This paper articulates a case for Indiana to exempt all non-land property from the taxable portion of the property tax base. This moves the state closer to a tax system that has great support among economists for its advantages in encouraging economic growth, progressivity, and reducing environmental damage from urban sprawl. Indiana might particularly benefit from a land only tax because of its unique system of property tax caps. The merits of this approach hinge on driving a wedge between gross assessed value and net taxable value. Future empirical research is needed to determine the distributional impact that would result from such a policy change.
Highlights
The property tax caps were phased into policy in 2009 and 2010, and their origins are widely recognized as a consequence of major reforms in property assessment that created a political demand for taxpayer protections from large changes in property taxes
The multi-year process of implementing a new assessment system resulted in significant changes in the property tax bills for many taxpayers
The passing of the property tax caps were bundled with other changes in the division of fiscal responsibilities between states and local governments
Summary
Banzhaf and Lavery (2010) tested the impact of the split-rate tax across 18 Pennsylvania jurisdictions from 1970 to 2000 Their results indicate that the split-rate tax results in more efficient growth patterns: the lower the structure rate relative to land increased the capital/land ratio, and was positively associated with more housing units rather than bigger units consistent with the curbing of sprawl. These findings are consistent with older studies of Pittsburgh implementing the split-rate tax for the consequences on building activity (Oates and Schwab, 1997) and the number of issued permits (Plassmann and Tideman, 2000). The theory is robust to complex assumptions, and what empirical evidence does exist is supportive of the theoretical propositions
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