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In Indiana tax debate, central question is who pays for services rendered

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INDIANAPOLIS — When it comes down to taxes and government services, one of the most fundamental questions is, "Who pays?"

State lawmakers, lobbyists, tax experts and others took up that question last week as they examined what to do with Indiana's tax on business equipment. Gov. Mike Pence pushed hard to eliminate the tax during the last legislative session but was forced to settle for a piecemeal approach sought by House Republicans that left the decision to county leaders.

Meanwhile, a study committee formed to further examine the impact of the state's personal property tax (a levy paid mostly by manufacturers based on the value of heavy equipment) met last week. And the question of who was paying for the state's services — ranging from roads to schools and everything in between — arose.

Larry DeBoer, an economics professor at Purdue University and one of a handful of experts on Indiana's tax system, presented findings showing that businesses paid between 44 percent and 47 percent of the state's total taxes from 2007 to 2012.

"Indiana has seen significant changes in its tax structure since 2007," DeBoer wrote in his presentation to the committee, as he ticked down a list that included the constitutional capping of property taxes, a concurrent increase in the state sales tax from 6 percent to 7 percent and the economic impact of the recession.

Those changes are likely to continue as state lawmakers meet in January for their biennial budget-crafting session. Gov. Mike Pence has signaled he would like to see an overhaul of the state's tax code but has not yet said specifically what he would like changed.

At a tax conference Pence called this past summer to examine the broader question of taxes, much of the focus turned to who pays Indiana's 7 percent sales tax. Talk of expanding the sales tax to professional services — like legal services and others provided by white-collar professionals — bubbled up, as more and more of the state and national economy has moved away from tangible goods to services.

It's one of the many questions state leaders have been looking at as they ponder whether to continue paying for certain services as the state's tax collections stagnate. Pence has continued a practice of cutting upward of 3 percent from most state agencies in order to maintain cash reserves of $2 billion.

But that combination of stagnating incomes and tight-fisted spending has spurred problems for Pence and the state.

The state agreed last week to pay $15 million to settle a lawsuit against the Department of Child Services from adoptive parents who said the state skipped out on payments promised them dating from 2009. Meanwhile, the Bureau of Motor Vehicles announced it had overcharged drivers $29 million in fees and would be issuing refunds.

The governor's staff also worked quickly last week to allay concerns from advocates for victims of domestic violence that they would be facing budget cuts again this year, despite having secured an additional $1 million in the state budget for their services.

Democratic Schools Superintendent Glenda Ritz, meanwhile, has asked for $109 million in the upcoming budget to end the state's practice of charging public school families for textbooks.

Last week's tax panel met just one day after a national report from the credit-rating agency Standard & Poor's was issued showing that the widening income gap in Indiana and nationwide has cut into the state's ability to collect taxes to pay for services. The report found that as more money was concentrated among the wealthiest people, less of it was being taxed, thereby putting Indiana and other states in a pinch as they look for ways to continue operating.

It might not always be explicitly stated at the Statehouse during the upcoming tax and budget battles, but at the center of it will be the question of who's paying for what the government is providing.

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