An example of a goal programming model to determine a tax policy: the case of the State of Indiana.

• Author: Abuizam, Raida

1. INTRODUCTION

   State governments provide direct services for their residents and are providing more public services than ever. In addition to delivering traditional services (e.g., state police, prisons, higher education, and highway maintenance), states are delivering many services once supplied and paid for almost exclusively by the federal and local governments. In virtually all cases, states are bound by balanced budget requirements. Thus, State tax systems are continuously challenged to develop and implement an efficient tax system.

   The prosperity of the late 1990s led to record budget surpluses and increased spending in most states; but, the recessions of the first decade of 2000, have witnessed unprecedented record budget deficits. Additionally, the age of e-commerce has revolutionized how people work, play, and even communicate. The economy in which people primarily bought locally manufactured goods no longer exists. In today's high-technology, global economy, the ability to purchase services or products from anywhere in the world is just a few keystrokes away. The tax systems constructed by state governments in the past are often inadequate for dealing with the current global economic environment and increasingly conflicting policy decisions regarding tax revenue.

   While the economy has transformed from a manufacturing base to one dominated by services and intellectual property, variables affecting state taxes have remained essentially unchanged. In this new economy, businesses, even small companies, no longer produce and sell products in just one or in a few states, but throughout the nation or the world. It is apparent that the current state tax structures are incapable of dealing with the economic shifts.

   These factors underscore the need for policymakers to reassess how well their tax systems address current and future revenue needs. But the examination must go further. Policymakers also need to consider the elements of viable revenue systems and how those elements change over time. Questions about the systems' efficiency are pressing, as state taxes have never been as important as they are today. Periodic review and revision help ensure that the elements remain relevant as lawmakers debate new policies.

   The main sources of revenue for these services are derived from seven essential tax bases: sales, individual income tax, property, corporate income tax, gaming, cigarette, and alcohol taxes. Revenue measures have an effect on each other; a state income tax, for example, is likely to make an allowance, directly or indirectly, for the taxpayer's property tax. In addition, many states use both sales and income taxes in part because the tendency of sales taxes to be regressive is balanced by the tendency of income taxes to be progressive. The use of both allows for lower rates for both than would be likely, if the state relied on only one of them. Hence, policymakers can use different revenue measures to offset the disadvantages of particular taxes or changes. Whatever the goals of equity, economic impact, and effect on behavior that policymakers may try to reach, they can do so more easily by examining the entire revenue system rather than individual revenue measures. Although Federal taxes are a better instrument for addressing the progressivity of taxation due to the available policy options (deductions, Earned Income Tax Credit, etc.), this paper will focus on state tax, specifically the state of Indiana.

2. INDIANA'S TAX SYSTEM

   According to the Tax Foundation in Washington, D.C., Indiana's State/Local tax burden is estimated at 9.4% of income for FY 2008. Indiana's state/local tax burden (on percentage basis) ranked 28th highest, below the national average of 9.7%. Hoosiers pay approximately $3,500 per capita in state and local taxes. The ranks of neighboring states were as follows: Michigan (27th), Illinois (30th), Kentucky (26th), and Ohio (7th).

   Indiana's personal income tax system consists of a flat 3.4% rate on federal adjusted gross income (AGI). That rate ranks 41st highest among states levying an individual income tax. Indiana's 2008 state-level individual income tax collections were $760 per person, which ranked 33rd highest nationally.

   The State of Indiana levies a 7.0% general sales or use tax on consumers, which exceeds the national median of 5.85%. In 2008 combined state and local general and selective sales tax collections was $1,241 per person, which ranks 33rd highest nationally. Indiana's gasoline tax was 34.1 cents per gallon, which ranks 16th highest nationally. Additionally, the state's general sales tax is applied to gasoline purchases. Indiana's cigarette tax was 99.5 cents per pack of twenty, which ranks 28th highest nationally. Sales taxes are inherently regressive since upper income households usually save larger portions of their...