By MIKE SMITH

AP Political Writer

INDIANAPOLIS (AP) — At least half the customers at Clarksville Schwinn Cyclery come from across the Ohio River in Kentucky, but owner Bob Peters is worried that might change starting Tuesday.

That’s when Indiana’s sales tax will increase from 6 percent to 7 percent, while it remains at 6 percent in Kentucky.

“It’s not going to help,” said Peters, who remembers business picking up in 1990 after Kentucky raised its rate to 6 percent while Indiana’s was 5 percent. “Any time people can save money, they are out to save money, and there is just a bridge from Kentucky and Indiana.”

Gov. Mitch Daniels and leading lawmakers sold the sales tax increase in the General Assembly as part of a property tax relief and restructuring plan that is projected to cut homeowners’ bills by about 30 percent on average statewide.

The increase will bring in an estimated $620 million through the end of this year, and close to $1 billion a year after that — revenue that will be used to lower property taxes.

The tradeoff? Hoosiers will pay more for goods and dining out.

A $32 pair of jeans will cost $34.24 beginning Tuesday, a 32-cent increase over the current tax rate. A $276 bicycle will cost $295.32 with tax — $2.76 more than before. A $3,300 diamond ring will cost an extra $33.

Kristin Sims of Indianapolis, who was shopping downtown a week before the tax increase, thinks the higher tax will make it harder for stores to attract customers during this sluggish economy.

“But when you need to shop, you need to shop and buy things no matter what the tax is,” Sims said.

Sims thinks she will save about $700 in property taxes if her bill is cut by a third. In her view, that’s a good tradeoff.

Jim Wright of Greenwood agrees.

Wright said a one-third cut in his property taxes would save him $1,600 to $1,800, and he won’t think twice about the sale tax increase.

“I’m fortunate enough that between my wife’s and my income, another percent is not going to impact my style of living at all,” Wright said.

Retired Indiana University economist Morton Marcus said the increase might change the spending habits of a small minority of people, but he doubts it will have much impact on decisions to buy even big-ticket items. Someone looking at buying a $25,000 car will pay an extra $250 in taxes. “That’s a lot of money, but on a $25,000 item, it’s just one percent,” he said.

That thinking hasn’t stopped car dealers from using the tax increase as a sales pitch.

An advertising association for 52 Ford dealers in Indiana is running television commercials urging customers to visit their Ford dealer and buy now to beat the tax increase. Other dealers are taking similar approaches.

Ray Skillman Westside Mitsubishi in Indianapolis has mailed brochures featuring a picture of a stop watch and bold letters with phrases such as “Time is running out. Act now and save!” and “Act now and save hundreds of dollars in sales taxes.”

Bill Martin, general manager and partner of Van Horne Jewelers in Mishawaka, is mentioning the increase to his customers. But he doesn’t think it will affect sales much once it’s in place, even though his store is close to Michigan, where the sales tax will remain 6 percent.

He said Indiana residents would have to drive 50 to 90 miles to Kalamazoo or Grand Rapids to find a comparable jewelry store in Michigan. The high cost of gasoline, he predicts, would likely exceed any sales tax savings.

Although Indiana’s flat state rate would be higher than the base rate of its four surrounding states, Illinois and Ohio allow local option sales taxes. According to the Daniels administration, the rate in six of the nine Ohio bordering counties is 7 percent.

The rate in most of Illinois’ bordering counties is 6.25 percent, but local officials in Cook County — home to Chicago — recently voted to double their sales tax, resulting in a cumulative rate of 10.25 percent.

“We talked to a lot of people around the borders as we were considering what plan to propose, and the overwhelming consensus was that this would not be a competitive issue,” Daniels said.

The Indiana Retail Council, which lobbies the General Assembly on behalf of 250 members ranging in size from Wal-Mart to independent hardware stores, took a neutral position on the sales tax increase because the revenue would be used for property tax relief, said Grant Monahan, the group’s president.

“Our members are very much concerned with the economic health of our shoppers, and if property tax reduction takes some stress off the family budget, there is more discretionary income to spend, and that is good,” Monahan said.

Politically, Marcus called the sales tax change “the perfect election-year tax increase.”

“People have no idea how much more in sales taxes they’re going to pay,” he said. “They don’t keep their receipts to see how much they paid compared to how much less they will pay in property taxes. It’s a shell game.”

Posted 3/31/2008