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Flashpoint

February 8, 2014

FLASHPOINT: Study dissects tough tax issues on business equipment, machinery

Indiana’s Legislature first got serious about eliminating personal property taxes in 1966, when Hoosiers approved a constitutional amendment separating taxes on property and personal property.

Since then, lawmakers have eliminated taxes on four of five personal property categories: intangible property like stocks and bonds; household goods such as furniture; vehicles, including cars and planes and boats; and, most recently, inventory.

The remaining category is this year’s top legislative priority: business personal property.

Lawmakers had considered reducing or eliminating the tax on business machinery and equipment that funds local government and schools during the last three sessions. Things got serious in December when Gov. Mike Pence made its elimination a legislative priority.

Now the House and Senate have each passed very different approaches to reducing or eliminating the tax. And the Indiana Fiscal Policy Institute has weighed in with a 36-page report that is the first comprehensive look at the complicated interplay between the business personal property tax, the property tax caps and how it all affects the choices lawmakers have to meet the governor’s request.

The IFPI report details how the constitutional caps on property taxes (1 percent for homes, 2 percent for other residential and agricultural property and 3 percent on business) limit lawmakers’ options. If the General Assembly decides to reduce or eliminate the business personal property tax, the tax on other property would rise to meet the needs of local government. The caps, however, would limit the amount of replacement tax revenue available and leave local governments and school districts short of money.

Among other findings:

n The potential revenue loss to local governments is direct, but the bigger issues include losses due to more homeowners reaching property tax caps and the challenge for local government to replace revenue lost in tax increment financing districts and enterprise zones.

n Studies have shown taxes on business personal property have a small effect on business relocation from outside a state, but depending on the structure if enacted could have a larger effect on relocation decisions from county to county within the state.

n A small minority of Indiana businesses pay the vast majority of business personal property tax.

n Local governments already have abated 10 percent of business personal property taxes statewide.

House Bill 1001 would allow each county to decide whether it wants to eliminate the business personal property tax on any new equipment or machinery after 2014. Counties would continue to collect tax on existing personal property until it is used up or replaced.

Senate Bill 1, in contrast, eliminates the tax only for those with $25,000 or less in business personal property, or about 71 percent of taxpayers. The remaining businesses would pay the personal property tax, but also would see their corporate income tax rate reduced from 6.5 percent to 4.9 percent by 2017.

The bill also reduces several tax credits and creates two committees to study the related issues.

The report does not attempt to reconcile the bills, but instead describes how the proposals—and others currently not included in legislation—affect taxpayers and government coffers. There are many choices before lawmakers, including the option to do nothing for now.

The key is finding the common ground between the interests of the business community and local elected officials, with the General Assembly serving as the mediating party. To reach a successful outcome, political credit for tax reductions and political blame for any offsetting tax increases must be shared by both the General Assembly and by local elected officials.  

Ketzenberger is president of the Indiana Fiscal Policy Institute, a not-for-profit government research organization based in Indianapolis. This report can be found at www.indianafiscal.org.

 

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