News From Terre Haute, Indiana

Local & Bistate

January 19, 2014

Biz property tax cut directly threatens local budgets

Raising the possibility of a cut leaves some counties wary of future actions

The Indiana General Assembly has barely begun, but Gov. Mike Pence’s push for a full elimination of the business personal property tax already appeared to be on life support last week.

House Speaker Brian Bosma, R-Indianapolis, is calling for individual counties to be allowed to voluntarily phase out the tax.

Senate Tax & Finance Committee Chair Brandt Hershman, R-Monticello, is calling for elimination of the tax for small businesses only. Hershman’s cut would save businesses about one-sixth what Pence’s plan calls for.

In theory, getting rid of the tax — which detractors say is essentially a tax on all capital investment — could spur economic activity in a state that has been steadily sliding down the rankings for personal income.

“I can guarantee that the personal property tax isn’t going to be eliminated in this session,” State Rep. Mike Karickhoff, R-Kokomo, told a legislative forum in Kokomo earlier this month. “But long term, it’s in our best interest to find a better revenue stream than business personal property tax.”

Even if neither the House Republicans nor the Senate Republicans support simply getting rid of the tax, which generates just over $1 billion a year for local government, even broaching the idea has caused consternation in Indiana’s counties.

Howard County, of which Kokomo is the county seat, is an example.

About 30 percent of all funding for local government in Howard County comes from property taxes paid on business equipment.

Chrysler Group LLC alone pays almost $21 million a year in business personal property tax to local government and schools in Howard County, most of which couldn’t be shifted onto other taxes, even if that’s what local officials wanted.

The state’s Legislative Services Agency, which studied the impact of a total elimination, estimated the average Howard County taxpayer, earning around $40,000 a year, would have to pay an additional $928 a year in local income taxes to make up the lost revenue.

The city of Kokomo would take the biggest hit, in terms of total dollars, losing about 20 percent of its budget to a total elimination, a dollar sum roughly equal to what the city spends on police protection each year.

Northwestern Schools would take an even bigger hit, losing 44 percent of its revenue stream.

That’s why the Indiana Chamber of Commerce, the biggest proponent of the tax shift apart from Pence, has been unequivocal in saying the tax can’t be eliminated without replacement revenue.

“Absolutely no one has called for that money to be taken away without some type of replacement revenue stream,” said Bill Waltz, the chamber’s vice president of taxation and public finance.

“There is no way that all personal property tax can be eliminated overnight. That is not going to be the proposal.”

At a local chamber of commerce meeting in LaGrange County last week, Pence indicated he’s not asking for a sudden cut.

“I want to say to the people in the General Assembly and around the state we should find a way to phase out the business personal property tax. I am open to a broad range of approaches to doing that,” Pence said. “But time and growth will be our friend here. We can do this over time in a growing economy, [in a way] that will be responsible and not unduly burden our local communities or shift the tax burden to individuals.”

Over in the Senate, the majority caucus is proposing a measure that exempts small businesses from personal property tax liability if they have less than $25,000 of personal property in a county.

This change is projected to exempt up to 71 percent of business personal property tax filers. In addition to at least partially paying for the cuts by eliminating some current state tax credits, the Senate plan also would create an 11-member Blue Ribbon Commission to study the impact of the business personal property tax on Indiana’s economic competitiveness. This commission would include representatives from state and local government and the business community.

Make no mistake, though: Their goal is to eventually eliminate the business personal property tax and not replace it with what they consider another “onerous” tax.

Ohio is often cited as an example of what Indiana hopes to avoid. The business personal property tax was replaced in Ohio with what Hoosier legislators would call a gross receipts tax — a tax on business revenue, regardless of how much profit a business makes.

But lawmakers say Pence’s suggestion that a tax which brings in $1.1 billion a year in revenue for local governments can be eliminated without shifting some the burden to individuals is hard to imagine.

“At this point, it’s not readily apparent how you could achieve a complete elimination without a replacement source,” Hershman said. “And we’ve got to be cautious. How do we implement a replacement source without causing an undue burden? The solution is not readily apparent right now.”

Connect with Kokomo Tribune business reporter Scott Smith on Twitter @JasonSSmith1 or CNHI Statehouse correspondent Maureen Hayden @MaureenHayden.

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