Pharos-Tribune

December 9, 2013

Business groups, mayors at odds over tax revenue

Local governments ask what will replace it.

by Arthur Foulkes For the Pharos-Tribune
Pharos-Tribune

---- — TERRE HAUTE — Who would have believed that old fork lifts, barber chairs and aging computers could capture the attention of so many folks around the state?

But taxes on those items — equipment known as “business personal property” — generate revenue for local government, helping pay for police, teachers, libraries and more.

Republicans, including Gov. Mike Pence, say they will propose legislation in the new year to reduce or eliminate the tax as a way to attract new investment in the state. However, mayors, school officials and other local government leaders are resisting lest they lose a big share of their annual revenue.

In 2012, the state collected nearly $1 billion in personal property taxes, which all businesses must calculate based on the value of their equipment. The tax covers everything from office furniture and shelving to massive production machinery.

Sony DADC, a big electronics manufacturer in Vigo County, paid $3 million in 2012. Even small businesses feel the tax. A Terre Haute tanning salon paid $894 last year on $29,000 in equipment, according to the assessor’s office.

Most of the state’s property taxes come from residential and commercial land and buildings, but a significant portion — about 16 percent — comes from personal property, according to state figures. Losing that would be a blow to cities, towns, schools and public library districts.

Without the tax, the City of Terre Haute would suffer a cut of more than $4 million from its already strapped budget, said Republican Mayor Duke Bennett, an opponent of eliminating the tax. The city’s sanitary district would lose $1 million, he said.

Vigo County Assessor Debbie Lewis said losing that revenue would have a greater effect than lifting the tax on business inventory a decade ago.

Matt Greller, executive director of the Indiana Association of Cities and Towns, said local governments will need new sources of revenue to replace the lost tax or face cutting “vital public safety services and other things that residents absolutely need and expect.”

Not all Hoosier counties would feel the same impact. Much depends on how much business personal property exists in the county, especially in comparison with taxable land and buildings. Heavily wooded and rustic Brown County, for example, collects only about 3 percent of its property tax from business equipment. In Gibson County, home to dozens of manufacturing plants, the figure is more than 40 percent. In Vigo County, that figure is 26 percent.

Of course, determining the value of business equipment isn’t always easy. Nor is it always clear what items are subject to the tax. Should an adding machine be taxed? It might, depending on how many adding machines a company has, a Vigo County official said. Another quirk: The tax is largely based on the honor system; companies “self-assess” their equipment, Lewis noted.

Elimination of the tax would increase property taxes for other taxpayers, according to Larry DeBoer, a Purdue economist. As a result, many tax bills would also exceed their constitutional tax caps, meaning cities and towns would lose that revenue, he stated in an article published last week.

In 2012, businesses paid $963 million in personal property tax. Without personal property, other property owners would pay about $453 million in higher taxes and local governments would lose $510 million, DeBoer stated.

Business groups, including the Indiana Chamber of Commerce and the Indiana Association of Manufacturers, see the personal property tax as the next target in their years-long pro-investment agenda. That has already included putting the state on daylight saving time and making Indiana a right-to-work state, in which employees can no longer be required to pay union dues.

Local officials, on the other hand, see the tax’s elimination as a nightmare scenario, at least if no new tax is expanded or created to take its place. Several ideas are under consideration, including increasing the state’s income tax or expanding local government taxing options.

Without replacement revenue, many city and county officials throughout the state are resisting the proposal to cut the personal property tax, Greller said.

“I will stop just short of saying it’s unanimous,” he said. “Every mayor that I have spoken with is deeply concerned about what the elimination of the personal property tax might mean to local government, to their cities.”

Dropping the tax would affect cities and towns as much or more than the caps on taxes on land and buildings, Greller said. Those caps, approved by the Legislature in 2008, have cost local governments millions of dollars.

Indiana property taxes are capped at 1 percent for homes; 2 percent for rental units, second homes and farmland; and 3 percent for business property. Hoosier voters in 2010 approved — by 71 percent — making the tax caps part of the state constitution.

Business groups and Republicans make pro-growth arguments for tanking the personal property tax. Only a few states tax the property of businesses as much or more than Indiana does, they note, and many states in the upper Midwest have no such tax.

“It remains the one area in our tax climate where we stand out like a sore thumb,” said Kevin Brinegar, president of the Indiana Chamber of Commerce.

Still, the chamber acknowledges that replacement revenue would need to be found if the tax is eliminated, Brinegar said.

Gov. Pence, speaking to Indiana mayors Thursday, said the same.

Agreeing on the source of that revenue could be difficult. Both sides are talking, Brinegar said, but that could break down over finding a substitute.