Pharos-Tribune

January 15, 2014

Proponents of erasing business personal property tax up against dry alternative revenue streams.

Proponents of erasing business personal property tax up against dry alternative revenue streams.

By Scott Smith & Maureen Hayden CNHI
Pharos-Tribune

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

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.

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.

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 the chamber’s vice president of taxation and public finance, Bill Waltz. “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.”

State Sen. Mike Karickhoff, R-Kokomo, who chairs the House Ways & Means Committee’s budget subcommittee, said he didn’t expect a vote Tuesday on the House Republican proposal, which would allow counties to eliminate the business personal property tax on new businesses.

Even so, a line of mayors waited to testify in committee on House Bill 1001 Tuesday evening.

Over in the Senate, the majority caucus is proposing a measure which 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.”

Agricultural economist weighs in Businesses paid about $1.1 billion in personal property tax, mainly on equipment, to local governments across Indiana last year. If the tax was eliminated, state fiscal analysts estimate local governments would lose close to half of that revenue, due to the property tax caps in the state's constitution. Here's why: "Indiana limits the revenue that local governments raise from the property tax. There's a maximum property tax levy restricting most local government operating funds. The maximum levy increases from the previous year's maximum based on a state formula. Most of the levy does not depend on changes in assessed value. "If we eliminate personal property from assessed value, total assessed value would be smaller. We calculate property tax rates by dividing the levy by assessed value. With the levy limited and assessed value smaller, most tax rates would go up. Personal property owners would pay less, but higher tax rates would shift this tax burden to everyone else. "Or taxes would shift, except for the property-tax caps. Indiana's constitutional tax caps limit homeowner tax bills to 1 percent of assessed value before deductions. The caps limit rental housing, second homes and farmland taxes to 2 percent of assessed value and business land and building taxes to 3 percent. "Personal property elimination would raise tax rates and tax bills. In many cases, these higher tax bills would exceed taxpayer caps. Taxes paid by personal property owners would shift to other taxpayers, but the part above the caps would be unpaid. Local governments would lose that revenue." Source: Purdue University Professor Larry DeBoer