Government and Economic Development and Real Estate & Retail and Transportation, Distribution & Logistics

Inventory tax repeal still being hailed as good decision: Amid rising property taxes, economic development officials and brokers say taxing inventory was bad policy

August 13, 2007

With the state in an uproar over soaring property taxes, some have wondered whether phasing out Indiana's business inventory tax was a good idea.

The phase-out process began in 2002 before completely eliminating the inventory tax this year, taking with it roughly $380 million in tax revenue shared annually by local governments.

Supporters of the move insist lawmakers made the right decision. And they say Indiana has become more attractive to business as a result.

Marion County property-tax bills were set to soar an average of 35 percent this year before Gov. Mitch Daniels ordered them frozen at 2006 levels until reassessments can be completed. Other counties also are experiencing dramatic increases. Several reasons have been cited for the upsurges, including the elimination of the inventory tax.

Yet Sen. Tom Weatherwax, R-Logansport, the legislator who championed the removal of the inventory assessment, is certain the General Assembly made the correct call.

"We brought ourselves to the forefront of the crossroads of America, where people could store and ship goods without the concern of inventory taxes," he said. "There's no doubt in my mind that it's a big benefit."

Indeed, at the time of the initial phaseout, only nine states continued to tax inventory, including Ohio and Kentucky in the Midwest. Ohio since has rescinded its tax as well.

Further, business-advocacy groups and politicians hail the tax-restructuring bill that included the measure as the most significant piece of state legislation passed in decades.

Red flag

Business advocates blamed inventory taxes for chasing off potential employers and millions of dollars in investments because it's cheaper to locate warehouse and distribution facilities in more taxfriendly states.

"When we did have an inventory tax, it was a red flag," said Gordon Hendry, interim CEO at Indy Partnership, a not-forprofit that promotes economic development in the Indianapolis region. "Oftentimes, we wouldn't even know about projects we lost because we were scratched off the list before we were contacted."

The scrapping of the tax has bolstered central Indiana's bid to become a distribution hub, real estate experts say, particularly in Plainfield and the northwest corridor at Lebanon and Whitestown.

Close proximity to the region's array of interstates certainly is a factor, but there's no discounting the impact of the incentive, said Tom Theobald, a senior vice president and regional partner at the Indianapolis office of Chicago-based real estate developer Verus Partners LLC.

"I think it has helped significantly in attracting the distribution, transportation and logistics industry to central Indiana," he said. "Because of our geographic location, we're going to attract those users to a certain degree anyway, but the inventory tax was a large hurdle that was hard to overcome."

Major objection?

Missouri-based retailer O'Reilly Auto Parts recently built a 400,000-square-foot warehouse and distribution center at Eaglepoint Business Park in Brownsburg. The $25 million facility will help create 500 new jobs by 2008 and will serve more than 200 Midwestern retail locations. The company also secured ground that will allow for future construction of 100,000 square feet of space.

Indiana's central location, abundant supply of workers and its overall corporate tax structure proved attractive, O'Reilly spokesman David Turney said. The elimination of the inventory tax contributed to the company's decision, he said.

Even so, he admitted O'Reilly would have located to Indiana regardless of whether the tax had been phased out. To that end, real estate experts say not having an inventory tax levels the playing field when competing against other states more so than serving as the sole incentive for a company to consider moving to Indiana.

Industrial brokers, however, are reluctant to discuss just how important the elimination was when it comes to landing new distribution centers and plants.

Numerous industrial brokers declined to return IBJ's phone calls seeking comment. So did several companies that have recently located in central Indiana.

Meanwhile, Indiana's friendlier business climate is no consolation to angry homeowners seething over spiking property taxes. But supporters think lost inventory-tax revenue ultimately will be replaced by additional sales- and income-tax revenue generated by more companies.

Moreover, legislators included a caveat urging counties to enact a local-option income tax to provide relief from escalating property taxes. So far, 43 counties have done so, including Hendricks, Madison and Morgan counties in central Indiana.

The amount that goes for property-tax relief is dependent on the rate (0.25 percent up to 1 percent) chosen by a county council. In Pulaski County, part of Weatherwax's district, the council passed a LOIT that will replace the normal growth in property taxes at a rate of 0.3 percent. It also passed an additional 1 percent to be used exclusively to lower property taxes.

Pulaski was the first county in the state to provide the relief and, in 2002, became the first to eliminate the inventory tax as well.

"I designed the bill to protect homeowners," Weatherwax said. "Those counties that didn't do it didn't care about the shift to homeowners, because everybody knew it was going to happen."

Marion County recently raised its income tax 0.65 percent-not to give homeowners a break on property taxes, but instead to fund public-safety initiatives.

Despite the resulting turmoil, the elimination of the inventory tax still enjoys bipartisan support. Rep. David Orentlicher, D-Indianapolis, was elected to the Legislature in 2002, right after lawmakers voted to phase out the inventory tax.

He said bringing an inventory tax back would be a bad idea. He would rather ease the burden on homeowners by increasing sales- and income-tax rates and revamping the current assessment system so homes are more fairly valued.

"I don't think the elimination itself was a bad idea," Orentlicher said. "I think the more important question is whether we have the right balance between homeowners and business owners, in terms of taxes."

That's a debate that may never reach a full consensus.
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