Governor and Economic Development Incentives and Legislature and State Government and Taxes and Property taxes and Tax Caps and Sales tax and Government & Economic Development and Government

Tax reform fallout worries biz interests

March 24, 2008

Property tax reform is now Indiana law. Hoosier homeowners are thrilled. But many corporate leaders grumble the historic deal was brokered on the backs of business.

Topping their concerns is the new 3-percent property tax cap for commercial and industrial properties, which they fear will slow business expansions and discourage companies from moving headquarters to the state. Lawmakers granted far greater relief to homeowners, whose tax bills will be capped at 1 percent of their homes' values. They set the cap at 2 percent for rental property.

Some business leaders also are uneasy with provisions in the reform bill that hike the state sales tax from 6 percent to 7 percent. The increase won't pinch just consumers, they point out, since 20 percent to 40 percent of all transactions are business to business.

And they're frustrated that lawmakers put off tackling major reforms to make government more effective and efficient--moves that are key to putting tax bills in check.

The Legislature passed the political hot potato of whether to eliminate township assessors in urban areas like Marion County to voters, who will consider the question in a November ballot referendum.

Though lawmakers next year plan to tackle reforms proposed in last year's Kernan-Shepard government-efficiency report, business leaders fear lawmakers' resolve will wane now that they've quieted the hue and cry from homeowners.

Business rumblings

State Sen. Luke Kenley, a key property tax reform negotiator, said his foremost goal this session was to help struggling homeowners, while holding businesses neutral.

"We wanted to make sure business didn't take any hits in this process. The focus was on the homeowner, but we didn't want it to be at the expense of business," said Kenley, a Republican from Noblesville. "We were trying to hold them harmless in this exercise."

But many business leaders have a different take on the reforms, which follow the framework Republican Gov. Mitch Daniels proposed last year. Even Daniels' staunchest supporters, such as Central Indiana Corporate Partnership CEO Mark Miles, acknowledge the business community's rumblings.

"Broadly, we're pleased with the governor's leadership and the fact that the Legislature essentially followed his lead and passed a package that we do think represents vital reform in the property tax system," Miles said.

"The question will be over time, as all classes of taxpayers run into the circuit breaker ceilings and there is clamoring for additional revenues, will business be the obvious target in the future?" he said.

Seated beneath the towering Statehouse rotunda, Daniels on March 19 was careful to use several ceremonial pens as he signed property tax reform into law. Hundreds of observers watched as Daniels passed a pen to House Speaker Pat Bauer, the Democratic leader.

Lawmakers were all smiles. It was a moment created for the campaign trail and captured by many television cameras--complete with local schoolchildren in the front row. Daniels lauded Bauer as a "straight shooter." Bauer opined that compromise led to a better product.

"We've seen a standard I hope Indiana can live up to as we deal with issues in the future," Daniels concluded.

Yet Bauer left plenty of room for changes to the legislation Daniels had proposed as "fair, far-reaching and final."

"Any legislation this significant takes compromise," Bauer said. "I call this a work in progress. We have eight months to see how it works out."

Businesses are still trying to understand all its ramifications. Local property tax attorney Beth Henkel took all 675 pages of House Enrolled Act 1001 home to digest and explain to her clients.

"I put it on top of the piano and played some blues," said Henkel, a former Indiana Department of Local Government Finance director who's now with the local firm Schuckit & Associates PC.

Businesses probably will see a short-term benefit from the property tax caps, said Mark Cahoon, the Indiana Manufacturers Association's vice president of government finance and economic development. But over time, he said, the lower cap for residential property will hurt economic development.

"When you have business tax caps set at three times what residential tax caps are, we're very concerned about where that places industrial investors on a long-term basis," Cahoon said. "That will place us the third-highest in the country. That's not a good place for Indiana to be."

The higher sales tax also could be a significant cost to business over time, Purdue University economist Larry DeBoer said.

Modern businesses rely increasingly on supply chains in which different companies produce the individual parts that are ultimately assembled into the products consumers buy, he said.

"That's been a trend in business, to create more rather than fewer inter-business transactions," DeBoer said. "And that's a complaint that economists have about sales taxes, that they ought to only apply to consumer sales, so things are only taxed once."

Bonds and assessments

Legislators anticipated and addressed one of the biggest consequences of the new tax caps: their potentially negative effect on debt ratings from Standard & Poor's or Moody's Investors Service.

To ease the debt-rating-agencies' fears of possible default, Indiana will step in as a backstop for local projects funded with municipal bonds. If local governments fail to make their payments due to lack of property tax revenue, the Indiana treasurer is now obligated to assume the bill.

Indiana already had such a mechanism for schools, said Jim Merten, vice president of the local investment firm City Securities Corp.

At the same time, the Legislature approved a 20-year payment cap on most new bonds and tightened the rules on debt refinancing. To keep annual payments as low as possible, many local issuers had stretched bond maturities. With less time for debt retirement, their payments will be higher. New requirements for referendums on some building projects also could discourage or reduce their size.

"It will take several years to figure out whether it truly slows down projects," Merten said. "If a project is necessary, I hope the community approves it. Because if they delay, it [ultimately] just increases the cost with inflation."

But holding down costs is only part of the property-tax problem, business leaders say. They continue to have little confidence that the current township assessor system yields the accurate assessments that are crucial to any fair property tax.

Crowe Chizek & Co. LLC executive Josh Malancuk, the property-tax-practice leader for his Oak Brook, Ill.-based accounting firm, expressed disappointment that the General Assembly didn't move further to professionalize property assessment.

To become a certified general appraiser, Malancuk said, he had to complete 180 hours of coursework and earn 3,000 hours of appraisal experience under a supervisor with the certification. By comparison, he said, township assessors' training lasts just a few weeks.

"There's a big difference between what I went through and what assessors are being given, and it's pretty easy to understand the big disconnect with the assessed values," he said.

"I think the word is still out on the impact on business. You've really got two factors--the [tax] rate that could materially change and the assessed valuation that very materially changes from one year to the next."

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