Report: Ditching business property tax shifts burden to others

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Gov. Mike Pence’s plan to eliminate the tax on business equipment would mean significantly higher taxes for other property owners if the state took no specific action to protect them, according to a new analysis.

The proposal would also mean big losses for local governments—unless another tax was created or increased to make up for the revenue.

And to do so with the individual income tax would mean a statewide average increase of more than three-quarters of a percent, according to the report from the nonpartisan Legislative Services Agency.

That could mean an additional $577 a year for a family with taxable income of $75,000. And for residents of the state’s more manufacturing-heavy counties, the amount would be substantially higher—as much as three times more.

“It all depends on the mix of the properties you have that you’re able to tax,” said David Bottorff, executive director of the Association of Indiana Counties.

“Ironically, it’s the communities that in general have been the economic hubs that are hurt the most—Howard County, Spencer, Gibson, Lake—the counties that have a lot of job creation and they rely on the personal property tax to help hold down everybody’s taxes,” Bottorff said. If the personal property tax is eliminated, “those are the ones that pick up the biggest shifts and the losses. It’s really a statewide issue but those are the communities that have the most to lose.”

The personal property tax is imposed on equipment used by businesses. Personal property can be a photographer’s camera or an automaker’s metal stamping machine or a newspaper’s printing press and it makes up about 14.5 percent of the state’s taxable property value.

Currently, the tax generates nearly $1.1 billion for cities, counties, schools, libraries and other local governments, according to the Legislative Services Agency report.

But Pence says it’s an impediment to business development and so he wants to dump it, a proposal that’s been backed for years by the Indiana Chamber of Commerce.

The tax “discourages companies from investing in new technology and the expansion of their businesses,” Pence said in a speech this month. “As the most manufacturing-intensive state in the nation, we are holding back new capital investment because of our business personal property tax.”

However, Pence has not said how—or if—he will back replacement revenue for local governments. He says he’ll leave that decision to the General Assembly.

The report, which was released Monday, provides a peek into some of the options, although it advocates no position.

The report found that:

— Eliminating the personal property tax without other changes would shift costs to other property owners.

That’s because local governments establish levies—which represent the total they aim to collect—and then that amount is split among taxpayers. If one group—such as those that own business equipment—is eliminated, then others pay more.

LSA estimates the shift in this case could mean the owners of so-called real property—which includes homes, buildings and land—would pay about $375 million more annually. Homeowners would be the largest single class of property owners to pay more.

The total shift would be higher but the state has limited property tax bills. So as tax bills increase, more property owners would hit the cap, reducing revenue to local governments.

— Replacing revenue with income taxes would mean significantly higher rates in some counties.

Pence has not advocated any way to replace revenue lost if the personal property tax is eliminated, but in similar situations, policy makers have turned to the local income tax as a makeup option.

The LSA report finds that to fully replace the lost revenue, counties would need to boost their income tax rates by an average of 0.77 percentage points—but the amount varies widely. (Click here for an interactive map showing how large of an income tax increase would be needed in each county to replace the personal property tax.)

In Brown County, it would take an income tax increase of just 0.10 percentage points (about $75 a year for a family with income of $75,000) compared to a 2.78 percentage point increase in Spencer County (an increase of $2,085 for the same family).

— The combination of tax caps and the elimination of the personal property tax means local government would lose about $554 million annually.

Without other changes or replacement revenue, cities and towns would be hit hardest by the elimination of the personal property tax, with about $175 million in total losses, according to the report.

Schools would also be big losers—about $151 million.

Additionally, tax increment finance districts—often calls TIFs—would lose significant revenue. Those districts are set up to capture tax revenue to use for special projects, usually to pay off bonds associated with construction or infrastructure improvements.

Pence has said repeatedly that he doesn’t want to “unduly” burden local governments. And he’s proposed a phase-out of the tax so the impact doesn’t hit at once.

“We will work to empower communities and local governments in this process,” Pence said. “Time and economic growth should be our friends here, making it possible to phase out the tax while protecting local governments.”

But key fiscal leaders—including Senate Appropriations Chairman Luke Kenley, R-Noblesville—have said there are significant issues lawmakers must tackle. Among them is how to make up the revenue—and who should do so.

Kenley said a key decision is whether businesses that are benefitting from the elimination of the personal property tax should be the ones who pay, rather than shifting the burden to individuals.

That could require creating a new tax, something the LSA report doesn’t address.


  • Tax Exemptions
    Time for the state to re-visit what type of businesses are given property tax exemptions. Some for-profit groups such as technical schools are exempt from property tax. Why should these outfits not be paying their fair share?
  • Now That's Leadership!
    "However, Pence has not said how—or if—he will back replacement revenue for local governments. He says he’ll leave that decision to the General Assembly." Our Governor wants to play Santa with tax cuts and leave the hard decisions to others.
  • Thanks Gov. Pence !
    Commercial & Industrial property owners already pay up to 3% a year in property taxes and the additional tax on Manufacturing & Co owned "personal property" versus a homeowners 1% of accessed real estate value and nothing on personal property, what is fair about that? My Manufacturing Co pays the full 3% on our real estate not including "personal property" taxes. In the next 20 years I will pay for our industrial building twice - first to the bank and second to the County Treasurer! As a compromise the State needs to offer an exemption for small and medium businesses for property AND personal taxes. Maybe the first 500k to 1m should be exempt for small & medium businesses trying to grow and employee more Hoosiers! If my Co's personal property taxes were eliminated and Proerty taxes reduced from 3 to 1 1/2% I could hire a new employee !!! It's not trickle down.... it's ECONOMICS !
  • You get what you voted for!
    It seems to me that Middle Income and Poor Families are going to see more of their money paid in taxes under the premise that the Republicans are going to take care of the people who voted them into office and filled their campaign coffers with contributions. It seems to me that folks are getting what they voted for, and the bait and switch tactics of the GOP seem to have worked once again.
  • We pay the taxes already
    "Fish Bowl" is right, but misses one valid point. We, the consumer, homeowner, purchaser is paying for the personal property tax already. There isn't one business in this country that actually pays taxes, they just pass it on to the consumer. At least with a sales tax we can see how much we're paying the government. So for everyone saying tax them more, get ready becaus you're just supporting a tax on yourself. Otherwise, because we have an insatiable need for "cheap" stuff, the business starts buying from out of state or overseas vendors or simply moves themselves to compete with businesses that don't have to pay the extra, homegrown tax. Simple, first chapter economics that too many people don't have a clue as to how the economy works.
  • Manufacturing jobs?
    How about Indiana try to attract some NON-manufacturing businesses??
  • Tax the Rich
    Since this is simply going to increase bonuses for the corporate executives, I say we tax them more. Indiana has a flat tax system, meaning that the rich get away without having to pay any greater percentage of their income than someone on minimum wage. If the rich want to move their factories here, then they need to be ready to pay more from their income taxes.
  • Typical
    This Republican Governor doesn't think we all need health insurance and now is sticking it to Indiana citizens with higher taxes especially property taxes. They've got to make up the short-fall somewhere and guess who will get stuck with the bill? He doesn't care about us, the regular voters because big business and corporations are the only things that matter to him.
  • Homeowners vote
    Mr. Pence needs big money to run for the White House...he's for sale. If he doesn't get the nomination, he may find that the Indiana homeowner's vote him out next time. He needs to make some credible concession to homeowner's and local governments. The theory that manufacturer's take money saved in taxes and invest it in their business is suspect at best, despite it being the mantra of every fiscal conservative...what business does is always act in the best interest of the business...it is garbage theory to say that businesses will take money that they save in business equipment tax and spend it on expansion and payroll...you don't know that and you can't make them...if you have a tight fisted CFO, you may spend nothing on expansion and cut cost even more to increase margin. Not having business tax won't keep a company from deciding to pick up and move to wherever the labor is .50$ per hour and there is no union. Tooth Fairy economics...
  • One Sided
    I can't believe these articles are allowed to be printed without defining how they calculate the results. It's written as if the earth will stand still and the local communities will just have to make up $1.1B. For every action there is a reaction. Why not go into more detail on why this is even being proposed? If the personal property tax is eliminated and businesses expand, buy new equipment, new businesses come to our state then the overall tax base is increased. This is good for all. This affects the small business owner as well, as there is currently an unfair advantage to the one that has fully depreciated it's equipment and repairs it versus ever investing in or buying new. Someone starting the same new business today, even buying older used equipment, pays a sales tax and then personal property tax while their competitor down the street with possibly newer equipment pays nothing because it's fully depreciated. If the State wants to make up the difference they just have to raid the under the table employers and audit the businesses that only accept cash and they would collect double the shortage indicated. Report both sides of the story or read an introductory to economics book before blowing the Governor's proposal out of the water.
  • This Will Make Pence's Resume Look Good
    Pence will be able to boast that he made conditions in Indiana more favorable for business owners - thus garnering favor [and contributions] from wealthy big business interests. This with his eyes focused firmly on his dream of running for President [and all the while living property tax free in the Governor's Mansion on N. Meridian @ Indiana taxpayers' expense].
  • A little more info than this story provides.
    "“Ironically, it’s the communities that in general have been the economic hubs that are hurt the most—Howard County, Spencer, Gibson, Lake—the counties that have a lot of job creation and they rely on the personal property tax to help hold down everybody’s taxes,” Bottorff said." Or, one could say those counties, which are trying to attact new businesses and employers, benefit MOST by lowering business equipment property taxes. Most businesses recognize these taxes as nothing more than a money grab, and you can be sure they take them into consideration when looking at new business sites. Indiana is the only Midwest state other than Kentucky that even taxes business machinery and equipment,and the Kentucky rates are considerably lower. And Indiana is near the top nationally for effective business equipment taxes. Other states, including New York, under Cuomo, have proposed cutting them as well.
  • wow
    This is disgusting. Take from the poor and give to the rich. Seems like the mantra of Pence. Hopefully sanity prevails in the legislature. Otherwise I hope the Democrats blast the airwaves telling Indiana families about their $577 tax increase...
  • Tax the little guy
    With Pence it is all about taxing the little guy and giving his cronies a break

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