IBJNews

Study: Indiana tax code discourages small businesses

Back to TopCommentsE-mailPrintBookmark and Share

A new study of Indiana's business tax structure suggests the state's tax code discourages the small, home-grown businesses often considered the engines of job creation.

The Ball State University study found several tax code inequities that result in larger, service-oriented businesses paying almost uniformly a smaller share of total revenue in state taxes than smaller, manufacturing-based firms.

The study by Ball State's Center for Business and Economic Research is provocative because it suggests Indiana's tax code discourages small, home-grown businesses that fuel job creation, said Michael Hicks, the center's director.

"The worse thing you can be in Indiana is a small manufacturing company that has organized itself as a corporation. These are exactly the kind of companies we want to be creating jobs," Hicks told The Indianapolis Star.

Hicks and co-author Hilary Fichter ran simulations for companies ranging in size from $1 million to $100 million in revenue and with differing legal structures, such as corporation, limited liability corporation, and not-for-profit. Their study also looked at a wide range of industries, including manufacturing, retail and personal services.

They then determined how those different companies would fare under Indiana's tax structure, which includes income, corporate net income, real and personal property, and sales taxes.

The study essentially found that the overall business tax rate favored some sizes, industries and corporate organizations over others.

Smaller companies generally had higher effective tax rates than larger companies because overhead tends to be higher for smaller firms, painting a fairly clear picture of the regressive nature of the states' overall business taxes, where — almost uniformly — larger businesses pay a smaller share of total revenue in state taxes, the report says.

The study also found that companies that produce goods had higher effective tax rates than companies that provide services. Hicks said this is because sales tax doesn't apply to services and because manufacturers tend to have more property than service companies.

Finally, companies organized as corporations in Indiana must pay 8.5 percent in income tax, while those organized as LLCs only pay 3.4 percent. As a result, big out-of-state companies like Wal-Mart that register to do business in Indiana as an LLC are taxed at a much lower rate than companies headquartered in the state, such as Eli Lilly and Co.

"This tax rate is an inequity affecting Indiana corporations rather than out-of state-companies with facilities in Indiana," the report says.

Gov. Mitch Daniels' office declined to comment on the report, but Indiana Economic Development Corp. spokeswoman Katelyn Hancock defended the state's tax structure in an emailed statement.

"Most Hoosier businesses pay the same income tax rate as individuals (3.4 percent) and Indiana recently lowered our corporate income tax rate," she said.

State lawmakers last year voted to reduce the rate from 8.5 percent to 6.5 percent over four years, beginning in fiscal 2013.

Hancock blamed uncertainty about changes to the federal tax code for any hesitation on new investment and hiring among Indiana businesses.

Business representatives agreed that Indiana's tax climate is competitive, but they also said the report reinforces the fact that it's not perfect.

David P. Lewis, Lilly's vice president of global taxes, said that even at the lower 6.5-percent corporate tax rate, "Indiana's taxation of businesses in the corporate form will remain higher than 19 other states."

"Remedying this higher rate, relative to Indiana's lower 3.4-percent individual income tax rate applicable to other forms of doing business, will further improve Indiana's already highly rated business climate," he said.

Indianapolis Chamber President Scott Miller said the study raises questions that warrant further study.

ADVERTISEMENT

  • Perhaps if we treated employees better?
    Indiana still has the "brain drain" where those with education leave the state....to find better living conditions. Giving corporations every break and having the individual pay the difference is not a solution. While government has sold out to the business lobby....I hope the voters will work to bring back the working middle class.
  • and you wonder why I vote Libertarian
    "The worse thing you can be in Indiana is a small manufacturing company that has organized itself as a corporation. These are exactly the kind of companies we want to be creating jobs," Hicks told The Indianapolis Star. Damn, guess I'll move LumenCache out of Indiana. Too bad, will be creating about 50-100 jobs in the next 12-24 months. Made In USA is still easy to accomplish.

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in IBJ editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by
ADVERTISEMENT

facebook - twitter on Facebook & Twitter

Follow on TwitterFollow IBJ on Facebook:
Follow on TwitterFollow IBJ's Tweets on these topics:
 
Subscribe to IBJ
  1. PJ - Mall operators like Simon, and most developers/ land owners, establish individual legal entities for each property to avoid having a problem location sink the ship, or simply structure the note to exclude anything but the property acting as collateral. Usually both. The big banks that lend are big boys that know the risks and aren't mad at Simon for forking over the deed and walking away.

  2. Do any of the East side residence think that Macy, JC Penny's and the other national tenants would have letft the mall if they were making money?? I have read several post about how Simon neglected the property but it sounds like the Eastsiders stopped shopping at the mall even when it was full with all of the national retailers that you want to come back to the mall. I used to work at the Dick's at Washington Square and I know for a fact it's the worst performing Dick's in the Indianapolis market. You better start shopping there before it closes also.

  3. How can any company that has the cash and other assets be allowed to simply foreclose and not pay the debt? Simon, pay the debt and sell the property yourself. Don't just stiff the bank with the loan and require them to find a buyer.

  4. If you only knew....

  5. The proposal is structured in such a way that a private company (who has competitors in the marketplace) has struck a deal to get "financing" through utility ratepayers via IPL. Competitors to BlueIndy are at disadvantage now. The story isn't "how green can we be" but how creative "financing" through captive ratepayers benefits a company whose proposal should sink or float in the competitive marketplace without customer funding. If it was a great idea there would be financing available. IBJ needs to be doing a story on the utility ratemaking piece of this (which is pretty complicated) but instead it suggests that folks are whining about paying for being green.

ADVERTISEMENT