Small biz tax bills rising, too: Extra expense narrows margins

August 27, 2007

Area homeowners weren't the only ones to get a shock when they opened their 2007 tax bills. Some small-business owners also saw their bills skyrocket-putting a strain on entrepreneurs who often operate on razor-thin margins.

"It's catastrophic for some businesses," said Kevin Hughes, state director for the National Federation of Independent Business's Indiana chapter.

Mike Hutson, owner of Westfield Lighting Co., certainly feels the pain. The bill on his commercial property-several acres and a 22,500-square-foot building-increased from $42,000 in 2006 to $85,000 this year. That spike came even after Hutson successfully appealed an assessed valuation he thought was too high.

"I can only speak for myself but, man, we got hammered," he said.

The increased expense comes at a time when his cash flow is tight due to a slowing home-building market. Hutson said he recently turned down a sales manager's request for more stock to display in the showroom.

"Right now I'm choosing between [paying for] people or product because my cash flow has taken a hit," he said. It's a similar story at Godby Home Furnishings Inc. The property tax bills on three of its four central Indiana retail stores increased 15 percent-50 percent, and the Noblesville outlet's taxes doubled.

"It will definitely have an impact," said owner Jim Godby. "Being an individual business owner, that comes right out of my pocket and filters down to all my employees."

His entrepreneurial counterparts in Marion County face similar problems-plus uncertainty about what the future holds. State officials have ordered a reassessment there because 72 percent of commercial property values in the county were unchanged from 1999 to 2005. Seventy-six percent of residential values increased.

The static commercial values caused some politicians to say business owners aren't paying enough. While NFIB supports taking another look at commercial valuations, Hughes said pointing the finger at all businesses isn't fair.

"Some small businesses are getting socked just as much as residential homeowners," he said.

Take Dawn Crow, who bought a Fountain Square office building for $220,000 in 2004. She also co-owns Green Three Inc., a landscape architecture firm that occupies space in the building. Her nowinvalid 2007 property tax bill totaled $6,600-almost five times as much as in previous years.

When she first got her bill, she called around to neighboring businesses and found out she was virtually alone in her pain. The assessed value of her building was adjusted to match its sale price, but nearby buildings that didn't change hands saw no change in value. So their tax bills had more modest increases in the 20-percent range.

While Crow isn't worried about her bill going up more with the new assessment, she is worried that, if other businesses see higher bills, it will stymie development in the area.

"I'm concerned that [neighboring business owners] who thought they made it through this hurdle will soon realize the same impact as me," Crow said. "They thought they got a pass."

She said the market won't support higher rents and she's afraid if some building owners are forced to sell, the area may lose its development momentum. Crow is putting any extra spending on hold until she sees her revised 2007 bill.

"There's a finite amount of income," she said. "We don't get to pay ourselves a higher wage, can't hire, can't do marketing we might have done or donate to charities."

Many business owners said they hope the current situation will help trigger a change to the property-tax system.

The first step is to address systemic flaws, including having more than 1,000 elected township officials assess properties, said J. Cameron Carter, vice president of small business and economic development policy for the Indiana Chamber of Commerce.

"With that many actors working on this, you're not going to get uniform [assessment] results across the board," Carter said.

Indianapolis-based Hurricane Food Inc.'s experience is proof of that. The company owns 17 Wendy's franchises and four Ritter's Frozen Custard franchises in Marion, Hendricks and Johnson counties. Though all of the stores are similarly sized, the assessed valuations are "all over the board," partner David Gowan said. All told, Hurricane's property tax bills increased $57,000 to just under $250,000.

"With margins that are already razorthin, you can't help but pass these costs along to consumers," said Gowan.

Small-business advocates regularly make a case for consolidating local government in an effort to cut budgets. Still, the appropriate balance between property taxes, local income taxes and other funding options always generates spirited debate-even among entrepreneurs. NFIB has just begun polling its members to see where they stand on the issue.

One option is to use local income taxes more to fund local government, a step that state lawmakers took in the last legislative session. Hutson, for one, said he favors that approach.

"Owning the building doesn't produce a nickel of income," he said. "It doesn't indicate how much business I'm doing this year."

Others say that would shift the burden from large businesses to smaller ones.

Hughes said NFIB will wait until the poll results are in to decide what solution it will pursue. But one message is already clear: The status quo isn't suiting small-business owners.

"There's a groundswell of support for change," he said.
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