Tax-cap bill, jobless fund among top business issues during legislative session

December 22, 2008
Crafting a new budget at a time when Indiana's coffers are thinner than usual will be the biggest challenge facing legislators upon convening next month.

But several major issues with business implications expect to receive ample attention, particularly the continuing saga of property-tax relief and the state's ability to pay jobless benefits.

Lawmakers last session passed a bill establishing a 3-percent property-tax cap for commercial and industrial properties, 2 percent for rental property, and 1 percent for homeowners. They need to adopt the legislation twice — again in the upcoming session — before it can appear for public vote on the 2010 ballot and officially become a constitutional amendment.

Shoring up the insolvent Unemployment Insurance Trust Fund is a matter that's been simmering for months as well. The $1.6 billion the fund held back in 2000 had shriveled to just $21 million last month, forcing the state to ask the federal government for hundreds of millions of dollars to cover the approaching shortage.

Achieving bipartisan support can be difficult, but passing a bill to fix the fund should be no problem, said Ed Feigenbaum, publisher of Indiana Legislative Insight.

"That's perhaps the only thing outside the true budget that legislators and the governor agree they absolutely, positively have to address," he said. "Right off the top, you're looking at something that is going to upset both business and labor, but everybody agrees something needs to be done."

Jobless benefits

Employers in Indiana are taxed on the first $7,000 in wages they pay each of their workers. Companies with a history of more layoffs are taxed at a greater rate. The proceeds are held in the trust fund, where they collect interest until they're used to pay unemployment benefits. Struggling workers are eligible to collect $390 a week for 26 weeks.

About seven years ago, the General Assembly lowered employers' taxes and boosted benefits for the unemployed — a decision that proved to be a double whammy for the trust fund.

Over time, those actions have slowly drained it, especially as job losses escalated. In October, 6.4 percent of Indiana's work force was unemployed, according to the latest statistics from the state Department of Workforce Development. That's nearly 2 percentage points higher than the same time a year ago.

The most likely fix is to raise the tax rate on employers and cut jobless benefits. But Kevin Brinegar, president of the Indiana Chamber of Commerce, thinks eliminating system abuses could help restore some funding. Too often, he said, employees are fired for stealing, for instance, only to collect unemployment.

"This could be the perfect time to make sure folks aren't getting benefits unjustly," Brinegar said. "Everything ought to be on the table."

In the meantime, the state expects to borrow more than $300 million to cover December and January benefits until the General Assembly takes action.

Property taxes

Lawmakers are almost certain to endorse property-tax caps for the second straight session, so they can proceed to constitutional vote by the public in 2010, said Sen. Luke Kenley, R-Noblesville, chairman of the powerful Senate Appropriations Committee.

"I think it's necessary we pass it this year," he said, "and let the public decide how they want to deal with that."

Leaders of the Indiana Manufacturers Association expressed their concern early this year that the higher tax rate on commercial and industrial property would deter investment.

Although the rate is higher than what homeowners would pay, Kenley thinks manufacturers and the business community in general will favor the proposal because it provides certainty on future tax bills. IMA President Pat Kiely is on board.

"You should not destroy the economic system with having different caps," he said. "But if in fact the 1-percent cap is going to stick for homes, we will favor a constitutional cap just to make sure we're not the outlet for all new property taxation."

Yet, Feigenbaum cautioned that tax caps could encourage nefarious activity. To create more revenue, for example, local governments might appraise properties at a higher value than what they're worth, and challenge the owners to dispute the appraisals.

Illegal immigration

One of the most divisive issues last session — whether to penalize companies that hire illegal immigrants — died during the waning hours. It's likely to be resusci- tated, though, by its sponsor, Sen. Mike Delph, R-Carmel.

The Senate and House passed the measure, but it later died after conference committees from both chambers could not agree on provisions of the proposal.

Under the legislation, companies could have had their business licenses suspended, or revoked after three instances. Repeated violations could lead to license suspensions and even revocations.

That could be another major sticking point, Kiely at the IMA said.

"We're not in favor of illegal immigration," he said, "but we don't want to be put in a position where we can't comply, or be fined, or put out of business."

Delph told IBJ earlier this month that it's a matter of national security.

"The idea, in a post-9/11 world, is that states like Indiana have a right to know who's in the country and for what purpose," he said.

Kernan-Shepard Commission

The nonpartisan Kernan-Shepard report advocating government streamlining to promote efficiency and cut costs was overshadowed last session by property taxes. But Kenley expects the recommendations to gain new momentum.

So does Mark Fisher, government relations director for the Greater Indianapolis Chamber of Commerce, who said the report is among the organization's top priorities.

"I think that the recent referendum on township assessors should be a signal to the Legislature that citizens around the state are ready for reform," he said.

Voters in Marion, Hamilton, Hendricks and Johnson counties approved consolidating property assessment. Now, one county executive will have responsibility for the assessment of all property in each central Indiana county (and most other counties around the state).

Feigenbaum of Indiana Legislative Insight is not so sure the Kernan-Shepard Commission will garner much attention. He thinks the referendums to eliminate township assessors were a reaction to escalating property taxes rather than a true crusade for government consolidation.

Taxing services

Legislative watchers are split as well on whether a proposal to tax business services will have any momentum. As local governments struggle to replace lost revenue, the issue could have legs, said Kip Tew, a partner within Krieg DeVault LLP's government affairs practice group. The idea has been discussed before but has not gotten serious consideration.

"Certainly, if state government is going to talk about having permanent property-tax caps, and we have downward pressure on municipal and local government in regard to taxes, folks will be looking at other ways to tax," Tew said. "I think it's going to be something that's on the table."

Feigenbaum concurred; Brinegar didn't.

Workforce development

The state Chamber president would much rather focus on issues that benefit his members, such as the availability of worker training and assistance programs, and improving the state's high school dropout rate.

Gov. Mitch Daniels' once-touted plan to raise funds to support those initiatives by leasing the Hoosier Lottery to a private company, much like the Indiana Toll Road, is likely undoable due to legal obstacles. But it's possible the state could pursue a major bond issue backed by some of the Hoosier Lottery's future proceeds to underwrite college scholarships.

Brinegar acknowledged state budgetary constraints likely will curtail any funding for new workforce development and education initiatives, he said, "but it's a drum the chamber will continue beating."

To that end, the TechPoint technology promotion group's wish list includes several education, economic development, and research and development recommendations.

Chief among those is to restore the appropriation to the 21st Century Research and Technology Fund to the $75 million the fund received at its peak. Gov. Daniels is set to include a $73 million appropriation in the 2009-2010 budget he'll submit to the Legislature.
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