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MALONE: Low business taxes aren’t enough

October 31, 2015

MaloneA recent CNBC survey listed Indiana as the least expensive state for conducting business in the United States, citing low business taxes and state incentives.

My initial reaction was, “Great! Low business costs will attract more companies, and more Hoosiers will have jobs.” But low business costs alone did not correlate to low unemployment. Of the 10 states with the lowest business costs, three were in the top 10 for low unemployment and four were in the bottom half. (Indiana ranked 21st.)

If low business costs don’t reduce unemployment, what does? The three variables in the CNBC survey that most closely correlated with favorable unemployment rates were 1) business friendliness, 2) quality of life and 3) education.

Business friendliness relates to the level of freedom state laws and regulations provide to businesses. Indiana fares well in this category, ranking ninth.

Quality of life measures crime rates, diversity and inclusiveness, quality of health care, environmental quality, parks, recreation and local attractions. “The best places to do business are also the best places to live,” according to the CNBC study. Indiana ranked 42nd, so we have work to do.

Education provides a qualified workforce, plus partners for research and an attractive environment for employees to raise their families. In this category, Indiana is in the top half, but not by much: The Hoosier state ranks 22nd.

I envision the variables as a three-legged stool. If you’re long on one leg (business friendliness) and short on the other two, it’s a wobbly place to sit. You need a balance to improve employment rates.

While Indiana doesn’t have mountains or oceans, we have some control over the quality of our education system and the livability of our communities. Everyone loves low taxes, but low taxes are not a bargain if they reduce the quality of our communities and our public education system.

It has been challenging for many communities to make additional investments the past five years, because the property tax caps created in 2008 have limited their financial resources. Although the caps create some financial predictably for property owners, state officials predict that almost $800 million of property taxes assessed by Indiana schools and local governments will not be collected this year due to the caps. Some communities lose as much as one-third of their property taxes.

Unlike property tax caps enacted elsewhere, Indiana’s tax cap losses are not funded by other sources. Indiana needs to take a serious look at replacing that lost revenue.

The General Assembly authorized a series of local option income taxes to provide new revenue, and several counties have adopted them. However, it is rare for the new income taxes to generate enough money to completely replace the lost property taxes. None of the new LOITs can directly replace property tax revenue lost to the tax caps. This leads to the adoption of local income taxes at levels higher than might be necessary. The LOIT that funds public safety is important, but it doesn’t help our schools and libraries.

Allowing local governments the flexibility to use the new tax dollars to fund the losses to tax caps would be a step forward. In the long run, it would provide a more efficient use of tax dollars, it might reduce local option income tax rates, and it would help our communities fund the education and quality of life that correlate to reduced unemployment.•

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Gary Malone is a CPA and a partner at Umbaugh, one of the largest financial advisers to governmental units in the Midwest.

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