No one I know particularly enjoys paying taxes, but nearly (if not) all will admit to their necessity in helping provide the government services needed to keep our economy running. But not all taxes are created equal — and not all taxes have the same impact on job creation and growth.
Indiana businesses are required to pay property tax on just about everything they own. This includes all the things they need in order to conduct daily operations and produce their product. Each year they must file a return listing all of their depreciable assets. Property tax is then assessed on the value of those assets. This means they pay tax on every machine, device, tool or piece of equipment they own — computers, office furniture, forklifts, laboratory equipment, lathes, boilers, cash registers, robotic assemblers, you name it. It is all taxed — every year.
But taxing personal property is taxing business investment. The state is taxing everything needed to start, maintain and grow a business. The consequence is that businesses moderate their capital investments because of the tax implications.
Some states wisely never elected to impose the tax, and a growing number of those that do are recognizing the detrimental effect and either choosing to do away with it or finding ways to moderate it. While Indiana’s business climate has many strong advantages over our neighbors, this is an area in which the state is at a distinct disadvantage. Illinois is a total fiscal mess, but it does not tax personal property. Ohio eliminated its personal property tax in 2010. Michigan is moving to do the same. And even though Kentucky taxes personal property, its average business property rates remain lower than Indiana.
Currently, 12 states have no personal property tax at all. At least another 20 have substantial exceptions and exemptions. In the best research available, the 50 State Property Tax Comparison published annually by the Minnesota Taxpayers Association (MTA), Indiana fares poorly with the fifth- and sixth- highest effective tax rates in separate rural and urban categories.
Local officials are reluctant to give up what is, in some cases, a substantial percentage of their tax base without replacement revenues. It would take about $1 billion to replace the personal property tax collected statewide each year. Thus, you can’t simply do away with the tax. Yet, the economic development certainty is that Indiana needs to change its policy.
Current law allows local units to completely abate personal property for up to 10 years. A greater use of this tool would help, but the abatement process is legally complicated, lengthy and cumbersome.
Authorizing local units to permanently exempt newly installed personal property would be more effective. A local option to allow such an exemption would be a logical first step to help attract investment. By exempting only the new property, the existing tax base is not impacted. As older equipment is gradually replaced, local revenues and dependence on the tax will be reduced. As the personal property tax slowly diminishes, the community enjoys the economic benefits of business expansion. Enhanced business investment means new jobs, and more real property, income and sales tax revenues.
Most economists, academics, policymakers and legislators quickly concede that the tax is counterproductive. Fiscal leaders have expressed a desire to deal with it for years, but have been deterred by the fiscal concerns. The reality is that we must be focused on constant progress toward reducing Indiana’s reliance on this tax. Unless the objective is top of mind, actively embraced and diligently pursued, progress will be minimal and Indiana’s prosperity will not reach its full potential.