Since his State of the State address Jan. 14, Gov. Mike Pence has generated countless number of articles, blogs and comments in social media regarding his proposal to eliminate business property taxes in Indiana.
The time-honored argument for reducing taxes on businesses has been repeated so often by so many political and economic development leaders that it has risen to that of holy writ: It will create jobs for Hoosier workers.
No one can argue that eliminating the business property tax wouldn’t help improve our state’s marketing pitch to firms considering the expansion of operations in Indiana. But will it really make enough of a difference that it will put more Hoosiers to work at jobs that pay enough to support a middle-class family? Or will it just shift the burden to individual property owners, workers and consumers? The answer is far more complicated that the economic development mantra proclaims.
According to Larry DeBoer, professor of agricultural economics at Purdue University and expert on state and local taxation policy, it all starts with the increased profits that flow to a business as a result of eliminating the business property tax. What happens after that varies widely from business to business and depends on the markets they participate in.
Will the attraction of higher profits attract more employers to Indiana? Will doing so compete for local labor and drive wages up? If so, Indiana workers benefit. Will new employers competing and adding to supply in similar markets as current employers cause prices of their products to fall? Will more jobs attract workers from out of state?
In either case, there would be less pressure on wages to increase. In some cases, employers will simply pocket the increased profits as a windfall. That’s not a bad thing, but only if it makes Indiana more attractive to locate or expand a business here. Typically, however, this boost in profits is temporary as rates of return tend to equalize over time across different locations.
Businesses, and especially businesses with significant investments in business property, also typically use lots of public services. They use roads and bridges to transport materiel into and products out of their facilities. They require the presence of first responders that protect property and employees. They require uninterrupted water and sewer services. And they require employees to be educated and trained in our K-12 and post-secondary schools.
To attract and retain employees, they must be located in communities that provide a good environment in which they can enjoy being single or raise a family. The question is, if businesses don’t pay these taxes, who should?
Indiana tax policy leaders should start by stepping back and taking a hard look at a comprehensive state tax overhaul to help propel our state and local communities into a future of growth and well-paying jobs.
Key questions need answers. How many prospective businesses have stated that the reason they passed over Indiana as a place to locate is because business property taxes were too high? Or, how many Indiana businesses have chosen to pull up and leave our state because of the weight of business property taxes? Preferably an independent and verifiable source of economic analysis would be worth the investment to shed more light on this option.
If it can be demonstrated that lowering overall business taxes in a state that already enjoys a top 10 favorable business-tax climate can create more business expansion, as well as jobs that pay more than current Indiana median household incomes, then the proposal should be further debated openly and worked into an overall tax policy that makes sense for all Hoosiers, not just some of them.
Indiana currently ranks No. 10 among states in business tax favorability by taxfoundation.org, and that ranking is likely to rise as the scheduled decreases take effect and Indiana’s economy continues to grow.
Decreasing the share of Indiana and local taxes paid by employers is only feasible when we have far more certainty that it will result in a significant increase in high-paying jobs and higher real incomes, and not before. Otherwise it will just be another tax burden on Hoosier property owners, consumers and workers, who are already struggling to make ends meet.