Report: Dumping Personal Property Tax 'No Easy Task'

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A new report from the Indiana Fiscal Policy Institute examines the potential effects of proposals that would cut the business personal property tax. The findings suggest "complicating factors" such as the property tax caps that were put in place in 2008. Many cities and towns have voiced opposition to House and Senate bills that could phase out the tax. You can view the full report by clicking here.

February 6, 2014

Executive Summary From "The Personal Property Tax In Indiana: Its Reduction Or Elimination Is No Simple Task"

It could be said the Indiana General Assembly has been working to eliminate the business personal property tax since 1966, the year Hoosiers approved a constitutional amendment that allowed lawmakers to separate taxation on real and personal property. Since then personal property taxes have been eliminated on intangible property like stocks and bonds, household goods such as furniture, on vehicles including cars and planes and boats, and, most recently, on inventory. The only remaining category of personal property taxed by the state: business personal property.

Bills to alter or eliminate the personal property tax on business equipment and machinery were introduced in the last three legislative sessions, but they all died in committee. The issue gained new momentum last fall, though, when Gov. Mike Pence endorsed the repeal called for by business interests. Since then House Bill 1001 and Senate Bill 1, which take two distinctly different approaches to the tax, have moved steadily through the process.

While public testimony has discussed many aspects of these legislative efforts and their effect on Indiana's fiscal policy, this report is a comprehensive look at the issue, including new information about the complicating factors presented by the property tax caps enacted in 2008. The report notes that distortions still rippling through the property tax system created by the caps currently favor individual taxpayers - homeowners - and that has spurred the effort to reduce or eliminate the personal property tax on business. Those very caps now enshrined in the state's constitution, however, limit legislators' ability to rebalance the property tax burden among homeowners and business interests, according to the report. All of this is of special interest to local governments, which receive the revenue from property taxes and themselves are still adapting to the changes wrought by the property tax caps.

Among the report's other findings:

The potential revenue loss to local governments is direct, but the bigger issues include losses due to more homeowners reaching property tax caps and the challenge for local government to replace revenue lost in tax increment financing districts and enterprise zones. Studies have shown taxes on business personal property have a small effect on business relocation from outside a state, but depending on the structure if enacted could have a larger effect on relocation decisions from county to county within the state. A small minority of Indiana businesses pay the vast majority of business personal property tax. Local governments already have abated 10 percent of business personal property taxes statewide.

The General Assembly has a plethora of options to address the issue. This report examines them in detail and discusses their fiscal ramifications, including some not currently considered in legislation. Before changes are made, though, it's important to understand how those changes would affect taxpayers and local governments, including public schools. This report shows on a county-by-county basis the effect of eliminating the business personal property tax, which areas are most affected by eliminating the tax and the interplay between property taxes, tax caps and local levies.

These factors lead to the real policy question: Is elimination of the business personal property tax primarily an economic development proposal, or primarily a taxation policy proposal. The answer is both, and it's up to the General Assembly to find the right mix. "To reach a successful outcome," the report concludes, "political credit for tax reductions and political blame for offsetting tax increases must be shared by both the General Assembly and by local elected officials." It's a tall order, especially given the complications presented by property tax caps, but the early results from this legislative session indicate a higher level of creativity, compromise and momentum for this issue.