Business Personal Property Tax Bill Senate Enrolled Act 1 Final as General Assembly Adjourns

15 Mar

WestsideThe Indiana General Assembly adjourned sine die late this past Thursday, having passed Senate Enrolled Act 1 (SEA 1), a much-discussed bill on business taxes, including so-called business personal property taxes (i.e. taxes on business equipment).

The act wound up being much more tentative than initially filed, and far less than what the Governor had originally proposed (full elimination of the business personal property tax). The act is awaiting the Governor’s signature at the moment.

Business Personal Property Taxes

There are three primary effects of Senate Enrolled Act 1 with respect to business personal property. All are optional for local governments.

1. Counties have the option of exempting business personal property from taxation if the acquisition costs of the property is less than $20,000.

2. Counties have the option of exempting new (non-utility) business personal property from taxation. The county can also repeal the exemption; however, any business personal property placed into service while the exemption is in effect remains exempt.

Both of these options for exemption would be exercised by the County Income Tax Council — a body that is sometimes referred to as the “phantom council”, and that I have criticized before. In Monroe County, this means that any decision for exemption would be made by the Bloomington City Council.

In addition:

3. Counties may grant abatements for new business personal property placed into service on a case-by-case basis for up to 20 years, rather than the usual maximum of 10 years. These up-to-20-year-abatements have been referred to in the media as “super-abatements”. The usual annual reporting and accountability requirements (i.e., compliance with the Statement of Benefits filed when the abatement is applied for) apply for these super-abatements. In addition, a public hearing is required after the 10th year of the abatement to address compliance with the Statement of Benefits.

Blue Ribbon Commission

The act also establishes a commission on business personal property and business taxation. In principle, this is, in my opinion, the best part of the bill. However the composition of the commission also represents a missed opportunity.  The composition is as follows:

  • 2 members of the senate appointed by the president pro tempore of the senate (i.e., 2 Senate Republicans)
  • 1 member of the senate appointed by the minority leader of the senate (i.e., 1 Senate Democrat)
  • 2 members of the house of representatives appointed by the speaker of the house of representatives (i.e, 2 House Republicans)
  • 1 member of the house of representatives appointed by the minority leader of the house of representatives (i.e., 1 House Democrat)
  • The governor or the governor’s designee. An individual designated by the governor under this subdivision must be a state employee.
  • 1 member who is nominated by the Association of Indiana Counties and is appointed jointly by the chairman and the vice chairman of the legislative council.
  • 1 member who is nominated by the Indiana Association of Cities and Towns and is appointed jointly by the chairman and the vice chairman of the legislative council.
  • 1 member who is nominated by the Indiana State Chamber of Commerce and is appointed jointly by the chairman and the vice chairman of the legislative council.
  • 1 member who is nominated by the Indiana Manufacturers Association and is appointed jointly by the chairman and the vice chairman of the legislative council.
  • 1 member who is nominated by the Indiana Association of School Business Officials and is appointed jointly by the chairman and the vice chairman of the legislative council.
  • 1 member to represent agriculture who is appointed jointly by the chairman and the vice chairman of the legislative council.
  • 1 member who is nominated by the Indiana Association of Realtors and is appointed jointly by the chairman and the vice chairman of the legislative council.

The commission’s charge is the following:

(1) Study issues concerning the taxation of business personal property in Indiana and business taxation in general in
Indiana.
(2) Study issues related to the share of the overall tax burden borne by businesses in Indiana.
(3) Study the competitive advantages and disadvantages for businesses in Indiana that result from the structure of state and local taxation of business.
(4) Study any special elements of the taxation of business personal property.
(5) Study issues related to property taxes paid by taxpayers (including individual taxpayers) other than business taxpayers, and the relative share of the overall tax burden borne by these taxpayers.
(6) Study the impact on local government of reducing business personal property taxes.
(7) Study the existing mechanisms and tools that may be used by local governments to address the effects of the circuit breaker credits under IC 6-1.1-20.6, and the extent to which these mechanisms and tools have been or have not been adopted and used.
(8) Study the impact of tax increment financing, including the impact of tax increment financing on local government.
(9) Study the issue of what number or percentage of votes by a county option income tax council should be required to eliminate property taxes on new business personal property in a county, if the county option income tax councils are given the authority to eliminate property taxes on such property.
(10) Study any other topics assigned by the legislative council or as directed by the chair of the commission

The act also gives the commission a due date of November 1, 2014 for its report.

The broad topics to be addressed by the commission are critical to designing a fair and effective system of taxation in Indiana. The business personal property tax is a holdover, and should ultimately be phased out (primarily because it taxes different types of businesses differently, depending on whether they use expensive equipment). However, the piecemeal approach to property tax restructuring that the legislature has used in the recent past is not effective. We need to rethink the whole system. How much should businesses pay vs. other classes of property owners, all of whom depend on government services. How do we strike the right balance between attracting and retaining businesses with well-funded public services and amenities vs. low taxes? How do economic incentives, such as TIFs and tax abatements, affect the attraction and retention of businesses, and how much do these economic incentives cost us? And what is the right mix of tax bases — property, income (both corporate and individual), and sales?

However, I said earlier that I thought the commission represented a missed opportunity in terms of its composition. The commission essentially consists entirely of politicians and representatives of special interest groups. I think the commission should have had at least some room for citizen appointees — for example, retired legislators who are no longer in a position to have to run for office could offer some valuable perspective without the need to cater to particular constituents. In addition, Indiana has several experts at IU and Purdue on tax policy — as well as the Indiana Fiscal Policy Institute — who should be seated at that table.

Corporate and Financial Institution Taxes

The final effect of SEA 1 is to ratchet down two corporate taxes: the corporate income tax rate and the financial institutions tax (FIT), but over a longer period of time than initially proposed.

  • The corporate income tax rate will be reduced from 6.5% in 2015 to 4.9% after June 30, 2021.
  • The financial institutions tax rate will be reduced from 6.5% to 4.9% through calendar year 2023.

Both of these reductions, although relatively gradual, will result in reductions to state revenue, and thus will come at the expense of some other public service. Roads? Schools? Social services?

In addition, although it hasn’t been discussed at all, as far as I know, the reduction in the financial institutions tax will affect local governments somewhat. Currently, local governments receive 40% of the previous year’s financial institutions tax from the state.

Conclusion

This was one of the highest-profile issues in this year’s General Assembly session (other than a constitutional gay marriage ban, of course, which will thankfully not be on the ballot this November). But after a lot of discussion and debate, the end result was something that will likely have little benefit but also cause little harm. Although I think that having a county-by-county option for reducing or eliminating business personal property taxes may encourage a race to the bottom in some places, that effect will be very limited, and in any case I very much prefer having the option retained by local government rather than having the tax reductions forced on local governments. I look forward the report from the business tax commission — but wish that Larry DeBoer or someone of his caliber and expertise were sitting at the table. And finally I remain concerned about the long-term reduction of the corporate and financial institutions taxes, even though the reduction is phased in over a long period of time.

 

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