Indiana House and Senate Pass Business Personal Property Tax Reform

January 31, 2014

Yesterday, the Indiana House and Senate overwhelmingly passed bills that would reform the state’s business personal property tax, a tax on business equipment, machinery, and supplies. H.B. 1001 (which passed 63-33) would allow localities to exempt new equipment from the tax, which is designed to slowly reduce the state’s reliance on the tax through intrastate competition. S.B. 1 (which passed 35-11) would create an exemption of $25,000 in the business personal property tax, and also furthers scheduled reductions in the corporate tax rate to 4.9 percent by 2019, while reducing the generosity of the state’s research and development credit. We’ve covered these bills extensively here, here, and here. You can additionally find my testimony on H.B. 1001 here, and my testimony on corporate tax policy and tax credits in Indiana here.

One of the most positive aspects of S.B. 1 is that its business personal property tax exemption is also a filing threshold. This means that not only are businesses not liable for tax on their first $25,000 in personal property, they also don’t have to go through the arduous and time-consuming process of adding up and depreciating all their assets if they are below the threshold. In Indiana, 71 percent of all business filers fall below this threshold, meaning that thousands of hours of time across the economy would not be wasted for what amounts in many cases to very small tax bills.

Taxes on business personal property are more distortive than other means of collecting revenue. From my comments from last month:

Between 2000 and 2009, real collections from tangible personal property taxes decreased by 20 percent on average across the 50 states, and in Indiana, collections decreased by 69 percent. This is a good thing. While taxes on real property (land) are generally thought to be the least destructive taxes to growth, property taxes on equipment and machinery are taxes on capital. They distort the market against labor-saving innovations and make it more costly for businesses to implement new production procedures.

Another beneficial portion of S.B. 1 is that it pays for the corporate tax rate reduction in part by broadening the corporate tax base. This is the bread and butter of serious tax reform. Specifically, the generosity of the research and development is curtailed. From my comments to Indiana’s Commission on State Tax and Financing Policy last November:

Even though credits lower the tax burden of a particular tax filer, in most cases we see them as poor tax policy. […] In a broad philosophical sense, we see credits as creating an uneven playing field. Some businesses might get the benefit of a preference, but other businesses that aren’t engaging in whatever activity is deemed “favorable” are stuck paying the full sticker rate of the tax. […]

It is in part because of this distortionary economic effect that the academic literature is generally not kind to tax incentive programs. Additionally, states routinely issue reports on the efficacy of credits in their code, and often times they fail to meet even the most basic of cost-benefit requirements.

While H.B. 1001 takes a slightly different approach, the bills are not necessarily at odds, and we’ll be watching closely to see how the bills progress. (Note: Legiscan is reporting that Sen. Hershman has been added as a sponsor to H.B. 1001)

Check out our comprehensive, 50-state report on business personal property taxes.

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