Governor Pence of Indiana has in recent weeks proposed a phase-out of Indiana’s business personal property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. , which collected approximately $630 million in 2009; about 1.75 percent of state and local taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. collections (tables 4 and 6 here). Business personal property taxes vary by state, but generally are levied on machinery, tools, equipment, even office furniture. This is a step toward better tax policy in a state that has already made serious strides toward a simpler, more neutral tax code. It’s also in line with a trend we’ve seen in recent years of states aiming to reduce taxes on tangible personal property.
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.
Reductions aren’t always a slam dunk politically though. Localities rely on the business personal property tax, and disrupting local revenues streams can be difficult. Last year, Florida and Arizona considered proposals to raise the exemption of their taxes on tangible personal property. The one in Florida was resoundingly voted by the legislature to be put on the ballot, but it failed a popular vote. The Arizona proposal also failed at the ballot box.
Gov. Pence has suggested at least two phase-out/down methods that we recommended in our 2012 study on tangible personal property taxes. The first is gradually raising the exemption level so that smaller businesses with less personal property don’t have to pay the tax. Currently, ten states have such “de minimis” exemptions. In Indiana though, businesses pay personal property taxes on the first dollar of capital they own. Even if repeal isn’t attainable, enacting at least some sort of exemption would curb some of the innovation-harming effects of the tax. The state could even consider enacting a filing threshold so that small businesses don’t have to go through any of the compliance issues associated with calculating all their business equipment and depreciating it every year. I would bet there are some small businesses with truly small tax bills that just create economic waste with how much time it takes to calculate and file them. Another option being floated that we wrote about in 2012 is exempting all new equipment purchases from the tax.
For now, the plan is in its infancy, but these are all good ideas here. We’ll be watching closely to see how this conversation develops.
By the way, did you hear that Indiana beat out Texas and jumped into the top ten of our State Business Tax Climate Index this year?
Also, see our recent testimony in Indiana on tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s in the corporate code.
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