This week, Indiana lawmakers advanced legislation to mitigate the impact of the state’s tangible personal property (TPP) 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. . Senate Bill 233 was amended by the House and sent back to the Senate, where a previous version of the bill passed in January with no senators opposing. If enacted, this legislation would double Indiana’s TPP tax de minimis exemption from $20,000 to $40,000 and prohibit counties from collecting TPP tax filing fees from businesses that file but do not owe the tax.
Like most states, Indiana has property taxes that apply to both real property–like land, buildings, and fixtures–and TPP, or property that can be touched and moved. The Hoosier State has taken strides to reduce reliance on TPP taxes over time by excluding broad classes of property, such as household property, business inventory, pollution control systems, and most motor vehicles, boats, and airplanes. However, many businesses continue to pay taxes on the value of their machinery, equipment, and tools, or other property held as an investment or used in the production of income.
In 2015, as recommended in Tax Foundation testimony and analysis, Indiana lawmakers created a $20,000 de minimis exemption for TPP, whereby businesses only pay TPP taxes when they have $20,000 or more in qualifying personal property in a given county. (Taxable value is determined based on asset acquisition costs adjusted according to a depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. schedule.) This means if a custom design company has $15,000 worth of screen-printing equipment in County A and $30,000 worth of equipment in County B, the business owner would only owe TPP taxes in County B, where the company has TPP in excess of the exemption threshold.
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According to the Indiana Legislative Services Agency, 89,749 taxpayers filed TPP tax exemptions in 2018, and an additional 28,300 exemptions would be expected if the exemption threshold increases to $40,000 under Senate Bill 233. Increasing the exemption threshold would be another step in the right direction for Indiana, reducing business TPP tax burdens and compliance costs.
Compared to alternative taxes, TPP taxes are distortionary: some businesses find themselves altering their decisions on where, when, or how to invest based on how to reduce their TPP tax liability rather than what might otherwise make the most sense for the company. TPP taxes are also a form of tax on business inputs. Taxing business inputs can lead to tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. , where taxes are piled on taxes throughout the production process, which usually results in some of the tax burden being passed along to consumers in the form of higher prices. TPP taxes are levied not just when the asset is purchased, but year after year on the depreciable value of the property. Finally, unlike taxes on real property, which are “taxpayer passive” (taxpayers are sent a statement assessing property value and taxes owed), TPP taxes are “taxpayer active,” requiring taxpayers to determine and pay the appropriate amount by listing and calculating the depreciable value of their taxable property each year. Finally, these taxes are non-neutral, with the greatest burden falling on manufacturers and other capital-intensive industries.
Increasing the exemption threshold would reduce TPP tax burdens for numerous businesses in Indiana, taking many off the TPP tax rolls altogether. Should policymakers wish to further reduce the TPP tax burden, they ought to consider making the exemption threshold a filing threshold, whereby only businesses exceeding the exemption threshold would be required to file TPP tax forms. Under current Indiana law, all businesses and not-for-profit organizations must file TPP tax forms on an annual basis, even if qualified for exemption.Share