With the Indiana General Assembly considering yet another measure that could impact schools’ property tax revenues , StateImpact sat down with a man who understands the state’s tax system better than almost anybody: Purdue agricultural economist Larry DeBoer.
We asked DeBoer to talk us through the complexities of the property tax system, and we put together a few snippets of our lengthy conversation with him below — we hope it helps put the state’s property tax caps and lawmakers’ debate over the business personal property tax into context.
So back up for just a second, and let me get this straight: We ask businesses to pay a tax on equipment they already own?
That’s right — any equipment “used in the production of income or held as an investment,” according to the state . “We’re not talking the land” used for a business, says DeBoer. “We’re not talking about buildings, we’re talking mostly manufacturing and utility equipment inside those factory and utility buildings. Then we’re talking about computers and all sorts of other things that businesses will have.”
Why do businesses have to pay a tax on things they already own… but as an individual, I don’t?
Funny you should ask. There was a time when we all used to pay personal property taxes. “Personal property actually used to include household personal property,” says DeBoer. “It was literally true before 1963 that the assessor would knock on your door and come tramping around your house assessing your carpet and your lamp and your radio. We got rid of that in 1963.
“We used to tax automobiles with a property tax. We got rid of that in 1971 and replaced it with a motor vehicle excise tax. We used to tax inventories with the personal property tax. We phased that out between 2002 and 2007. So pretty much the only thing that’s left under the category of personal property is business equipment.”
Roughly $1 billion. And I assume by “we” you mean local governments — counties, cities, towns, library districts and schools. “Schools are the biggest users of property taxes,” DeBoer says.
“There’s 250,000 businesses that pay the personal property tax, approximately,” says DeBoer. “If you rank them all from most property tax to least property taxes paid, the top hundred pay nearly a third of the total… I don’t know if you wanna name companies, but you’re talking Lilly and Cummins and the auto companies and so forth… The bottom 100,000 [businesses] pay one percent. There’s a tremendous skew in this distribution of payments.”
A few reasons. One is regional competition — the governor points out Michigan, Illinois and Ohio have all eliminated their taxes on business property. Kentucky still has a tax on business equipment, but it’s lower than Indiana’s. “If you reduce these [taxes that businesses directly pay,” DeBoer says, “there’s at least some evidence that this ought to encourage new investment and firm expansion…
Another reason: for possibly the vast majority of businesses, the costs of collecting the tax might be higher than the amount the business pays in the tax itself. “Think of the effort that goes into calculating those taxes, the effort that the assessor has to make in collecting and looking and key-punching all that information,” DeBoer says, for 100,000 businesses from which the state only collects a few million dollars.
“The fact is,” DeBoer says, “if you want lower and more stable property taxes, that means that local governments will receive less in property tax revenues. One thing to recognize — and I’m not sure everyone does recognize — is that there are two sides of the budget. If you pay less in property taxes, don’t replace it with some other form of revenue, your local governments have less revenue and in the end they deliver fewer services.”
All told? About $700 million. (About $150 million are losses school districts incur.)
Governments would still collect that.
In a nutshell, governments will still collect that $300 million in the form of property taxes.
Local governments set tax rates based on the amount of property they have to tax. If local governments cannot tax business property anymore, then they’ll raise property tax rates for everyone.
But here’s the twist: Indiana limits the amount of tax different property owners pay based on how much their property is worth. So even though property tax rates go up, the lost revenue from getting rid of the business equipment tax becomes a casualty of the state’s property tax caps.
That depends on which plan the state follows — the Indiana House’s plan or the Indiana Senate’s plan.
The House’s main plan involves giving county governments the authority to pass an ordinance getting rid of the business personal property tax. The governor has said he supports this plan. In theory, a county whose government entities need the revenue wouldn’t to repeal the tax. But you can just as easily imagine counties competing with their neighbors for the lowest rate.
The Senate’s main plan goes a different direction. Their bill would exempt the first $25,000-worth of business equipment from the tax, meaning companies that still own expensive equipment would still have to pay. But the plan would also lower the state’s corporate income tax rate over the next five years.
