Backgrounder: Ditch the Eco-Devo for Tax Reform
by JASON ARP
I left my recent city council meeting disgusted, having participated in the process of reviewing the compliance of businesses with their abatement agreements. State law requires us to grill companies unable to meet the hiring objectives set forth in their application for the abatement.
This ludicrous abatement process is only a symptom; punishing capital formation and production is the bigger problem. But let’s stay on the topic of abatement.
State law defines the address of the applicant business an “economic revitalization area.” It doesn’t matter whether the location happens to be in the poshest neighborhood in town or the most in need of revitalization. So, usually the first step for a councilman is to lie. The first step for the applicant is to presume perfect knowledge of the future. The whole process requires picking winners and losers and providing special privileges.
A city council has no business digging into hiring practices or business operations. For a capital-intensive manufacturing concern, however, the process could mean survival. Imagine you have a small machine shop where your equipment is worth about a year’s sales. In manufacturing, 10-percent profit margins are typical. The tax on business personal property (i.e., equipment) is 3 percent. If you can get it lifted, your profit is 30 percent higher in my example.
Now you know why businesses subject themselves to such scrutiny and torturous evaluation — they need the money. We’ve created a situation where businesses often just don’t report equipment purchases or lie about values or play accounting games to avoid paying the tax. And honest businessmen are frustrated that what is in effect deception and fraud have been codified.
Here is the solution: If your council’s goal is not to control outcomes or micromanage business but rather to stimulate economic growth and prosperity, why not just exempt all new business equipment from taxation?
Thanks to legislation effective last year, Indiana county income tax councils have the option to do just that. Eliminating this tax will level the playing field for all businesses in regard to personal property taxation. Think about it: For manufacturers, equipment is a major investment; wouldn’t making it easier and less expensive to do business be a positive economic-development tool?
My city abates about $6 million each year. It spends $2.5 million on economic-development corporations and an economic-development department whose primary tool is tax abatement. The city gives out grants and other economic development money each year that equal more than $10 million a year. It collects about $17 million in personal property taxes. Would it not make more sense just to eliminate the tens of millions of dollars of economic development spending and simply stop collecting the tax?
Ohio and Illinois have already lifted business personal-property taxes, as have nine other states. And there are firms in Indiana that have decided to expand in Ohio for that reason. And why not? Who wants city councilmen sticking their nose in your business?
Jason Arp represents the 4th District on Fort Wayne City Council. A version of his essay appeared in the June 27 Fort Wayne Journal Gazette.