Backgrounder: History Is Against Business Tax
Members: The author is a former legislator and councilman now an instructor at the Keith Busse School of Business and Entrepreneurship at the University of Saint Francis in Fort Wayne. This is adapted from testimony he presented this week to the Fort Wayne City Council, the first in the state to take up the new option of exempting business personal property taxes. The measure, written and introduced by Councilman Jason Arp, was defeating 5-3.
by Mitch Harper
A few years ago, my city council considered a personal property tax abatement for a specific business. There was a lengthy discussion of the particulars of that request — quite lengthy.
After the other council members had spoken, I raised my hand to speak. I noted we had used up a lot of time talking about a specific business personal property tax abatement of a single business.
I said that the view from 18,000 feet might be instructive. Rather than discuss the minutia of a particular abatement on an investment in productive equipment, Indiana would do better to eliminate the business personal property tax altogether.
It is a tax on productivity. It is a tax on growth. It is a remaining disincentive to Indiana’s attractiveness as a place to locate new manufacturing industry or invest in new information technology. It has outlived its history. And it is a relic among almost all other states.
If it were not, the council would not be debating the offering of business personal property abatement. If it were not, there would not be a carve out in enterprise zones.
After my remarks, an economic development director in another part of the state took issue with my argument. I met him for lunch; he is someone I respect. But here is what he told me: If you take away the imposition of the tax it is one less economic-development tool to offer.
That is, you have to have certain taxes to be able to take them off the table. I asked him whether that made any sense when other states didn’t have the tax in the first place. He conceded my point.
The merits of taxes are, in part, measured in terms of “frictional costs.” That is, how much are the compliance and preparation costs relative to the tax collected. The business personal property tax, with its continued record keeping, preparation and filing, is a tax with a high frictional cost. That is particularly true for firms with mobile assets. It is even more true for those who have applied for abatement and need to file compliance documents.
I quipped in an editorial interview five years ago that tax abatement is “God’s way of telling you taxes are too high” — too high for certain activity or it wouldn’t be offered. Business personal property taxation discourages jobs. It discourages investment in new equipment. It taxes capital equipment that adds value to manufactured goods. We want value-added jobs, manufacturing jobs, those that help the Hoosier State compete with neighboring states and the rest of the world.
There has been much talk of “lost revenue.” But this is not on existing revenue. And much of the talk, most of the talk, has come from people who have been interested in maximizing revenue from taxes. The money is not lost. It is just that it remains in the hands of businesses and people who will decide for themselves how to spend it, or save it, or invest it. Decisions that result in spending creating greater economic activity.
The tax has been on a historical path to elimination for 60 years now — actually, longer than that. Change in personal property taxation was desired for decades before public officials, finally, enacted each step that shrank the reach of taxation of personal property.
At one time, it applied to personal property — a homeowner’s furniture, appliances, even bicycles. The assessor could come onto your property and inside your home to count the Frigidaire, the Roper or even the Schwinn.
But the Legislature eliminated that. Then the Legislature converted the personal property tax on automobiles (an extension of taxing buggies the century before) and substituted the auto excise tax.
It took several decades for the next steps to be enacted. It was one that resulted in the elimination of the business inventory tax, a tax which had hindered this state, “the Crossroads of America,” as a shipping and distribution hub and had negated the geographic advantages of being within a days drive of half the U.S. population.
So, Indiana’s history on this general issue is this: 1) personal property taxation of individuals ended; 2) personal property taxation of automobiles ended; and 3) business personal property taxation on inventory ended.
The trend is as clear as it is welcome. The Indiana Legislature now has taken an interim step exempting another such tax business property, one that allows a geographic area to give itself a competitive advantage for business investment in growth — real growth.
It will be interesting to see which areas take advantage of it.
Mitchell V. Harper, a veteran legislator and councilman, most recently was the Republican candidate for mayor in Fort Wayne. An attorney, he edits the weblog Fort Wayne Observed.