INDIANAPOLIS — Some Republican fiscal leaders are promising to take a “cautious approach” on a proposal to eliminate a business tax that provides nearly a $1 billion in revenue to local governments and schools.
On Tuesday, during an organizational session in advance of the 2014 session in January, House Republicans said eliminating or reducing the business personal property tax would be one of their top legislative priorities.
House Speaker Brian Bosma called on his members to pass legislation that would create a “fair” business tax policy that would line Indiana up with other Midwest states that have eliminated the tax that businesses pay on machinery, computers, furniture and other equipment.
Bosma said the other top priorities are expanding early childhood education opportunities for low-income families, closing the “skills gap” for Indiana workers, and finding more funding to repair the state’s crumbling infrastructure.
But that tax-elimination priority may be the hardest sell because of its potential to dramatically impact local governments and schools that use that tax revenue to pay their bills.
Bosma acknowledged that concern at a legislative preview on Monday, and his Senate counterpart repeated that Tuesday.
Senate President David Long said the state can’t afford to replace the nearly $1 billion in annual revenues that local governments would lose if the business personal property tax is eliminated.
“We should not be afraid to look at this, but we should absolutely go into this with the understanding that if we don’t do it right, it could have a negative impact, a serious negative impact on the revenues for local governments,” Long said. “We cannot be tone deaf to that and we must thoughtfully work through the issue to make sure that it’s done fairly and reasonably, if we do decide to do that.”
A study done last year for the Regional Chamber of Northeast Indiana on the impact of eliminating the tax found it could cause significant stress on local government budgets. The study found, for example, that eliminating the tax would cost Long’s hometown of Fort Wayne more than $9 million a year in tax revenues.
The Association of Indiana Counties has come out against eliminating the tax, saying it would force local communities to cut services.
Communities with large manufacturing employers could especially be hard-hit. In some communities, the personal property tax produces more than 30 percent of their local revenue stream.
“It would be just devastating to some communities,” said Andrew Berger, government affairs director for the Association of Indiana Counties, said at Monday’s luncheon . “We’re talking about a dramatic cut in services in those places.”
Senate Minority Leader Tim Lanane of Anderson said it was critical to consider the impact on local governments.
“We’re going to have to come up with replacement revenue,” Lanane said Monday. “To me it’s irresponsible to just say we’re going to abolish another revenue stream without looking at the impact on local government services.”
The idea of eliminating or reducing the business personal property tax has been floated before. But it’s been shot down because of its impact on local units of governments that contend that property tax caps passed by the General Assembly in 2008 have already forced them to operate on lean budgets.
But it’s gained more momentum in recent months because surrounding states, including Michigan, Ohio, and Illinois, have done away with the tax in an effort to lure more businesses into their states. The Indiana Chamber of Commerce has also named eliminating the tax as one of its top legislative priorities.
Sen. Brent Hershman, chairman of the Senate Tax and Fiscal Policy Committee, said legislators like the concept of creating more incentives for businesses to locate or expand in the state. “The (personal property) tax does have an impact on business, to modernize and become more productive,” Hershman said. “However, it’s a billion dollar revenue stream for local governments.”
“One of my concerns,” he added, “is that a replacement revenue stream has not been identified.”
Among the options being considered, he said, was phasing out the personal property tax over a long enough period of time to give local communities time to adjust. Another option may be eliminating the tax on new machinery and equipment, while leaving the tax in place for existing machinery and equipment.
Sen. Luke Kenley, chair of the Senate Appropriations Committee, echoed Hershman’s concerns. “It’s a thing that a lot of legislators would like to do, but there’s the question of finding the replacement revenues for local government. And a big part of that decision is ‘Who will pay the replacement revenue?’ “
“There are a lot of tough questions raised by the issue,” Kenley said.
“So I would suggest the goal is laudable, but whether it can be achieved this year is questionable.”
The General Assembly is scheduled to open its 2014 session on Jan. 7.
Maureen Hayden covers the Statehouse for the CNHI newspapers in Indiana. She can be reached at firstname.lastname@example.org.