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Q&A: Why Indiana Should Cut Its Tax On Business Equipment

A higher business personal property tax, argues economist Scott Drenkard, would incentivize a bank that needs an ATM, for example, to "hire a bank teller — even though it doesn't make any economic sense."

A higher business personal property tax, argues economist Scott Drenkard, would incentivize a bank in need of an ATM, for example, to "hire a bank teller — even though it doesn't make any economic sense."

StateImpact is featuring conversations with experts from two national think-tanks on the state’s proposed business personal property tax cut. Read our interview with an economist who opposes the cut here.

Imagine a bank, economist Scott Drenkard says, that wants to purchase an ATM machine.

In Drenkard’s hypothetical example, the ATM costs $30,000 per year to buy and maintain. It’s also business equipment, meaning the bank will have to pay Indiana’s business personal property tax on that ATM.

What’s the alternative?

“Hire a bank teller for $30,500 a year,” Drenkard says. “If the business personal property tax is higher than $500 a year, you’re going to hire the bank teller even though it doesn’t make any economic sense” — after all, the teller won’t dispense bills at any hour of any day of the week.

Drenkard, an economist at the right-leaning Tax Foundation, uses the example to illustrate his central point: personal property taxes create barriers to buying the equipment businesses need to be successful and, ultimately, stimulate growth in the broader economy.

Others disagree with Drenkard, saying the tax doesn’t have a big enough impact on businesses’ bottom lines to justify a cut. The tax revenues help school districts pay down their debt, fund transportation or repair buildings — funds that are already running short because of Indiana’s caps on property tax collections.

Here’s a lightly-edited transcript of our interview with Drenkard:

StateImpact: You’ve written that Indiana is part of a national trend by moving to cut the business personal property tax. What makes it a trend?

Scott Drenkard: Over the past decade or so the data that we have from 2000 to 2009 shows that states on average are moving away from personal property tax collections. We show that over that period, there’s been a 20 percent reduction in personal property tax collection across the 50 states.

And why is that?

Some states have started exempting various types of personal property that’s used as a business input, other states have totally eliminated the tax during that period as well. Indiana is the latest state that’s taken a look at introducing a de minimis exemption, meaning that businesses with a small amount of capital would not be subject to the tax. Businesses with capital under $25,000 would not be subject to the tax.

Indiana collects $1 billion from more than 287,000 business personal property taxpayers. Most of the money, though, comes from the state’s bigger companies. Smaller payers, by contrast, might be paying more to their accountant to file their taxes than they pay in the tax itself. Is that true across states?

One of the problems with business personal property taxes is that small businesses spend a greater deal of compliance costs trying to fill out the forms, make sure that they calculate all the business capital that they have, like desk chairs, computers or sometimes large machinery. Then they have to depreciate it according to various schedules. So one of the ways around that is to enact a de minimis exemption so that smaller businesses with less capital do less of that more arduous calculating.

The Senate’s plan would eliminate the business personal property tax on these smaller businesses. The plan on the House side would allow counties to decide whether to eliminate the tax on new equipment purchases. That’s seems like a proposal to cut of one’s own nose, despite one’s own face. Can counties really afford this revenue hit?

Well, remember that the House plan does not eliminate the tax entirely. House Bill 1001 just allows localities to have the option to exempt new property. That’s kind of a novel concept… because it allows states to start reducing collections on tangible personal property but not in a way that cannibalizes that revenue source in one year or in two years. It just allows so that new firms that are considering locating there, or old firms that are considering buying new capital, are not having that negative incentive effect that’s created by the business personal property tax.

A negative incentive, yes. But put it into context of the state’s overall tax climate. Isn’t this tax — fiddling around with it, eliminating it — more like tinkering at the margins rather than getting to the real heart of what really is going to make a business decide to locate or not locate in a place?

Indiana has a very good tax climate. According to our state business tax climate index, we rank Indiana 10th, and that’s because the taxes have a broad base, for the most part, they have low rates. This business personal property tax is an example of a tax that’s not really very good for economic growth and is pretty distortive to the economy. That’s one of the reasons it’s being targeted right now. I do think targeting the business personal property tax is a way that Indiana can become more competitive and also a way that, in the long run, you can have increased economic growth.

Counterpoint: Business personal property tax cuts are ‘part of a broader trend of believing that reducing business taxes is something that will significantly boost state economic growth. But it won’t work.’

I’d like you to, if you could, put me in the shoes of a business that’s thinking about relocating. What is it about the business personal property tax that’s so prohibitive to growth or investment? Can you talk me through the mechanics of what that looks like?

Sure. So I can sort of go through a bit of an example… The problem with business personal property tax is that they treat capital inputs to businesses differently than labor inputs to businesses. They really harm capital inputs to businesses, and those are the investments that we make in machinery and tools that then laborers can utilize to make new products. That’s why it’s a harmful tax…

If you’re a business— say you’re a bank and you’re thinking of building an ATM machine and that costs you $30,000 per year to maintain and purchases. Or you could hire a bank teller for $30,500 a year. If the business personal property tax is higher than $500 a year, you’re going to hire the bank teller even though it doesn’t make any economic sense. The whole point here is that we want to have business inputs being treated in a neutral fashion. The business personal property tax creates a sort of punishment on investing in new innovative technologies that make the economy run better.

The point being there that, we’d spend on a bank teller when we don’t need some guy standing on the street holding dollar bills and dispensing them when you show them your bank account number. We need a machine that can work at 24 hours a day, 7 days a week.

There’s multiple benefits there. And some people would lament the job lost of the bank teller, but the point is that the bank teller can create more value in the economy doing something else other than being a bank teller. In the long run, this is the story of innovation. Do you want to tax creation of new products that help us to innovate in the form of a tax that recurs year over year and has negative incentives to economic growth? Or do you want to move towards a tax system that doesn’t distort business decisions? Do you want a tax system that collects revenue without trying to distort the economy? Moving away from business personal property tax is an attempt to do that, and I think that’s a good move.

Scott Drenkard is an economist at the Tax Foundation’s Center for State Tax Policy.

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Read more from Michael Mazerov of the Center for Budget and Policy Priorities. He opposes the proposed tax cut.

“[The business personal property tax collects] so little revenue that it’s not enough to allow [businesses] to pay for more than a few hours of additional work of a few workers,” he told StateImpact. “It’s not going to create jobs, it’s very penny-wise, pound-foolish thing to do to fritter away so much revenue.”

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