Q&A: Why Indiana Should Not Cut Its Tax On Business Equipment

February 14, 2014 | 10:44 AM

By Kyle Stokes

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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.

If Indiana lawmakers decide to scale back the state’s tax on business equipment, they’d follow half-a-dozen other states where lawmakers have already eliminated the tax entirely.

“It’s just part of a broader trend,” says state budget and tax expert Michael Mazerov, “of believing that reducing business taxes is something that will significantly boost state economic growth.”

“But,” Mazerov adds bluntly, “it won’t work.”

Mazerov, a senior fellow at the non-partisan but left-leaning Center for Budget and Policy Priorities in Washington, calls Indiana’s plans to cut its business personal property tax “penny-wise” and “pound-foolish,” arguing the move would harm local governments and schools while not substantially helping the economy.

But others say the business personal property tax is distorting the economy, discouraging businesses from investing in equipment and machinery that they need to grow and innovate.

• Listen: Why Indiana Should Not Cut Its Business Personal Property TaxStateImpact Indiana‘s Kyle Stokes speaks with Michael Mazerov, a senior fellow at the Center for Budget & Policy Priorities.Download

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

StateImpact: Why do you think cutting business personal property taxes won’t help the economy?

Michael Mazerov: Because state and local taxes paid by businesses are a very, very small share of their total expenses. State and local taxes are no more than 3 or 4 percent of total business expenses on average. Their influence on where business chooses to locate or invest is just completely swamped by interstate differences in energy costs and wage costs and costs of transportation and so on. There’s not very much leverage to be gained over business location by trying to influence their state and local taxes. It’s just too trivial for them…

One thing’s that’s notable about the Indiana is that it has that Indiana has one of the lowest percentages of its adult workforce that’s gone through college. I think there’s just growing awareness that if you want to create good jobs and attract the businesses of tomorrow, you need a highly-educated workforce. And impairing the state’s ability to fund education through eliminating this tax which substantially goes to K-12 education is just completely in the wrong direction.

[pullquote]Counterpoint: ‘Business personal property taxes are up there — according to our analysis — in terms of taxes that are very harmful to growth.’[/pullquote]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 than they pay in the tax itself… For those small businesses, is there some logic in getting rid of a tax that doesn’t substantially help governments collecting the tax but still is a burden to the business on some level?

No, I don’t think that argument makes very much sense at all. You’re just frittering away a substantial amount of revenue to put a little bit of additional money in the bank accounts of businesses that, it’s so little revenue that it’s not enough to allow them to pay for more than a few hours of additional work of a few workers, it’s not going to create jobs, it’s very penny-wise, pound-foolish thing to do to fritter away so much revenue…

In terms of the overall distribution, in terms of the fact that the biggest businesses play the largest chunk of it, that’s totally appropriate. This is a tax on personal property on their machinery and equipment and it directly pays for services that benefit that property. It pays for police and fire protection for that property, it pays for the education of the workers that are working in those factories.

In terms of the kind of fairness of distribution of the tax, it’s really a tax that’s supposed to be levied in proportion to the benefits received. If you have a lot of property that’s getting police and fire protection, which the tax is substantively paying for, it’s totally appropriate that big businesses are paying a disproportionate share of the tax.

The example I’ve heard is, ‘Why would you incentivize a bank to pay another teller when you really need that bank to buy an ATM?’ The ATM is going to be subject to the business personal property tax, but the teller isn’t going to do the work you want the ATM to do. It’s not going to be open 24 hours and dispense bills on demand and stuff like that. What’s wrong with that logic?

Part of the logic is that if you incentivize businesses to invest more in machinery and equipment, that’s much more likely to eliminate jobs than it is to create jobs. If you’re concerned about job creation, it’s not exactly clear at this point, given the slack in the economy, that you want to incentivize businesses to invest more in machinery and equipment rather than hire people.

But going back to the larger point, this tax is a really insignificant expense for businesses. Yes, I recognize in theory that reducing it ups the after-tax rate of profit on investing in machinery and equipment and therefore the margin, in theory, it might have a small incentive effect. But again, coming back to the actual real-world facts, it’s a really insignificant expense for businesses and it’s not going to have much of an incentive effect. And there are much better uses for the revenue, and in particular improving Indiana’s education system.

Michael Mazerov is a senior fellow with the Center for Budget and Policy Priorities’ State Fiscal Project.

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Read more from Scott Drenkard of the Tax Foundation. He supports the proposed tax cut.

“Some people would lament the job lost of the bank teller,” he tells StateImpact. “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.”

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