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Business/Money

February 7, 2014

Divide on business tax grows

Independent report shows $376M burden would shift to property owners

INDIANAPOLIS — Despite intensifying opposition from mayors around the state, Gov. Mike Pence is reaffirming a pledge to eliminate a tax on business equipment worth $1 billion to local governments.

Pence said he wants to eliminate the tax to boost job creation, but he still has not detailed plans to replace lost tax revenue for communities or prevent a shift in the tax burden to homeowners and other property owners.

During a Statehouse press conference Thursday, Pence said he’s “in negotiations” with legislative leaders. The House and Senate have bills that would begin to phase out the business personal property tax in different ways, but neither bill replaces the lost local revenue.

Pence said the legislation need to be improved, but declined to elaborate.

“I know you all want me to talk about details,” he said after repeated questions about how he’ll avoid what he calls “undue harm” to local governments. “I don’t want to negotiate this in public.”

The governor’s comments came the same day an independent report projected significant lost tax revenues for local governments and $376 million worth of increased taxes on homeowners, farmers, landlords and other property owners should the business tax be eliminated. Those property owners would see tax bills increase 12 percent or more in 24 of Indiana’s 92 counties, according to the report issued by the nonpartisan Indiana Fiscal Policy Institute. The report also found that eliminating the tax would have minimal effect on luring new jobs to the state, but it could pit Indiana communities against each other in attempts to attract business development.

Pence told reporters he had not read the report but believed it would add to the ongoing debate.

Republican and Democratic mayors from around the state have voiced strong opposition to eliminating the business personal property tax, which would roll back a revenue stream that funds local governments, schools and libraries.

Neither the House bill nor Senate bill totally eliminates the tax that manufacturers and other businesses pay on equipment. But Pence said again that his eventual goal is to match other Midwest states that have repealed taxes like it.

Last week, mayors from the state’s six largest cities met with Pence to press for details on his often-repeated promise to mitigate the local harm caused by his plan. They left without answers, according to those who attended.

“I don’t know any mayor who is saying, ‘Let’s get rid of this tax without replacing the revenue,” said Terre Haute Mayor Duke Bennett, a Republican, who took part in the meeting.

Matt Greller, executive director of the Indiana Association of Cities and Towns, said local leaders are frustrated.

“We have no understanding of what the governor means when he says there will be no ‘undue harm.’ We don’t know if that means $1 or $1 billion,” said Greller.

The Fiscal Policy Institute’s report explains the local officials’ anxiety.

The report found that local governments are still grappling with property tax caps enacted in 2008. Those alone will cause $800 million in lost tax revenue next year — money that would have been used to pay for police, school buses and other public services. Eliminating the business tax would increases those losses by another $687 million.

The report also notes that property tax caps, now locked into the state Constitution, limit lawmakers’ ability to “rebalance the tax burden among homeowners and business interests.”

That means that a reduction in business tax revenue would automatically be shifted to other property owners.

Tax cuts for businesses decrease costs and add to profitability, the report notes, and can encourage companies to relocate or make new investments. But the report also says tax cuts “are most effective where the loss of tax revenue to governments does not reduce public services, especially on highways, police and fire protection, and perhaps education.”

Terre Haute’s Bennett said that’s among the mayors’ biggest fears.

“We need to slow down and take a look at all the tax changes that have already been put in place and see how they impact local communities,” he said.

The Senate bill calls for a commission to study the issue. It also calls for eliminating the tax only for businesses with less than $25,000 worth of equipment. That would impact about 70 percent of Indiana businesses and result in lost tax revenue of about $50 million for local governments.

The House proposal gives counties the option of eliminating the tax on new business equipment, but offers no mechanism to replace the lost tax revenue.

Pence seemed to rule out the possibility of the state dipping into its surplus to directly replace lost tax revenues for local governments, as some mayors have requested. He said local governments must identify their own options.

— Maureen Hayden covers the Statehouse for the CNHI newspapers in Indiana. She can be reached at maureen.hayden@indianamediagroup.com. Follow her on Twitter @MaureenHayden

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