Local sales tax could aid economic development

A local sales tax to fund economic development initiatives could help Indiana cities attract more jobs, supporters of the levy say.

Most local economic development organizations rely on private contributions and some government money to support their efforts. But an unstable economy has led to some belt-tightening and soul searching on alternative ways to fund the associations.

Some economic development leaders suggest taking a cue from Texas and allowing cities to enact a local sales tax of up to 1 percent on top of the state sales tax.

“It would just be so critical on that local level,” said Skip Kuker, executive director of the Hancock County Economic Development Council. “It would stabilize budgets so local leaders can do their jobs.”

Kuker, who chairs the Indiana Economic Development Association’s legislative committee, said such a sales tax is not on its radar for the next legislative session given the sluggish economy and tepid support for raising taxes.

Yet the tax has been wildly successful in Texas, the state typically held out by supporters as the poster child for passage.

Cities there have the option to enact a local sales levy on top of the state’s 6.25-percent sales tax. Similarly, residents of counties surrounding Indianapolis pay a 1-percent food and beverage tax to help finance the cost of Lucas Oil Stadium.

Texas lawmakers passed the tax in 1989 and have since added variations to help catapult the Lone Star State to the top of Site Selection magazine’s latest list of best business climates, unseating North Carolina.

“The tax is the undisputed workhorse of local economic development efforts, serving as the backbone of economic development programs in more than 500 communities across the state,” Texas boasts on its state website.

Indiana also has been reasonably successful under the Daniels administration in luring companies to the state, ranking sixth in the Site Selection survey.

Giving local economic development officials more firepower to attract businesses might help the state improve its standing even more, supporters argue.

“I just think we need to be a little more creative,” said Greg Wathen, president and CEO of the Economic Development Coalition of Southwest Indiana. “People haven’t wanted to stop moving to Texas because of this local sales tax.”

Indeed, Atlas Van Lines’ annual study of corporate relocations in 2011 showed Texas logging more than 7,861 inbound relocations, the highest among all states.

The tax, however, likely would be a tough sell in Indiana, whose 7-percent sales tax already is among the highest in the nation. The tax increased a single percentage point in 2008 to compensate for property tax caps.

“For that reason, the Legislature has shown not much appetite for increasing sales tax for any purpose, statewide or local,” said John Ketzenberger, president of the Indiana Fiscal Policy Institute.

The closest Indiana has to a local sales tax is the County Economic Development Income Tax, in effect since the early 1980s. The tax can be levied at rates ranging from 0.25 percent to 0.5 percent and is meant to support local economic development efforts.

What counties can use the tax for has been loosened in recent years due to tighter budgets and less revenue.

Not all counties have chosen to implement CEDIT, however. Some, such as Boone County, have the County Option Income Tax, or COIT, used to fund county operations at a 1-percent rate.

In 2011, legislators allowed counties to use COIT for economic development purposes. But Dax Norton, executive director of the Boone County Economic Development Corp., hasn’t made a request to county officials because the county has more pressing funding issues.

Boone County uses a portion of its general fund and food and beverage taxes to support his agency, in addition to the private funds he receives, bringing its total annual budget to $350,000.

Norton favors one pool of funding for economic development, no matter the source.

“I’m not a big fan of the [sales] tax, but certainly I’m in favor of some sustainable revenue stream,” he said. “I think that’s the key.”

For Wathen, the issue hinges on letting local governments decide what taxes to levy, whether through referendums or other means.

“It’s really difficult to get the Legislature to do that,” he said. “They already feel like we’re over-taxed.”

Kuker in Hancock County lauded the Texas model as a game-changer for the state.

Yet few states have followed the lead. Missouri is the only other with a similar tax.•