Experts see limits to state’s low-tax strategy

Thanks to a concerted effort to lower taxes and government spending, Indiana ousted Texas this year in the Tax Foundation’s annual ranking of business tax climates.

Indiana now holds the No. 10 spot and could rise higher by eliminating the business personal property tax, an equipment tax that experts say deters investment.

Gov. Mike Pence made phasing out the equipment tax his top legislative priority.

“We all recognize that low taxes are essential to attracting investment and good-paying jobs,” he said in his state-of-the-state address.

But economic development experts say there are limited benefits to continuing Indiana’s low-tax strategy. Some experts believe the state could go further by boosting its reputation for quality schools and attractive places.

“This is sort of the old school versus new school economic development model,” said Bruce Race, professor of practice in Ball State University’s College of Architecture and Planning. “The new economy’s based on innovation; it’s not based on cost.”

The state’s tax climate helps the Indiana Economic Development Corp. attract new business, but as Ball State University researchers noted in a recent paper, even in the IEDC’s best year on record, 2010, the agency had a hand in no more than one of every 22 jobs created.

“Taxes matter, but they matter less the better your tax climate is,” said Ball State economist Mike Hicks, who co-authored the paper, which calls for Midwestern cities to stop relying on traditional tools like tax abatement and focus on livability.

“Good businesses are increasingly wise to the fact that good local public services in the long run helps the bottom line,” Hicks added. Skilled workers want to live in places with good services, he said. “Households are the real key to economic impact, not the business itself.”

Alex Rosaen, director of public policy and economic analysis at Anderson Economic Group in East Lansing, Mich., agrees.

“Taxes are not the only thing that’s important for business, and they’re not even the most important thing,” he said.

Pulling the tax lever

State lawmakers tend to focus on taxes because they are directly under their control, Rosaen said.

Greller

“State government has their hands on that lever, and they know what direction business wants them to pull it in,” he said.

Pence recognizes the livability factor, and his State of the State speech included a passing reference to boosting public and private investment in the state’s metropolitan areas. One step in that direction is House Bill 1035, which requires the IEDC to assess cities’ competitiveness, including on quality-of-life measures.

Race said the administration so far is not giving quality of life issues the importance they deserve. “I don’t see anything but lip service right now. We’re still a bit old school.”

Getting rid of the business personal property tax has been on the Indiana Chamber of Commerce wish list for more than a decade, but it took on new importance after Ohio eliminated its tax four years ago and Michigan lawmakers voted to phase it out, said Bill Waltz, the organization’s vice president of taxation and public finance.

In Indiana, the tax provides $1 billion in revenue to local governments. If it were eliminated, the burden would first shift to other taxpayers, and any revenue that exceeded constitutionally mandated property-tax rate caps would be lost.

Pence asked the Legislature to find a way to phase out the tax without burdening local governments, or other taxpayers, but local elected officials aren’t happy with the House and Senate proposals.

The House passed a bill that would give counties the option of eliminating the tax on new equipment, a move local officials fear would pit them against one another. The Senate’s bill exempts businesses with less than $25,000 in equipment and reduces the corporate income-tax rate from 7.5 percent to 4.9 percent by 2020.

Avoiding undue harm

The governor keeps saying he doesn’t want to “unduly harm” local governments, said Matt Greller, executive director of the Indiana Association of Cities and Towns, which is pushing for a source of replacement revenue.

“Undue harm to us is anything over $1 in impact to local governments,” he said.

Because local governments already lost revenue to the constitutionally mandated property-tax caps, Greller said, “We cannot sustain any more cuts, period.”

Race

Even suburbs where the impact of the House and Senate proposals would be relatively small are resisting. Carmel stands to lose $2.7 million, Mayor Jim Brainard told the city council at a Feb. 3 meeting.

“It’s a major discussion that is not a surface discussion at all,” Carmel City Councilor Luci Snyder said. “We are all concerned about it.”

“It’s time that the state look at something more than just a very low tax climate,” City Councilor Ron Carter said. “We’ve gotten to the point now where the state plant is the median weed.”

Race, who writes a monthly design column for IBJ, said he shares local governments’ worry about taking even a small budget hit. Indianapolis is using property-tax revenue to subsidize new downtown apartment and retail buildings, he noted.

“As an urban designer, it’s very difficult to create interesting places without the public investment,” he said.

While Hicks agrees that sprucing up downtown is a good economic-development strategy, he’s not convinced the House and Senate proposals would gut local efforts.

“Needing to have more resources to address quality of place doesn’t mean you need to have more taxes,” he said.

In Indiana, businesses must value their equipment, and it’s added to the assessed value of their property. The average tax rate on commercial property is 2.75 percent, so wiping out that tax on millions of dollars in equipment would be a boon to a heavy manufacturer like Cummins Inc., the Columbus, Ind.-based diesel-engine manufacturer.

The company wants good tax policy, spokesman Jon Mills said. “We also look at the need for communities to be strong.”

The equipment tax is “not a material discussion” in the technology sector, said Mark Hill, managing partner at Collina Ventures and chairman of the industry group TechPoint.

One of the best incentives for tech firms has been job-training grants, Hill said. When he was moving his former firm Baker Hill from Colorado to Indiana, he said he chose Carmel because of the city’s reputation for quality schools.

Schools and transportation are important factors, he said.

“If those things aren’t in order, a little bit lower taxes aren’t something to get excited about. I think the balance is pretty good right now,” he said. “I think we have to be careful not to under-invest in education.”

Rosaen at Anderson Economic Group thinks tax cuts and increased spending both have the potential to boost local economies, if carried out wisely.

“It really matters a lot, the details of what you’re talking about spending the money on,” he said.•