Cities, schools concerned about business property tax changes

A bill that would cut taxes for Hoosiers and businesses could cost local taxing units up to $21 million.

Two components of the bill would cut taxes for Hoosiers, but a third part of the bill would cut business taxes and force local cities and towns to raise property taxes on residents, according to Franklin and Greenwood officials.

House Bill 1002, authored by Rep. Tim Brown, R-Crawfordsville, would represent the largest tax cut in the state’s history, House Republicans say.

The bill would lower the individual adjusted gross income tax rate for Indiana residents from 3.23% in 2022 to 3% by 2026, and eliminate the 1.4% Utility Receipts Tax, effective in July. The Utility Receipts tax is assessed on monthly utility and telecommunications bills.

It would also expand the number of Hoosiers who would typically be eligible for a tax refund, which allows more Hoosiers to get the $125 payment that state lawmakers are adding to refunds from the state’s budget surplus this year. But a change to how business personal property taxes are assessed on new equipment would cost Johnson County taxing units millions, local officials say.

The proposal is to give business owners a 10-year tax holiday beginning in 2024, from the 30% maximum depreciation floor for all new equipment which qualify under the Business Personal Property Tax. These are typically large pieces of equipment purchased to facilitate manufacturing, sorting or warehousing functions at large businesses.

Currently, equipment cannot be assessed for less than 30% of the original purchase price, no matter the age of the equipment. With the proposed change, businesses would pay fewer taxes on the equipment after three years, said Greg Wright, Greenwood city’s controller.

The bill passed the House in a 68-25 vote last week. All of Johnson County’s representatives voted in favor of the bill.

The rationale

Indiana is ranked ninth in the country for overall taxes and 11th for business tax rates by the Tax Foundation, and both of those rates are more competitive than neighboring states that are vying for the same jobs.

Current business tax rates are not deterring anyone from locating in Franklin. In addition to the lost revenue, lawmakers would also be taking away one of the city’s economic development tools — the personal property tax abatement, Barnett said.

Franklin, Greenwood and several towns in Johnson County have used those abatements to attract new businesses and incentivize businesses to stay.

Local lawmakers in a joint statement issued Thursday said the bill’s purpose is to give money back to Hoosiers and encourage investment in Indiana.

“Hoosiers have made it clear they aren’t interested in more government, and this sentiment has been amplified through the pandemic,” Rep. John Young, R-Franklin, said in the statement. “This responsible tax relief package emphasizes giving money back to the hardworking people who earned it.”

Lawmakers are able to make these changes due to fiscal responsibility, they said.

“Indiana continues to invest in our priorities, live within our means, pay down debt, and now we’re expected to hit a record $5 billion in our reserves by the end of the fiscal year,” Rep. Michelle Davis, R-Whiteland, said in the statement. “This bill will help Hoosiers keep more of their hard-earned money and encourage existing businesses to expand their operations.”

Rep. Chris May, R-Bedford, said eliminating the business personal property tax encourages investment and allows businesses to pay an amount more closely based on the true value of the equipment.

“Indiana is already considered one of the top states to do business, but we need to make sure it stays that way,” May said in the statement. “These tax cuts would be another incentive for companies to plant roots here or grow their existing operations.”

Lawmakers plan on “ensuring homeowners and schools aren’t negatively impacted by the reduction in revenue,” May said in the statement.

The bill’s future in the Senate remains uncertain, as it has not yet been assigned a committee or hearing date.

A similar bill, Senate Bill 368, was pulled after the same concerns about local government funding came up. SB 368 would have increased the acquisition cost threshold to trigger paying the business personal property tax to $250,000 from $80,000, and included language to lower the 30% floor on all current and future equipment.

The proposed phase-down of the floor was projected to have a $140 million impact on local government revenue generated from business personal property taxes.

Sounding the alarm

If the bill is not changed or eliminated by the Senate, it would collectively cost Indiana taxing units $1 billion, according to Accelerate Indiana Municipalities (AIM).

All local taxing units, including cities, towns, counties, schools, townships and libraries would be impacted.

If state lawmakers feel it is necessary to eliminate the tax, Franklin and Greenwood officials, along with local government advocates with AIM, are asking lawmakers to cut taxing units some slack by providing full replacement revenue. After amendments to the bill in the House, it was passed on to the Senate with a guarantee to replace 25% of lost revenue from the tax holiday.

Last week, the Greenwood City Council unanimously passed a resolution opposing any changes without full replacement of the revenue lost by the state. Greenwood could lose up to $1.9 million in business personal property taxes, or 12% of the city’s total property tax revenue, according to city documents.

The bill would cost the city of Franklin $1 million in tax revenue, said Jeff Peters, the city’s financial adviser. Though Franklin officials have not passed a formal resolution, Barnett has made his concerns known to local lawmakers, he said.

Clark-Pleasant and Greenwood school officials are also watching the bill.

Clark-Pleasant would see a decrease of almost 11% in its net assessed value, which would have a significant impact on CPSC’s operations fund and future debt service, said Rick Hightower, spokesperson for the district.

At Greenwood schools, the tax makes up about 4% of the district’s net assessed value, said Terry Terhune, superintendent.

Taxing units can’t afford to lose that much revenue, so leaders would have to find a way to recover that. The revenue would likely be made up by raising real property taxes or creating an income tax, which city leaders are opposed to doing.

Raising the property tax would force homeowners to take on a large share of the taxes that businesses had been paying, Wright said.

But local governments likely can’t raise enough revenue to fully make up the shortfall with property taxes due to the state’s property tax caps, Peters said.

A local income tax presents the same problem — that residents, not businesses, would take a financial hit, said Mike Campbell, Greenwood city council member.

“Right now, the tax is all being paid by corporations,” Campbell said. “I think it’s a bad idea (to change that).”

HB 1002 would also impact local governments’ abilities to repay tax incremental financing, or TIF, bonds. TIFs are set up to capture incremental increases in property taxes and are often focused commercially on business personal property, said Matt Greller, AIM’s CEO.

TIF dollars pay for infrastructure in TIF districts and bond payments on those improvements. However, significant reductions in the assessed value of personal property would put local governments’ ability to pay the bonds in jeopardy if the bonds are backed by business personal property taxes, which is a common practice in Indiana, according to AIM.