Content cited from "Examining the Indiana Business Personal Property Tax" testimony By Economist Scott Drenkard
Business and Personal Property Taxes Distort Economic Decision Making
The trend away from business personal property taxes is a promising one, because this class of tax is uniquely harmful to economic growth and productivity. While taxes on real property (land) are generally thought by tax experts to be relatively “good” taxes, taxes on personal property are more destructive. Real property taxes are roughly correlated with the benefits and protections a person or business receives from the government in that area, but taxes on personal property just disincentivize a business’s decision to expand their use of technology and capital.
For example, if a bank is faced with a decision between building an ATM at a cost of $30,000 per year or hiring a bank teller at $30,500 per year, they should choose to build the ATM. But if that ATM is subject to a tangible personal property tax in excess of $500, the bank will choose to employ the bank teller instead, even though doing so is economically wasteful and that bank teller could provide more value elsewhere in the economy.
Business Personal Property Taxes are Complex
We also know that business personal property taxes have high compliance costs. Unlike taxes on real property, where assessors determine your tax bill, taxes on personal property are “taxpayer active.” Businesses must file forms detailing relevant attributes of their property, including (but not limited to) a physical description, year of purchase, purchase price, and any identifying information (e.g., serial numbers) that are included on the property.
While I do not know of significant empirical data on how much time businesses spend filling out personal property tax forms, we do know that the compliance burden weighs most heavily on new businesses that must find and detail this information for the first time.
Reducing Reliance on Business Personal Property Taxes
There are a number of ways that states can reduce reliance on business personal property taxes. In our study we detail a few:
Ten states have de minimis exemptions, which range from $500 in Texas to $225,000 in the District of Columbia. These exemptions have the advantage of limiting the amount of business personal property tax paid by small businesses. To limit compliance costs, states could additionally consider filing thresholds, allowing businesses with a very small amount of capital to entirely forgo the hassle of filling out these complex tax returns for what amounts to very small tax bills.
Other states like Maine and Kansas have gone the route of exempting new property, a way to slowly phase out business personal property taxes without a sharp drop in collections. This method has the advantage of being attractive to businesses looking to locate in the state for the first time, or businesses looking to expand their capital in the state.
In Alaska, Maryland, Vermont, and Virginia, localities have the option to enact broad exemptions, and this method helps to induce healthy competition for business location.
Conclusion
In closing, I’m happy to see this committee take on this issue. As I mentioned at the beginning of my remarks, business personal property taxes are largely unknown to the general public, but they distort the marketplace and have tremendous compliance costs. Indiana has in the last few years led the country on implementing pro-growth tax reform, and this represents another opportunity set an example to other states. Thank you for time today; I look forward to your questions.
For more details please read the full original article this information is cited from by clicking the link below:
http://taxfoundation.org/article/examining-indiana-business-personal-property-tax