INDIANAPOLIS | It's not often you'll hear a Hoosier governor claim Indiana's business taxes should be more like those in Illinois.
Usually they tout Indiana's corporate tax rate, lower average wages and minimal regulatory burden to lure Illinois companies across the state line.
But in Republican Gov. Mike Pence's quest to phase out the business personal property tax, he regularly insists Illinois doesn't charge a property tax on business and manufacturing equipment and so is a prime reason to get rid of Indiana's, which provides $1 billion a year to schools and local governments.
"This is just a bad tax in a state where you make things," Pence said. "Illinois doesn't have one, Michigan just voted to phase theirs out ... I think it will make Indiana more prosperous, more competitive."
Repeatedly left unsaid -- and perhaps unknown to Pence -- is that while Illinois is one of seven states without a business personal property tax, Illinois companies annually pay a 2.5 percent income tax surcharge known as the "business personal property replacement tax."
The 1970 Illinois Constitution required the General Assembly eliminate the business personal property tax by 1979 and authorized a replacement tax to ensure schools and local governments continued to receive the same amount of money they did when the personal property tax was in effect.
As a result, while Illinois' corporate income tax rate is 7 percent -- the same as Indiana's, though Indiana's is set to drop to 6.5 percent next year -- Illinois businesses actually pay a corporate income tax of 9.5 percent with the business personal property replacement tax included.
Similarly, when Pence speaks about Michigan being on track to eliminate its business personal property tax, he omits that starting in 2016 Michigan local governments can charge an "essential services assessment" on business real estate, to make up 100 percent of the revenue lost due to the personal property tax cut.
Pence also is fond of talking about how Ohio eliminated its business personal property tax in 2010. He never mentions, however, Ohio replaced it with a gross receipts tax, charging a 0.26 percent fee on all taxable business revenue over $1 million for the privilege of doing business in the state.
House Democratic Leader Scott Pelath, D-Michigan City, said he believes Pence is too focused on business taxes and is failing to ensure Indiana maintains everything else that goes into being a state where people want to live and work.
"There's so many complex reasons why a business locates in one place as opposed to another," Pelath said. "It's not all about taxes; sometimes it's about the overall reputation of your state and we clearly have room for improvement."
Tax machinations continue
Last week, following a meeting with Indiana mayors who told the governor they can't afford another big hit to their revenue so soon after property tax caps, Pence revealed that he's "open" to some $55 million a year in state-provided replacement revenue if the business personal property tax is eliminated for small businesses, as envisioned by Senate Bill 1.
"This would ensure that any reform of this tax does not unduly burden local governments or shift the cost of this tax onto hardworking Hoosiers," Pence said.
However, Pence gave no details on where the replacement revenue would come from or if it would require cuts elsewhere in the state budget, which mostly goes toward education.
Senate Bill 1, which is under review by the House Ways and Means Committee, also further reduces the state's corporate income tax revenue by $132 million a year by cutting the corporate income tax rate to 4.9 percent in 2020.
Together, the tax cut and replacement revenue would blow a nearly $200 million hole in a state budget already struggling to keep up with Hoosiers' needs following a business tax cut and the elimination of the inheritance tax in 2013, continued sharp declines in gaming tax revenue and sub-inflation growth in sales and personal income tax revenue.
Another proposal pending in the Republican-controlled General Assembly, House Bill 1001, gives each county the option to eliminate the business personal property tax on new equipment.
Pence has not said if he supports either state replacement or a new county-option business tax to make up lost revenue if counties choose to eliminate the personal property tax.
"We are in the midst of discussions and negotiations to improve those bills," Pence said.
State Rep. Tim Brown, R-Crawfordsville, chairman of the Ways and Means Committee, confirmed meetings are ongoing among the House, Senate and governor's office.
"What we're trying to do is create a broad policy that's favorable for all Hoosiers to grow jobs," Brown said. "You can't sit still. This is a dynamic and evolving situation. What we do this year for the next five years, we'll have to change in 20 years."
Lawmakers have until March 14, the General Assembly's mandatory adjournment date, to hammer out a compromise.