Senate Bill 1 creates a commission on business personal property and business taxation, which will include legislators, appointees of the governor and business and local government representatives, among others.
The bill didn't eliminate the property tax on business equipment. Perhaps the Legislative Services Agency's report on the concept discouraged legislative proposals. Businesses pay about $1 billion in property taxes on equipment. If the taxes were eliminated, about a third of that billion would shift to other taxpayersm and two-thirds would be lost revenue for local governments. That's big money.
The commission will probably look at elimination again, if only because "business personal property" is in its name.
Could we simply eliminate the tax, and leave it at that? Well, there's that one-third of a billion-dollar increase in everyone else's property taxes, about a 7 percent hike in the average tax bill. The tax bill increase would top 20 percent in half a dozen counties.
The commission might consider that possibility. But suppose we wanted to replace personal property taxes with other revenue. Where could we get $1 billion?
There are only three Indiana taxes that can raise money like that: the property tax, the individual income tax and the sales tax. The property tax raises about $6 billion a year (including the equipment tax); the individual income tax raises $5 billion for the state and another $1.9 billion for local governments; and the sales tax raises $7 billion.
The property tax is out, though. The tax caps we put into the Indiana Constitution prevent big increases. The state's individual income tax seems unlikely, too. We've scheduled a reduction in the state income tax rate, from 3.4 percent now to 3.23 percent by 2017.
Local income taxes would have to increase by half to raise a billion dollars. That's a lot. More plausibly, those local taxes could offset the property tax shift to other taxpayers. That's about a third of a billion dollars, closer to a 20 percent increase in local income taxes.
That leaves the sales tax, the traditional way Indiana reduces property taxes.
Our 7 percent sales tax raises about $7 billion a year. That's $1 billion per point, more or less. Raise the rate to 8 percent, and there's your billion dollars.
Way too easy. For one thing, an 8 percent state sales tax rate would give Indiana the country's highest state rate. That's not a distinction we want.
Looks like the new business tax commission will have to study more than just business taxes. How much should we pay for local government? What should be the mix of business and household taxes? Sure enough, the list of issues the commission will study includes all those — and more.