EDITORIAL: State needs careful look at tax structure

We hope the commission will listen to Larry DeBoer, a Purdue professor who might understand Indiana’s tax structure better than anyone.

In a column for our latest issue of Greater Fort Wayne Business Weekly, DeBoer points out that we can’t study business taxes without looking at the whole tax system.

If Indiana cuts taxes for business, someone else usually winds up paying them instead, DeBoer notes.

After looking at the options, Indiana leaders might decide it’s worth whatever it costs to make the state more attractive to business. In his analysis, DeBoer takes a hard look at the price of that strategy.

Legislators showed they have some sense of the complexity this winter, when they backed away from an outright elimination of the tax on business equipment. Instead, they gave each county three options for ending or reducing that tax.

Counties that are manufacturing centers probably can’t afford to eliminate the business equipment tax. It brings in too big a share of their budgets, and the loss to local government and schools could be crippling. Most counties in northeast Indiana would fall in that category.

What those counties fear is that their neighbors will cut the tax, pressuring them to do the same to compete for new industry.

DeBoer noted that statewide, businesses pay about $1 billion in property taxes on equipment. Eliminating that would shift one-third of $1 billion to a tax burden on other property taxpayers. The other two-thirds of the money would be lost to local schools and governments.

As a state average, ending the business tax would add 7 percent to the bills of others who pay property taxes. But in counties with lots of factories, the shift to other taxpayers could be 20 percent or more, DeBoer said.

This summer’s study could look more closely at ways to replace $1 billion if Indiana wants to cut the business equipment tax.

DeBoer says the state has only three options. None of them sound very appealing:

• Raising the property tax may be an impossible solution due to the “cap” limits we recently placed in the state constitution.

• Raising the sales tax enough to collect $1 billion would require going from 7 percent to 8 percent. That would give Indiana the highest state sales tax in the nation — not exactly good for our reputation.

• Raising the state income tax would run counter to last year’s reduction in rates, approved by the Legislature. However, raising local income taxes would fit legislators’ recent pattern of cutting state tax rates and pressuring county officials to raise their income tax rates.

Will Hoosiers continue to be fooled when their state income tax rate goes down, but their overall state-plus-county income tax rate goes up?

The tax burden on Hoosiers rose over a recent past decade, according to a recent Tax Foundation study. It said Indiana taxpayers paid 9.5 percent of their incomes in state and local taxes in 2011 — a 1.1 percentage point increase over a 10-year span, amounting to a tax increase of $313 per person.

Since the years covered in the study, the General Assembly passed one of the largest tax cuts in Indiana’s history in 2013, cutting the corporate and financial institution tax rates and repealing the inheritance tax — along with a 5 percent cut in the personal income tax rate.

By making changes almost every year, legislators have created a complicated tax structure in which they can’t move one domino without knocking over a few more unintentionally.

This summer, it’s time to step back and take a careful look at who stands to pay more taxes if legislators give businesses or any other class of taxpayers another break.