By Tony Cook

tony.cook@indystar.com

For critics, a proposal to eliminate a state tax on business equipment is conjuring all kinds of nightmare scenarios.

In Indianapolis, officials say lost revenue from the tax cut would force them to shrink the police force, close fire stations, lay off teachers and shutter library branches. In industrial-heavy cities such as Whiting, where the tax makes up 70 percent of the city budget, the impact would be even more dramatic.

Consolidating with a neighboring community would be the city’s only hope, said Mayor Joe Stahura. “We would have to turn the keys over to someone (else).”

Database:How local government, schools, libraries could be affected by eliminating the business equipment tax

Local governments would shoulder only part of the burden. Because of how property tax levies work, the elimination of the equipment tax would shift part of the burden to real property owners. Nearly 80 percent of Indiana homeowners could see their property taxes rise if lawmakers were to simply eliminate the business tax.

“You’re basically shifting those business expenses over to residents of the community who can’t afford it,” said Terre Haute Mayor Duke Bennett.

Such concerns have reached a fever pitch in the weeks since legislative leaders and Gov. Mike Pence announced their support for phasing out the tax, which generates more than $1 billion in revenue for local governments, schools and libraries.

Supporters of the phaseout argue the tax is a hindrance to the state’s efforts to attract new investment and jobs. They say the tax can be phased out in a way that mitigates the impact on local governments, which are still reeling from the impact of property tax caps that took effect in 2010. Pence has said he’s leaving the details to lawmakers.

The proposal is expected to get a lot of attention during the legislative session that begins Monday. Some powerful business forces, including the Indiana Manufacturers Association and the Indiana Chamber of Commerce, are making elimination of the tax a top priority this year.

Indiana House Speaker Brian Bosma, R-Indianapolis, said the reaction from local officials has been loud and clear.

“Anytime you propose something new, there is always a mass exodus to the lifeboats,” he said. “I’ve never used the term ‘elimination’ because that shocks local government into thinking they are going to have a $1.1 billion loss of revenue tomorrow, and that doesn’t have to be the case.”

He said a House version of the measure that will be introduced after the session begins likely would give counties and perhaps cities the option of eliminating the tax but would not require it. He also said the elimination would apply only to new equipment. That would put local officials in control and would result in a gradual elimination, he said.

Fearing the worst

Still, the lack of a clear consensus about how to mitigate the impact on local government and homeowners has some people fearing the worst. And even if the tax cut is optional, it could still represent a significant shift of the tax burden from business to individuals.

A recent report from the nonpartisan Legislative Services Agency found that simply eliminating the tax would result in $556 million in losses to local governments and schools and an increase in real property taxes of $375 million. On average, property taxes would increase 36 cents per $100 of assessed value, the report said. On a home valued at $150,000, that would mean a tax increase of $540, or about $246 with homestead deductions.

At the same time, some of the state’s largest companies would benefit the most from the tax cuts, according to an Indianapolis Star analysis of state tax rolls. Eli Lilly, BP and Chrysler each would save more than $20 million a year. ArcelorMittal, Toyota, Comcast, General Motors and United States Steel would save more than $10 million each.

“I am very much pro-business and for economic development,” said Jack Kroeger, president of the Spencer County Council in Southern Indiana and a Republican. “But it seems like a huge shift in tax burden from large multinational corporations and other large corporations to local homeowners, farmers, and small business owners.”

Supporters of cutting the tax say that’s not accurate. The tax applies to the assessed value of everything from industrial blast furnaces to tanning beds and computers.

“Some critics have characterized getting rid of this as a tax break for big business,” Pence said last month. “The truth is that all businesses — big and small — pay this tax. It’s as much a tax on the new, small business as it is on a large company.”

Shift may mean loss

For farmers and smaller businesses without a lot of heavy machinery, the shift of the property tax burden from equipment to homes, buildings and land could mean a net loss.

“While business as a whole will see a tax decrease, smaller businesses without much personal property could see taxes go up,” said Larry DeBoer, a professor at Purdue University who studies state tax policy.

The same would be true for some farmers. Eliminating the equipment tax without replacement revenue is estimated to cause a net loss of nearly $24 million for farmers, said Katrina Hall, director of state government relations for the Indiana Farm Bureau.

She said farmers generally dislike the equipment tax because it has a 30 percent devaluation floor, which means an old tractor that is worth virtually nothing on the open market is still taxed at 30 percent of its original value. Still, support of the tax repeal from farmers isn’t guaranteed without some other form of replacement revenue.

“We’re open to talking about it,” she said. “But I do think it’s a pretty big nut to crack. You’re not going to shift around a billion dollars of personal property tax unless there are winners and losers — and we don’t want to be losers in that.”

Indiana Chamber President Kevin Brinegar said his organization is not opposed to some form of replacement revenue. But he wouldn’t disclose which options are being considered.

He and others emphasize that the intent is not to shift the tax burden but to bring more jobs to Indiana.

“There’s no purposeful attempt to shift anything here,” Bosma said. “What we’re reacting to is the real concern from folks outside of Indiana who want to bring their business to Indiana and they point to this tax when Illinois and Ohio don’t have it.”

Indeed, all of Indiana’s neighbors with the exception of Kentucky have eliminated the tax or are phasing it out. But in most cases, the changes were part of broader tax reform involving new business taxes that provided some form of revenue replacement for local governments.

Some skeptics also question whether eliminating the tax will actually attract a significant number of new jobs.

Brinegar said the chamber is collecting information about the impact of the tax elimination in other states.

Breaks for business

Opponents, meanwhile, point out that Indiana already has one of the top business climates in the country and that local governments can already offer individual businesses a 10-year tax abatement.

Andrew Berger of the Indiana Association of Counties said an across-the-board elimination could actually reduce the ability of local officials to keep businesses accountable for creating the jobs they promise. Now, local officials could revoke a tax break if any employer fails to make the investment or create the jobs it promised.

“We can put strings on it,” he said. “Counties can claw back incentives if an employer doesn’t meet their obligation.”

Eliminating the equipment tax could also cause problems for local governments that are already using tax increment financing (TIF) for economic development deals.

In Whiting, for example, the city recently took out bonds for a $7.5 million road improvement to assist BP’s expansion of its refinery there. If the equipment tax were eliminated, the city wouldn’t be able to meet its bond obligations, said Stahura, Whiting’s mayor.

Indianapolis would lose about $16 million in TIF revenue, said city Controller Jason Dudich.

“In some cases, most of the revenue generated through a TIF is from personal property,” he said. “If the personal property were eliminated, the only revenue source to repay TIF bonds would be wiped out.”

Given the complicated nature of the issue, some legislative fiscal leaders say they aren’t sure it will be resolved before the session ends in mid-March.

The state Senate’s chief budget writer, Luke Kenley, R-Noblesville, said some basic questions about the proposed tax cut remain unanswered in his mind.

“What is the fair share for people to pay?” he said. “Will it help business in the way you say it will? Clearly it’s an option to be considered, and it has some merit. But I don’t think I have enough answers to those other questions.”

With more than a $1 billion at stake, he’ll have plenty of people offering to provide them.

Call Star reporter Tony Cook at (317) 444-6081. Follow him on Twitter: @indystartony.

Potential winners and losers in the business property tax debate

Lawmakers plan to debate a proposal from Gov. Mike Pence to phase out the business personal property tax, which is a tax on business equipment and machinery that generates about $1 billion in revenue for local governments, schools and libraries. Elimination of the tax without any source of replacement revenue would produce a windfall for big business — and cause significant problems for others. Lawmakers have said they would provide replacement revenue or make the tax cut optional for local governments.

Biggest Winners

1. Eli Lilly and Co.: The Indianapolis-based pharmaceutical giant would see its taxes reduced by $29.5 million.

2. BP: The multinational oil and gas company, with its large refinery in Northwest Indiana, would save $21.7 million

3. Chrysler: The Detroit-based automaker and its Kokomo transmission plant would save $20.9 million.

4. ArcelorMittal: With plants in East Chicago and Burns Harbor, the steel company headquartered in Luxembourg would save $14 million.

5. Toyota: The Japanese automaker’s Indiana presence includes an assembly plant in Princeton and a forklift plant in Columbus. It would save $10.8 million.

Biggest Losers

1. Homeowners: Eliminating business equipment and machinery from the pool of taxable property would shift the burden to homeowners, who would pay an additional $175.2 million in property taxes.

2. Cities and towns: Local municipalities would lose $174.6 million in revenue. Indianapolis officials say such a loss would likely require reduced services, including police layoffs and fire station closures.

3. Schools: Indiana’s public schools would take a $150.7 million revenue hit. Indianapolis Public Schools would lose $15.2 million.

4. Counties: County governments would lose $70.6 million. County officials say that would cut into criminal justice and public safety services.

5. Libraries: Public library funding would fall $23.9 million. The Indianapolis-Marion County Public Library would lose $4.3 million — approximately the amount it takes to operate four branch locations.

Sources: Legislative Services Agency, Department of Local Government Finance, Star research.

The General Assembly kicks off its 2014 session Monday. Because lawmakers pass a biennial budget only in odd-numbered years, this year’s session will be an abbreviated one. Still, lawmakers are expected to debate some significant pieces of legislation before the session ends March 15.

Gay marriage ban: An amendment to the state constitution that would ban same-sex marriage and civil unions is expected to take center stage this year. Lawmakers approved the amendment in 2011, but must do so again before it can go before voters in November.

Early childhood education: Gov. Mike Pence has proposed a voucher program to help up to 40,000 low-income Hoosier children attend pre-school. Legislative leaders have expressed support for passing some type of program, but have expressed some concerns about how to pay for it.

Business tax: The governor wants to phase out Indiana’s tax on business equipment and machinery to make the state more competitive and to draw new investment and jobs. But such a move could increase property taxes for everyone else and cause local governments to lose a significant revenue stream.

Mass transit: Lawmakers are expected to take up a summer study committee’s recommendation to allow local governments in Central Indiana to expand mass transit.

Child care regulation: A series of articles in The Indianapolis Star has exposed deep flaws in how the state regulates day care safety, prompting a bipartisan group of lawmakers to propose stricter regulations.

Common Core: Depending on action taken by state education officials, lawmakers may get involved again in the fight over Common Core standards. Key Republican leaders have written guidelines that keep the state out of the Common Core, but create Indiana standards that recognize students need to be prepared for the SAT and ACT college entrance exams.

Electronic privacy: Several Republican lawmakers plan to introduce bills that would require law enforcement agencies to obtain a warrant before tracking the electronic data of Hoosiers. Those measures come after The Star reported that Indiana State Police had acquired a device capable of tracking phone call data for hundreds of cell phones at a time.

Other education issues: Pence wants to provide a stipend for teachers who want to move to low-performing public schools or charter schools that serve primarily low-income students. He also wants to create a fund for innovative teachers and make it easier for charter school networks to operate.

Other tax issues: Pence also wants lawmakers to pass a law that would increase the state’s individual and dependent income tax exemptions by adjusting them for inflation. He also wants to introduce a new tax credit for Indiana parents who adopt.

- Tony Cook and Barb Berggoetz

The Star’s Statehouse team

Here’s a look at who will be covering this year’s session of the Indiana General Assembly.

Barb Berggoetz, a veteran reporter who has worked at The Star since 1985, is returning to covering the Statehouse after several years of focusing on wellness, fitness and consumer health issues. She has extensive experience writing about state education issues, K-12 schools, higher education, courts and the retail industry. Email: barb.berggoetz@indystar.com. Twitter: @barbberg.

Tony Cook has spent past year exploring the intersection between government and business as a member of The Star’s business and investigative teams. He has written about questionable pay raises for utility executives, allegations of self-dealing within a grant program funded by public riverboat casino money, and controversy surrounding a proposed coal gasification plant in Rockport. Before joining The Star in 2012, he worked at the Las Vegas Sun, the Toledo Blade, and the Cincinnati Post. Email: tony.cook@indystar.com. Twitter: @indystartony

Greg Weaver is the editor who will be guiding The Star’s Statehouse coverage. He covered his first session of the Indiana General Assembly in 1983 as a college reporter for the Ball State Daily News and developed the first computer database of Indiana campaign contributions as Statehouse reporter for The Evansville Courier in the early 1990s. He is now in his second stint as government editor at The Star, where over the past 20 years he has guided award-winning reporting on the deep influence of lobbyists, the ethics scandal surrounding Duke Energy’s Edwardsport plant and questionable grants from a casino-funded government program. Email: greg.weaver@indystar.com. Twitter: @BizWeaver.

Other members of The Star’s government and education team also will provide some coverage of the legislature this year. They include city hall reporter Jon Murray, John Russell on economic development and health care, Eric Weddle on K-12 education and Stephanie Wang on higher education.