A House lawmaker is seeking a renewed effort to make changes to the personal wealth tax for businesses that would offer small business owners a little bonanza while reducing local government revenue.
Rep. Peggy Mayfield, R-Martinsville, is introducing legislation that would increase the exemption that determines which businesses must pay the corporation’s personal wealth tax. Their bill would exempt any business owning machinery, equipment, and other tangible goods that cost them less than $250,000 in total. The current threshold is $80,000.
The proposed change could essentially eliminate up to 48,000 tax returns, according to earlier estimates by lawmakers.
Mayfield’s bill is the latest in a series of decades-long efforts to lower corporate wealth taxes and ease administrative accounting headaches. The concept has the support of House Speaker Todd Huston. But its prospects are less clear in the Senate, where leading Republicans are pushing for other avenues to lower the tax burden on small businesses.
Mayfield’s particular approach revitalizes a failed attempt by last year’s legislature to abolish the minimum tax companies pay on new equipment, also known as the 30% depreciation floor. Traders pay at least 30% of the purchase price for machines and systems, even if they are several years old.
Last year’s tax cut package included a measure to gradually reduce the individual income tax rate from 3.23% to 2.9% over seven years, but lawmakers failed to agree on changes to the corporate wealth tax, despite strong support from Gov. Eric Holcomb, the Indiana Chamber of Commerce and the Indiana chapter of the National Federation of Independent Businesses.
According to a study by the Legislative Services Agency on the impact on finances, local government leaders strongly opposed the proposed cut, which would have cut local revenues by $100 million nationwide by 2037. A study by Indianapolis-based economic research firm Policy Analytics also found that removing the depreciation floor would have resulted in homeowners paying a larger share of the total tax burden.
But Indiana tax policy experts say Mayfield’s proposal is an easier pill to swallow. According to a tax impact study last year on a similar bill authored by Sen. Aaron Freeman, R-Indianapolis, raising the threshold to $250,000 would reduce annual local revenues statewide by $17 million — a significantly lower margin.
“The depreciation floor affects the large companies, while this proposed threshold only affects small and medium-sized businesses — which make up a much smaller proportion of personal property,” said Larry DeBoer, a retired professor of agricultural economics Purdue University, who co-authored the Policy Analytics study. “This would also save the municipalities money because fewer forms would have to be processed.”
DeBoer said that while the change would still shift costs onto homeowners, it might go unnoticed because homeowners are already anticipating higher property tax bills as home values have risen dramatically in recent years.
make the case
With a background in local government and small business, Mayfield seems the ideal candidate to soothe both sides of the debate.
Mayfield, now in her sixth term, won her 2012 election bid after serving six years as a Morgan County clerk. She and her husband Dean have owned an insurance company for three decades.
Raising the threshold to $250,000 would exempt about 80% of small businesses from paying the tax, she said.
“It would be one less thing for a small business owner to worry about,” Mayfield said. “They have to go through the exercise of paying an accountant to find out they don’t owe any money.”
The change would keep Indiana competitive with other Midwestern states that have either reduced or eliminated taxes on personal property altogether, proponents said.
“There aren’t that many states that do this, and it penalizes companies for investing in real estate and machinery,” said Kevin Brinegar, CEO of the Indiana Chamber of Commerce. “There are tens of thousands of small businesses that have very little machinery and equipment and still have to pay a CPA and a very small property tax.”
Natalie Robinson, director of the Indiana chapter of the NFIB, said the change would benefit small businesses that are already disproportionately burdened by tax laws. “In many cases,” Robinson said, “it takes them more time and effort to determine the tax owed than it does to file the tax return.”
Illinois stopped collecting the tax in 1979 and replaced funding with a 2.5% surcharge on corporate income. a 1.5% surcharge on income for partnerships, trusts and S corporations; and a 0.8% tax on the invested capital of a public utility.
The state of Michigan picked up the bill for local governments after eliminating the private commercial property tax in 2014. Local government units receive a portion of the state’s use tax to offset the loss. Non-industrial personal property with an initial value of less than $80,000 is exempt, as in Indiana.
Ohio began phasing out its personal wealth tax in 2006, and by 2011 the revenue was fully replaced by the state. Additional taxes on trading companies, electric utilities and natural gas companies have been used to offset future losses, but the state continues to make payments to local governments based on their losses.
The 2022 proposal to eliminate the minimum depreciation floor would have prompted Indiana to make up for losses in local revenue for the first few years, but thereafter local businesses would have to cope with the reduced revenue, a provision that didn’t sit well with some municipalities.
Mayfield’s bill doesn’t currently include a replenishment mechanism, but could be amended to include one if a majority of her faction votes in favor of raising the exemption threshold, she said.
Local government supporters say they oppose any changes to the tax that don’t offer a funding replacement.
“More cuts, freezes, or government-mandated cuts just mean it’s going to be much harder for locals to keep up with the costs of inflation and services,” said David Bottorff, executive director of the Association of Indiana Counties. He pointed out that state laws will prevent total property tax revenues from growing more than 5% in 2023, which is less than the current 7% inflation rate.
“I think that needs to be factored into the equation,” Greller said.
An uncertain path
It’s unclear whether Mayfield’s initiative will become part of the overall GOP agenda.
After calling for a tax cut last year, Holcomb has since shifted his focus to increased public health funding, investment in K-12 programs and stronger economic development incentives, including $500 million for a second Funding round for the READI program.
“It’s not on my agenda right now, but I would consider it if it gained momentum,” Holcomb said.
Senator Travis Holdman, a Republican from northeast Indiana who chairs the Senate Committee on Taxes and Fiscal Policy, has authored legislation establishing a commission to study the feasibility of phasing out the state income tax and reforming the property tax. He declined to say whether he would support Mayfield’s bill or whether the commission would consider adjusting the tax.
Senator Ryan Mishler, chair of the Senate Budget Committee, said he is open to changes if there is greater demand from the business community. “When we spoke to some of the companies, at least the ones I spoke to, that wasn’t one of their priorities,” said Mishler, R-Mishawaka. “Jobs, childcare, housing – those are their priorities.”
Among Senate Republican priorities is a measure that would change state tax laws to allow limited liability companies and S corporations to deduct all state tax payments from federal tax returns.
Regarding changes to the personal property tax for corporations, House Speaker Huston said he has always advocated lowering the tax and is pleased to hear Mayfield is taking up the issue.
Rep. Jeff Thompson, chairman of the House Ways and Means Committee, said he would like more time to analyze the state’s financial prospects before taking a position. Mayfield’s bill is expected to be assigned to the Ways and Means Committee.