Larry DeBoer
Professor
Agricultural Economics
Purdue University
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Any day now it will start. The February
advertising onslaught, as regular as Groundhog Day:
the Inventory Tax Sales.
For the past few years, retailers haven’t
been the only ones shouting about the inventory tax.
It’s been a big issue in the General Assembly.
Your legislators have been doing some shouting, too.
What is the inventory tax?
You’ll find no tax on the books with that name. Inventory
tax is what we call the property tax on business inventories.
The same property tax that applies to your house, at the very same tax
rate, also applies to the assessed value of cars on dealers’ lots, corn in
farmers’ silos, parts in manufacturers’ warehouses.
The assessment date is March 1. On that day businesses report the value of their inventories,
for taxes payable the following year. How
to avoid paying taxes on inventories on March 1? Sell them in February!
Fewer than ten states still tax inventories with the property tax. A lot of businesses would like Indiana to stop taxing inventories, too. They say that Indiana could be a center for goods distribution, since we’ve got so many interstate highways. We discourage firms from keeping goods here because we tax them. But, their opponents say, who will make up the $400 million in inventory property taxes, that go to support schools, counties, cities, towns and other local governments?
The General Assembly debated a phase-out of
the inventory tax during the 1999 session.
On the last day, they passed a $12,500 assessed value deduction for all
personal property—inventories, plus business equipment and even many mobile
homes. Unfortunately, this
deduction turned out to cost about twice what was expected.
The General Assembly repealed it in 2001, in response to the looming
budget shortfall.
In its place they passed a new income tax
credit. Businesses will pay their
inventory taxes, but will receive a credit for part of this payment to reduce
their income taxes. The credit is
scheduled to go into effect in 2003, though the Governor’s budget plan calls
for it to be postponed until 2005. Either
way, this year, 2002, neither the property tax deduction nor the income tax
credit applies.
The on-going property tax reassessment
enters the mix. For decades past,
when businesses assessed their inventories they started with their purchase
costs, then subtracted 35%. Under
the new assessment rules, the Department of Local Government Finance (formerly
the State Tax Board) will not allow the 35% inventory adjustment.
The Indiana Tax Court has ordered the Department to write assessment
rules that are more closely related to property value.
And, increasing the assessments of business property will decrease the
shift in property taxes to homeowners.
Most businesses will still pay lower taxes on their inventories because
of reassessment, since tax rates will fall.
But the tax cut would have been bigger had the 35% adjustment remained.
Then there’s tax restructuring. The Governor’s 21st Century Tax Plan proposes a
100% property tax credit for inventory taxes starting in 2003.
The plan includes $462 million to be paid to local governments to offset
the lost inventory tax revenue. That
money comes from higher sales and income taxes.
This is complicated.
Couldn’t we just eliminate the property tax on inventories?
Avoid having to assess them, avoid paying the hundreds of millions of
dollars from state revenues to offset them?
We could do that, but the Indiana Constitution seems to require that
inventories be assessed and taxed. We’d
have to amend the Constitution. And,
if we reduced assessed value because inventories weren’t assessed, property
tax rates would have to be higher to raise the same amount of local revenue.
Remaining property owners (like homeowners) would pay those higher rates.
Still, with all these new rules and proposals, it could be that the days of the inventory tax are numbered. One of these years, we’ll see the last of the inventory tax sales. Perhaps we won’t be so nostalgic for the loss of this particular Indiana tradition.