Cut the tax cut debate, spend the money wisely

Indiana’s business personal property tax remains a hot topic across much of the state.

Tax abatements, tax-increment financing and an outright repeal are getting more of the attention they deserve. There is reason for optimism in this debate; however, the most critical issues are persistently ignored.

In Fort Wayne, the city council will vote on a proposal to eliminate the business personal property tax. The proponents of this make two arguments.

First, a lower tax will make the region more enticing to business investment. Second, that the city approves tax abatements and TIFs so often that new businesses receive huge windfalls while existing businesses bear higher taxes (or reduced services) because of the TIF or abatement.

Both of these arguments have the benefit of being factually true; however, both entirely miss the real issues about tax policy and economic development. Let me explain.

There’s no way around it, business taxes in Indiana are modest. Overall, Indiana ranks in the Top 10 states on any national ranking of taxes and has done so for a number of years. Still, recent changes make the situation more favorable for businesses. Anyone who thinks Indiana’s state or local tax rates act as a meaningful impediment to business location or expansion is simply mistaken.

It is also true that the repeal of the business personal property tax, along with the repeal of every TIF and every tax abatement, favors one business at the expense of everyone else. Ironically, this truth was admitted by the opponents of the Fort Wayne proposal, when they reviewed the fiscal impact of the tax elimination.

To be clear, eliminating the business personal property tax has the same effect on everyone else as does granting all new businesses an abatement. It either raises everyone else’s tax rates, or reduces the available public services, or both.

The debate over the impact of abatements and TIF is long overdue, but we can’t afford to neglect the more fundamental issues involved. Again there are two issues that matter deeply to this debate that are routinely ignored.

Firstly, we should ask the simple question: Why is it we want to favor capital investment over workers? Workers face much higher taxes and regulatory costs than does capital, both at the state and federal level. By further reducing the relative cost of capital investment, we are unwittingly facilitating the substitution of more machines for fewer workers. The right mix of workers and equipment is inherently the decision of a business owner. These are things we should let markets, not city councils, figure out.

Second, the problem with taxes isn’t how much is collected, but rather how they are spent. Fort Wayne is a classic example.

For nearly half a century the city effectively ignored its deepest challenges of urban blight and poor schools. The economy suffered, and people and businesses moved to places with better schools, cleaner cities and paradoxically in most every case, higher taxes.

A little more than a decade ago that changed. The city began to focus on making itself a better place to live. As a result, the greater Fort Wayne area is the only part of Indiana outside of Indianapolis that is forecast to grow over the next generation.

The lesson here is pretty clear. Instead of trying to second guess the optimal mix of capital investment and labor for a company, or slashing already low taxes for new business at the expense of all the other taxpayers, city councils ought to focus on the basics of making a city attractive to people. That’s pretty much what Hoosier cities did a century ago when they were the successful wonder of the world.

Michael Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University. Send comments to letters@dailyjournal.net.