Gov. Pence Convenes Tax Conference

The Pence administration is looking for big and little ideas regarding taxes. The Governor – through the Department of Revenue and Office of Management and Budget – recently conducted an all-day discussion on ways to simplify Indiana’s tax code and tax administration as a means for making Indiana even more competitive in its quest to attract more business activity to the state.

The day began with comments from Indiana’s own Al Hubbard, former director of the National Economic Council and a longtime Indiana Chamber board member. His insights were followed by a panel of nationally recognized tax experts who discussed – at a high level – tax structure and the impact of taxes and tax reforms. Well-known economist Art Laffer (of the Laffer Curve fame) spoke at lunch.The afternoon consisted of breakout panels of various Indiana tax professionals who addressed different aspects of our tax system. Each session and all the talks were captured on video and most of the panelists also submitted papers or written comments on the topics they discussed (see the Indiana Chamber’s remarks, under the Tax Simplification section at www.in.gov/dor/5122.htm). The video link and other conference materials are available for review at www.in.gov/dor/index.htm. You can also submit your own ideas (up to two weeks post conference) at www.in.gov/dor/5120.htm.

The event was generally intended to generate, collect and consider ideas on how to make Indiana’s system simpler and better. Everything from big picture sweeping changes to down-in-the-weeds process tweaks were put on the table. There were many references to “broadening the base and lowering the rates.” The taxation of business personal property came up in a number of times. And a wide range of suggestions and recommendations on tax policy and procedure in the contexts of sales, income and property tax were brought forth. Indiana Chamber staff and numerous members of the Chamber Tax Policy Committee took part in the panel discussions and otherwise participated.

The question now is how this host of ideas will be digested by the Pence administration and the Legislature. Many members of the tax policy committees in the Legislature participated and were in attendance. And many of the attendees will also be participating in some way with the Legislature’s Blue Ribbon Tax Commission that will get under way later this summer. The Governor indicated that he hopes the commission and ultimately the General Assembly will give consideration to some of the things discussed at the conference. It seems likely that the conference will create momentum for some proposals. Many appear very doable and could be realized in the near term, others may take a much longer course or never pan out. Of course, only time will tell which ones fall into which category.

Chamber’s Bill Waltz: State Budget Holding Steady for Now

There are plenty of ways to parse the revenue collections over the first 10 months of the current (2014) fiscal year. Officially, the general fund numbers are 0.5% below the most recent (December 2013) forecast. But they are 1.7% below the 2013-2015 budget based targets. Neither percentage warrants great concern, representing in dollars $61 million (0.5%) and $194 million (1.7%), respectively. But the last two months of fiscal year 2014 will be worth noting for the purpose of identifying trend lines. The March and April numbers came in very close to the December forecast, but the problem is the December forecast adjusted the predictions downward from the April 2013 forecast on which the budget is based.

Last month’s actual collections were 6.4% below the original forecast. So there is a need for the May and June collections to be close to the revised forecast amounts, or else the budgeting going into the second fiscal year of this biennium will get trickier. If those collections drop off, the forecasters and budget-makers will be looking at less than desired numbers going into the new budget making session next year. Sales tax revenues are the real key since they make up 49% of the collections. The sales tax numbers are not bad, but are very modest, showing 1.5% growth over last year. Corporate revenues remain stalwart, 14.5% above target for the year. On the other end, gaming remains down, 7.1% below target. All in all, the budget is in an alright place, but there is a lot to be determined in the coming months as far as expectations going into the next biennium.

Stay Tuned for Real Interim Action on Tax Issues
Nothing is happening just yet, but things are in the works: This will not be an ordinary interim for tax matters. The Pence administration is currently busy organizing a major event for next month. The initiative, dubbed the Indiana Tax Competitiveness and Simplification Conference, is set for June 24. It will be opened by Gov. Pence and feature a few nationally recognized speakers. There will also be panel sessions on a variety of tax subject areas. Panelists will have a work group type format. This is a “by invitation” conference. More details will be reported next month.

Dovetailing the Governor’s conference to some degree will be the Blue Ribbon Commission established by SEA 1-2014. It is expected that his body will begin to take shape in the coming weeks.

The Legislative Council has recognized the commission (referenced as the Commission on Business Personal Property and Business Taxation) in conjunction with the other interim committees sanctioned for interim activity (via Council Resolution 14-01). Senate Pro Tem David Long will name one of his Senate colleagues as the chair and Speaker Brian Bosma will name one of his House colleagues as the vice chair. Four other legislators will likewise be appointed, while the Governor will have a designee. And the remaining seven members will be laypersons representing various interested parties, including the Indiana Chamber, the Indiana Manufacturers Association, the Realtors Association, agriculture and local governments.

Indiana Climbing in the Rankings

Yesterday’s post highlighted some very promising jobs numbers in Indiana. It’s no coincidence that others are recognizing the state’s continually improving business climate.

The Small Business & Entrepreneurship Council released its Small Business Tax Index 2014, rating states on 21 measures. Indiana placed 11th. And with personal income tax rates (positively impacting capital gains and dividends) and corporate income taxes decreasing further, the ranking just might improve.

Even more promising, the American Legislative Exchange Council unveiled its annual Rich States, Poor States report. Fifteen state policy variables are used to forecast economic outlook. The theory: states that spend less and tax less (particularly on productive activities such as working or investing) experience higher growth rates than states that spend and tax more. Indiana ranks third (14th in 2013 and 24th a year earlier), behind Utah and South Dakota.

We’ll take the good news, but won’t rest on any laurels or allow others to do the same. There are still too many challenges and too many goals to be reached in our Indiana Vision 2025 plan. But it’s nice to be moving in the right direction.

Don’t Squander That Tax Refund!

Taxes aren’t all bad – especially this time of year when refunds are doled out to the tune of (on average) approximately $3,000. But don’t be fooled. Before you embark on an extravagant shopping spree, there’s something I have to say: Halt! Stop! Wait!

Kiplinger offers 10 tips for spending (and saving) your refund. Paying off credit card debt, rebuilding your emergency fund and boosting retirement savings are great ways to protect – and pad – your pocketbook.

I know what you’re thinking: That’s no fun! Point taken. But heeding some of these suggestions might help you avoid a serious case of buyer’s remorse. Who wants to deal with that?

So What’s the Deal with Bitcoin?

If you’re like me, you’ve pondered what exactly Bitcoin is. And you’re possibly uneasy about the thought of a “virtual currency.” Or maybe that’s just me.

Elaine Bedel of Bedel Financial Consulting is widely thought of as one of Indiana’s top financial experts (and we’re proud to say she serves on the Indiana Chamber’s finance/audit committee). She recently offered a useful summary of Bitcoin for Inside INdiana Business:

Bitcoin is a “virtual” currency. There is no physical paper or coins that you can touch or feel. It is an online currency. There is no centralized authority controlling bitcoin like other currencies such as the U.S. Dollar, Euro, and Yen.

How Do You Get Bitcoin?

Bitcoin can be purchased through an exchange or received in return for the sale of products and services. Once received, bitcoin can in turn be spent for other products or services. Today, there are almost 2,400 online businesses that accept bitcoin.

What is the Appeal of Bitcoin?

There are several reasons why bitcoin has appeal to some individuals. They include both good and not so good reasons:

-Limited Supply. The amount of bitcoin that can be created is capped at 21,000,000. For individuals concerned that governments are printing too much money, having a type of currency with a limited amount of supply is appealing.

-Privacy. Bitcoin provides a certain amount of privacy for its users. The ownership and recording of transactions with bitcoin is essentially a numerical code; therefore, there is no personal information attached when a person uses it. However, depending on where the bitcoin is used or stored this may be changing and some privacy may be given up. Several stories regarding bitcoin being used for online illegal activity has raised issues concerning the level of anonymity.

-Speculation. The value of bitcoin has skyrocketed in the past year. It has ranged from $100 to over $1,100 over the past twelve months and is now valued at approximately $500. This volatility in value is not appealing for a currency. To be widely accepted and used, the value of a legitimate currency needs to remain relatively stable.

What Does the IRS Say?

The IRS announced last week that bitcoin will be treated as property and not as currency. This ruling will likely make it more difficult for bitcoin users. Every time someone uses bitcoin to purchase a good or service, they will be required to keep track of their cost basis on those bitcoin for tax purposes. If the bitcoin was purchased or received a long time ago, it has likely gone up in value. Therefore, the individual will pay either capital gain or ordinary income tax on the increase in value when he/she files income taxes for that year. When the tax impact is included, a purchase may cost more when bitcoin is used than when dollars are spent.

The tax impact may cause some bitcoin holders to treat it more like an investment and less like a currency. If investors hold on to their bitcoin as a long term investment, it will limit the bitcoin in everyday circulation. A currency cannot exist if the everyday supply is too limited.

Breaking Down the Pension Puzzle

I’ll summarize pensions in three short phrases: needed (in some form) to help prepare for retirement, difficult to understand and maybe even more difficult to write about.

I give it a shot in the upcoming BizVoice (available online on Feb. 28 and in the mail that same day) with the help of some really smart state and national experts. A couple of takeaways:

  • Indiana’s public pension system is in better shape than most, thanks to some long-term innovative and common sense practices
  • Traditional defined benefit plans in the private sector have largely given way to defined contribution programs (think 401{k})
  • There remain big (really big) concerns over whether Hoosiers and Americans are saving enough

Check out the numbers and the analysis in the March-April issue of BizVoice.

Business Personal Property Tax Elimination a Priority

Right now, state legislators are weighing whether to move forward with key legislation in both the House and Senate to phase out, eliminate and/or exempt a major portion of the business personal property tax. The Indiana Chamber, Gov. Mike Pence and a host of tax experts believe this is an important and wise move to reform a tax that discourages business investment and job creation.

Please take a moment right now to send a message to your state legislators urging them to support a phase-out to elimination of the business personal property tax.

House Bill 1001, authored by Rep. Eric Turner (R-Cicero), would provide county officials the ability to choose to exempt business personal property taxes on new equipment – effectively a phase-out option. Senate Bill 1, sponsored by Sen. Brandt Hershman (R-Buck Creek), would eliminate the bottom 50% of filers of this tax – for whom tax receipts make up only 1% of total receipts.

Some background information and facts:
•    The effective property tax rate for commercial and industrial property taxpayers is near the top of the states in every category (big, small, urban or rural), and this is largely due to the state’s tax on business equipment.
•    Taxing the very machinery and equipment that allows companies of all sizes (79% of Indiana manufacturers have fewer than 50 employees) to operate, expand and create jobs makes little sense.
•    Our state is among the five or six states that tax business personal property tax at the highest rates. Most Midwest states don’t have the tax at all. We need to shift away from a tax that discourages business investment and job creation.
•    This is not a $1 billion hit to local governments. No one is advocating an immediate and entire elimination – and certainly not without restructuring for revenue replacements. This is a complicated issue because the tax funds local units of government, but there are a variety of options to replace lost revenues.

There is major support among legislative leaders and the rank-and-file for a phase-out to elimination of the business personal property tax. However, they are being inundated with objections from local government officials who simply don’t want a change. We believe economic growth and job creation should be the priority, not protecting the status quo.

Transportation Funding: Current Taxes, Fees Not Paying for Highways

Transportation funding is a topic that is getting more traction (tire pun completely intended), and we recently explored the Chamber’s position on this blog, which includes comments from our own VP Cam Carter.

In fact, one of the Indiana Chamber’s legislative priorities for 2014 is development of a vehicle miles traveled pilot program. The need for such initiatives is illustrated in a new Tax Foundation study that finds just over half of state and local expenses on roads in 2011 came from highway user taxes and fees. Indiana falls below the national average.

Despite being dedicated to fund transportation projects, revenues from gas taxes and tolls pay for only about half of state and local spending on roads, according to the nonpartisan Tax Foundation. Alaska and South Dakota come last in transportation funding derived from gas taxes and tolls—10.5 percent and 21.5 percent, respectively—while Delaware and Hawaii rank the highest—78.6 percent and 77.3 percent, respectively.

State and local governments spent $153.0 billion on highway, road, and street expenses, but raised only $77.1 billion in user fees and user taxes ($12.7 billion in tolls and user fees, $41.2 billion in fuel taxes, and $23.2 billion in vehicle license taxes). The rest was funded by $30 billion in general state and local revenues and $46 billion in federal aid.

“The lion’s share of transportation funding should be coming from user taxes and fees, such as tolls, gasoline taxes, and other user-related charges,” said Tax Foundation Tax Foundation Vice President of State Projects Joseph Henchman. “When road funding comes from a mix of tolls and gasoline taxes, the people that use the roads bear a sizeable portion of the cost. By contrast, funding transportation out of general revenue makes roads “free,” and consequently, overused or congested—often the precise problem transportation spending programs are meant to solve.”

The story is much the same even when adding other transportation options to the mix. In 2011, state and local governments spent $58.7 billion on mass transit, $22.7 billion on air transportation facilities, $1.6 billion on parking facilities, and $5.2 billion in ports and water transportation, in turn raising $13.2 billion in mass transit fares, $18.8 billion in air transportation fees, $2.2 billion in parking fees and fines, and $4.2 billion in water transportation taxes and fees. Altogether, states raised about 48 percent of their transportation spending from user taxes, fees, and other charges.

Expanding tolls and indexing gasoline taxes for inflation may not be politically popular even though transportation facilities and services are highly popular. Given that transportation spending exists, states should aim to fund as much of it as possible from user fees and user taxes. Subsidizing road spending from general revenues creates pressure to increase income or sales taxes, which can be unfair to non-users and undermine economic growth for the state as a whole.

Chamber’s Top Legislative Priorities in 2014

Eliminating business personal property tax, allowing employers to screen prospective hires for tobacco use and establishing a work share program are among the top legislative priorities for the Indiana Chamber of Commerce in 2014.

“In many categories of commercial and industrial property tax, Indiana is among the very highest states in the country. That’s largely due to our taxing of machinery and equipment. It’s a remaining black mark on our tax climate – an area where we simply can’t compete,” declares Indiana Chamber President and CEO Kevin Brinegar.

“All of our surrounding states have done away with the tax except for Kentucky, which taxes personal property at a lower rate than Indiana. It’s past time to remove this burden that can greatly hinder business expansion and innovation.”

On the health care front, the Indiana Chamber is seeking to repeal what is termed the smokers’ bill of rights for prospective employees.

“This is an intrusion into the rights of employers in making hiring decisions. Holding smoking up to the same standards as we hold discrimination based upon race, gender, religion and ethnicity seems arbitrary and without justification,” Brinegar offers.

“There are other behaviors (such as substance abuse and having a criminal record) which are also personal choice and over which employers do have discretion in hiring decisions; this reinforces that the state’s protection for smokers is unnecessary and not well founded.”

One policy the Indiana Chamber believes would benefit employers, employees and the state is a work sharing initiative that would allow employers to maintain skilled, stable workforces during temporary economic downturns.

“Employers would be able to reduce hours without layoffs and provide unemployment compensation to partially compensate workers for their lost hours. Then when circumstances improve, employees could return to full-time work status for the company,” Brinegar explains.

“What’s more, a federal grant is available for three years to pay for the cost of the program. It’s a positive scenario for all parties.”

When it comes to K-12 education, Brinegar says the Indiana Chamber will continue to push for the absolute best academic standards for the state.

“That’s the bottom line. We need to improve student learning, meet the essential college- and career-ready requirement and have an appropriate student assessment system. Those elements all currently exist within the Common Core State Standards program, which we continue to fully support.”

Below are the Indiana Chamber’s top legislative priorities. The complete list is also available on the Indiana Chamber web site (www.indianachamber.com).

CIVIL JUSTICE
Support regulating the practice of lawsuit lending, in which a third party provides a plaintiff a cash advance loan while the legal case is pending. In turn, a plaintiff agrees to repay the advance (which is usually at a high interest rate) from the lawsuit proceeds. This practice complicates the legal process by forcing more cases to go to trial because the plaintiffs can’t afford to settle due to their repayment agreement with the lender. In turn, this causes more and more Indiana businesses to pay expensive legal fees. This lending practice is legal in most states, but regulation and transparency do not exist in Indiana.

ECONOMIC DEVELOPMENT
Support a voluntary vehicles miles travelled (VMT) pilot program as a potential replacement for existing fuel taxes. With Indiana’s already insufficient fuel tax revenues for roads/transportation trending down and more fuel efficient and electric/hybrid vehicles on the roads, a new funding mechanism for road maintenance needs to be found. Owners of alternative-fuel vehicles, including electrical vehicles, should pay for the roads they use just like other drivers. Voluntary VMT pilots in other states are currently taking place and Indiana cannot afford to ignore this potential road funding alternative.

Support expanding the patent-derived income tax exemption to the pre-patent phase. This incentive change would allow innovative, high-tech businesses that typically pay high wages to qualify during the earlier patent-pending phase of the (often long) patent application process, thus carrying forward any credit. Many emerging businesses would find this helpful in capitalizing their start-ups and expanding hiring. (Current law states you must have had a patent issued by the federal government before you can apply for the exemption.)

EDUCATION
Support maintaining high-achieving academic standards, such as the Common Core, and allowing the State Board of Education (SBOE) to determine student assessments. Indiana needs standards that improve student learning and meet the college- and career-ready requirement. The testing component of the standards can best be determined by the SBOE.
Support a framework for the future development of publicly-funded preschool initiatives for low-income families. There is critical need for improved preschool opportunities, especially for low-income children whose families may not have the means to provide a high-quality preschool experience or to provide needed learning opportunities in the home. The Indiana Chamber supports publicly-funded preschool programs that are: focused on those families in greatest need, limited to initiatives that maintain parental choice, focused on concrete learning outcomes and integrated with reforms at the elementary school level that will maintain and build upon the gains.

ENERGY/ENVIRONMENT
Support a water policy to stabilize our economic future and effectively compete with other states. A policy/plan is needed in order for the state to effectively manage its significant water resources, as well as to ensure delivery of an adequate, reliable and affordable supply of water.

HEALTH CARE
Support repealing the smokers’ bill of rights for prospective employees from the Indiana Code. The Indiana Chamber believes that all employers should have the right to choose whether or not to screen and/or hire prospective employees who use tobacco products. Since employers are footing most of the bill for health care costs for their employees, they should be able to have some discretion in determining whether new employees use tobacco products or not.

Support reinstating the wellness tax credit. The Indiana Chamber supports this incentive to start a wellness program, which can increase attendance, boost morale and productivity, as well as positively impact health care coverage costs.

LABOR RELATIONS
Support a work sharing program that will allow employers to maintain a skilled stable workforce during temporary downturns. Employers then could reduce hours without layoffs, enabling workers to keep their jobs – which hopefully could be returned to full-time status once economic circumstances improve. Also part of the equation: Unemployment compensation to partially compensate workers for their lost hours.

LOCAL GOVERNMENT    
Support common sense simplification and reforms to local government structures and practices. Creating the option for counties to have a single county commissioner and county councils with legislative and fiscal responsibilities is one that several Indiana counties desire. There should be incentives to reward local government efficiencies and performance in the delivery of services to taxpayers.

TAXATION
Support legislation to reduce the dependence on the taxation of business machinery and equipment. This tax discourages capital investment, places a disproportionate property tax burden on businesses and puts Indiana at a competitive disadvantage with surrounding states that have eliminated it or are moving to do so.