Hits and Misses: The Indiana Legislature Halftime Report

We are pleased that several of our top priorities are alive and in good shape at the midpoint – including long-term transportation funding, pre-K expansion and anti-smoking legislation. All of these tie directly to the Indiana Vision 2025 economic development plan.

Long-term transportation funding – tolling around the corner?
This is the Chamber’s top priority in 2017. House Bill 1002 is the proposal to take care of the state’s transportation needs; the 20-year infrastructure plan addresses the erosion in funding that has taken place and the lost purchasing power from the enhancements in automotive technology and fuel efficiency.

We believe that the bill’s proposed gas tax increase is pretty solid. Senator Luke Kenley (R-Noblesville), who appears to be taking the lead on this bill in the Senate, may change things like dedicating all of the sales tax on gasoline to transportation needs and put a heavier emphasis on tolling, which would enable the state to undertake major projects like adding additional lane miles to Interstate 70 and Interstate 65 throughout Indiana. Overall, we are very encouraged by the commitment we have seen to date from the House, Senate and Governor. We also realize this will be a little tougher sell in the Senate and are prepared for a strong advocacy effort.

Tax threats avoided; overall outlook good
Everyone should be thrilled that two detrimental proposals – on mandatory combined reporting and sales tax on services – didn’t really get out of the gate. And that’s thanks to the good work of the Chamber’s Bill Waltz over the course of the summer. That means there are no big, threatening tax bills looming for us to worry about.

Instead, this session has brought some positive activity that will improve things procedurally within the Department of Revenue. Additionally, while not involving the Legislature, the Chamber has provided substantial input to the Department of Local Government Finance on a rule with respect to the so-called big box commercial/industrial property assessments. (That input was made possible thanks to a subgroup of the Chamber’s Tax Committee that analyzed the big box assessment issue; we are always grateful to our members for lending their expertise!)

On track: expansion of the state’s pre-K pilot for children from low-income families
Obviously, the expansion – to $16 million total in the Senate (including funds for a new online pre-K pilot); at $20 million in the House proposal – is not as significant as we would like, but we recognize this is still a very young program and are encouraged that what’s being debated is the level of increased funds, not the merit. We also appreciate all of the programmatic language that allows for potential expansion into all 92 counties (SB 276) and increases the income thresholds for eligible families (HB 1004). That said, we are going to continue to work to get as many dollars as possible directed to this. It’s vital for children to have that strong early education as a foundation.

Making the superintendent of public instruction an appointed position still can happen
We remain optimistic this longstanding Chamber goal will be realized this session. Yes, House Bill 1005 will have to be amended because it’s too similar to the one the Senate voted down last week. What happened there was, by all accounts, a blunder created by a perfect storm of factors – including little caucus discussion before the vote. But the good news is that the House bill is alive AND Senate leader David Long (R-Fort Wayne) has assigned it to the Senate Rules Committee that he chairs, so he’s going to go to work on it and will ultimately determine how much of it needs to be changed. We speculate that requiring Indiana residency – which is not currently in HB 1005 – could be one modification. It definitely will have to be different than the failed bill to pass the Senate Rules Committee.

Comprehensive smoking reform, now in HB 1001 and HB 1578, would send big message
We are hopeful that the increased tax on cigarettes ($1 per pack) and funding for a more robust smoking cessation program will stay in the budget bill (HB 1001). Likewise, that the repeal of the special civil rights privileges for smokers will survive on its own in HB 1578; this marks the first time that policy has been passed by either house, so we are making progress. Seeing these three elements cross the finish line would be a clear indication that the state is taking seriously the ever-increasing costs to employers of Hoosiers smoking – more than $6 billion annually in health care costs and lost productivity on the job.

The provision raising the cigarette buying age from 18 to 21 is most likely not happening this session after its removal in the House Ways and Means Committee. That group felt there wasn’t enough definitive information or testimony.

ISTEP, energy and technology updates
The Chamber is supporting legislation that will replace ISTEP with a shorter, more focused assessment. You can put all the debates and disagreements aside because this has to happen this session.

We are encouraged by the Senate’s passing of SB 309, an energy bill, which, among other things, addresses net metering for those investing in wind and solar energy; we believe the bill is consumer-friendly. Moreover, utilities have offered up some ideas and concessions that we think will help control electricity prices. The water infrastructure proposal (SB 416), while not funded, sets up the appropriate framework and keeps that needed policy moving along.

The budget bill (HB 1001) contains some pro-technology priorities, including the transferability and expansion of the venture capital tax credit. This would incentivize additional out-of-state investors without state tax liability to invest in promising early stage Indiana companies. Additionally, the open data measure (HB 1470) would allow public access, in an appropriate way, to the tremendous amount of data the state has collected. This is one of a couple of new initiatives coming from our Indiana Technology & Innovation Council policy committee. To see these efforts making progress right away, in their first session, is very encouraging.

A disappointment for the Indiana Chamber
There were several bills centered on litigation that couldn’t get out of committee. That’s because there are too many attorneys on both civil justice committees who are standing with trial lawyers, which essentially is blocking any sort of tort reform.

Indiana Climbs in Small Business Policy Index

Indiana ranks seventh in the Small Business & Entrepreneurship Council’s 2017 Small Business Policy Index (up from 10th in last year’s ranking).

This is the SBE Council’s 21st annual look at how public policies in the 50 states affect entrepreneurship, small businesses and the economy. The report ranks the 50 states according to 55 different policy measures, including a tax, regulatory and government spending measurements.

According to the report, the most entrepreneur-friendly states under the “Small Business Policy Index 2017” are Nevada, Texas, South Dakota, Wyoming, Florida, Washington, Indiana, Arizona, Alabama, and Ohio. In contrast, the policy environments that rank at the bottom include Rhode Island, Oregon, Iowa, Connecticut, Maine, Hawaii, Vermont, Minnesota, New York, New Jersey, and California.

A Step Closer to Sales Tax Collection for Online Purchases

The Indiana Chamber supports SB 545 (Sales Tax Collection by Remote Sellers).

This bill takes an important step toward the Legislature requiring online retailers who have no physical presence in Indiana to collect Indiana sales tax from their Indiana customers when they make online purchases. Ultimately, one of two things must happen for the requirement to go into full effect. Either the U.S. Supreme Court has to determine that states are allowed to impose this requirement based on their economic activity in the state (and the nominal burden associated with it), or Congress must pass legislation to authorize states to require the online sellers to collect a state’s sales tax.

The issue is pending before both bodies and several states are passing legislation to put pressure on one of the two entities to act and resolve the issue. Senate Bill 545 is modeled after a South Dakota law that is under review by the high court. It is designed to put Indiana in the position of making the requirement effective as soon as an Indiana court declares the collection valid under federal law. So this remains legally complicated, but SB 545 is a thoughtful and sound approach.

Senator Luke Kenley has pursued this issue diligently for many years – doing everything possible to address the problem of the sales and use tax on these transactions going uncollected. He is to be commended for his pursuit in the past and for formulating this legislation. In-state brick and mortar retailers are put in an unfair position when their online competitors are not required to collect and remit Indiana’s sales tax (as they are), effectively giving the “remote sellers” a 7% price advantage. Additionally, Indiana’s sales tax base is diminished each year as the online sales market continues to grow at rapid rates. What’s more, this is not a new tax since purchasers are already legally obligated to report their online purchases and pay the “use” tax when they file their income tax returns. But the reality is very few people comply with this law.

The Chamber supported the bill in committee this week and, in fact, has been working along with Sen. Kenley for years to achieve, by some means, state authorization for collecting these unpaid taxes. The objective is set forth in our Indiana Vision 2025 economic plan and we just might, after years of complications, be getting closer to obtaining this goal.

Taxes and Public Finance: A Very Early Look at What We Are Following

We have yet to see the complete list of bills that have been introduced, and no bills having primarily to do with tax have yet been heard in committee. But of those that are available for viewing and assigned to committee, quite a few are worthy of note. They may or may not ultimately get a hearing, so it cannot be said that they are moving. Nevertheless, these bills are ones to keep an eye on.

Two measures will undoubtedly move through to the end of session – albeit with the expected/unexpected twists and turns. House Bill 1001 on the budget currently contains the Holcomb administration’s spending proposals – that is until the Ways and Means Committee has its way with it. Accompanying it will be HB 1002, the measure for long-term transportation funding (see Mark Lawrance’s infrastructure story).

There are the usual sales tax exemption and sales tax holiday bills, which historically have not been favored by the budget makers: HB 1063, HB 1111 and SB 53. There are many dealing with property tax assessment and property tax appeals, which could get some attention: HB 1046, HB 1056, HB 1105, HB 1198, HB 1229, HB 1299, SB 292, SB 331, SB 350 and SB 415. Meanwhile, SB 449 addresses how personal property tax audits can be funded; SB 308 would take heavy equipment that is rented off the property tax rolls and puts an excise tax on the rentals; HB 1247 creates a minimum property tax fee; and SB 342 revisits tax increment financing.

On the local tax front, HB 1129 keeps up the ongoing work on local option income (LOIT) taxes while HB 1096 grants broad authority to locals to adopt food and beverage taxes.

Interestingly, and unnecessarily, HB 1160 seeks a further study of the Tax Court (on top of the review conducted by the Supreme Court just last year.) Tax attorneys will be interested in SB 440 as it gets into some procedural issues.

This is just a small sampling of what has been filed. Once bills involving tax matters begin to make their way through the committees, we will report on those that are of consequence to the business community.

Smaller State Revenue Collections Continue: How Will It Impact 2017 Legislative Session?

Each December the state budget makers receive a revenue forecast prepared by group of very knowledgeable and conscientious fiscal analysts, economists and academics. The group considers economic predictions, uses elaborate models and applies involved equations to generate what has proven to be remarkably accurate predictions of how much the state will collect in taxes over the next two years. Every other year, including this year, their numbers serve as the basis for building the state’s biennium budget. While lawmakers will debate how the projected revenues should be spent, Indiana is fortunate that lawmakers accept the consensus of these experts and do not debate how much money there is to spend – as is the case in many other states.

Forecasters project that Indiana will take in $31.5 billion in FY2018 and FY2019. This is around a billion dollars more than what was projected for the last biennium. However, as good as the predictions have been historically, FY2017 estimates turned out to be off the mark by $378 million. Low gas prices were a major contributor to the inaccuracy. Unexpectedly cheap gas meant less sales tax on those less expensive fill-ups.

When coupled with generally weaker sales tax collections, the FY2017 (ending in July) collections are now expected to be about 2.5% less than earlier projections. That money will have to be made up in the first year of the biennium, from the projected 2.9% year-over-year (FY2018 over FY2017) growth. Fortunately, the forecasters see a little better growth, 3.9%, in the second year of the biennium (FY2019). The bottom line is that the money available to cover growing expenses and new funding desires will be very modest, somewhere around $1 billion – that’s only about 3% more money for the entire two-year period. And essentially it all comes in the second year, so look for budget makers in the 2017 legislative session to be very frugal in FY2018 and then build in some increases in FY2019.

Economic uncertainty, sluggish sales tax collections, further diminishing gaming revenues and other factors will all put additional pressure on the budget process. As these things play out, the forecasters could shift their numbers a little more before they update their two-year projections in mid-April, just a couple of weeks before the budget has to be passed by the General Assembly.

On the Passing of Longtime Indiana State Senator Larry Borst

Indiana Chamber of Commerce President and CEO Kevin Brinegar comments on the death of longtime Indiana state senator Larry Borst. Brinegar worked for nine years as fiscal analyst for the Senate Finance Committee chaired by Borst:

“Larry Borst was a truly dedicated public servant. He was instrumental in critical pieces of legislation at the local level (UniGov in Marion County in the 1960s and Mayor Bill Hudnut’s transformative efforts in the decades to follow) as well as statewide (major tax reforms in 1973 and 2002, and Gov. Bob Orr’s A+ education plan in 1987 to name just a few). His efforts helped transform Indianapolis into the dynamic city it has become and Indiana into a great state for doing business and creating jobs.

“Senator Borst studied legislation intently and knew the details and intricacies of every bill that came before his committee – often more so than the authors and proponents. I learned so much from him in regard to state government and the importance of being prepared. It was a privilege and an honor to work for and with him.”

Borst, in a BizVoice® magazine interview upon being named the Indiana Chamber’s 2002 Government Leader of the Year, said:

“The more complex it is, the more interested I am. This (the 2002 tax restructuring that was ultimately passed in special session) was a complicated thing, but that’s what I love. In the end, there were going to be no miracles for today or tomorrow. We had to look long term and we did.”

Tax Man: Ice Miller’s Mark Richards a 2016 Volunteer of the Year

It’s immediately evident that Mark Richards is passionate about taxes.

As a lawyer for Ice Miller, LLP, specializing in tax law for the past 30 years, he is quick to explain how taxes are essential to the Indiana economy.

Richards points to changes – from a cash to credit economy, and from brick and mortar retail to online over the last few decades – as evidence of how interesting taxes can be.

“I’m using that as an example to show how our entire economic system evolves and the tax laws have to evolve to keep pace.

Some would argue (the laws) haven’t done that very well, but the result is there’s always a new frontier, a new area that’s undeveloped, unexplored, new issues that come up. This is fundamentally important,” he stresses.

Richards has been a member of the Indiana Chamber’s tax policy committee about as long as he’s been a lawyer. He views his role as a source of support and advice to the Chamber. He has been integral to several major tax policy initiatives over the years, including the repeal of the inventory and gross receipts taxes in 2002, and, more recently, the elimination of the throwback rule…

Read the full story in BizVoice.

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Happy Veterans Day! Did You Know Tax Credits are Available for Hiring Veterans?

37738634Veterans, National Guard Members and Reservists remain key assets in helping meet workforce needs.

A free publication for employers, prepared for the Center for America, provides clear and concise understanding along with step-by-step guidance on four new federal tax credit programs: Returning Heroes; Wounded Warrior; Activated Military Reservist Credit for Small Businesses; and the Federal Empowerment Zone Employment Credit.

The guide includes links to the required Internal Revenue Service and Department of Labor forms employers need to submit. It features key eligibility and filing details, with guidance on eligibility and the specific steps to take to claim the credits.

American Jobs for America’s Heroes is a nonprofit campaign sponsored by Phillips 66 and foundations to encourage employers to post full-time jobs for veterans, National Guard members and Reservists. Access the guide and additional information.

Chamber to Study Committee: ‘Why Jeopardize Our Tax-Friendly Image?’

The much anticipated study of combined reporting, performed over the summer by the Legislative Services Agency (LSA) Office of Fiscal Management Analysis, was recently outlined to the legislative Interim Committee on Fiscal Policy.

As a refresher: Combined reporting would impact companies here with operations outside of the state. It tasks these businesses with adding together all profits for one report. Indiana’s current system of separate accounting allows for each subsidiary to report independently based on its location.

The study was required by SEA 323, which passed last session. That legislation also directed a study of the related issue of transfer pricing. Both LSA studies were presented to the interim committee and have now been made available to the public.

The combined reporting study, however, was by far the more comprehensive and was the primary subject of discussion at the interim committee meeting. The report includes examples that demonstrate how a switch to mandatory unitary combined reporting would have varying impacts on taxpayers.

Depending on their particular circumstances, some taxpayers would see their tax liability increase while others would see it decrease. The end result being that the overall effect on the tax revenue stream is unpredictable.

Using data from numerous states and applying econometric techniques, the LSA economists estimated that Indiana could see an initial spike in corporate tax revenue but that it would “only be short term and will decline to zero in the long run.” The study also recognized that while the change could be beneficial in addressing some current issues, such as transfer pricing disputes, it would raise a multitude of new administrative burdens and complexities; most notably those associated with the core difficulty, “determination of the unitary group” – exactly which affiliated entities are ultimately to be deemed part of those that must be combined. In other words, going to combined reporting only trades one set of problems for a different challenge of substantial magnitude.

Studying combined reporting is itself a complicated and difficult task. The LSA did a nice job of putting the issues in historical and practical context, identifying the issues and analyzing the potential impacts. What it could not do, because it isn’t really its role, is fully evaluate how a change could disrupt the progress that has been made over the past 15 years in improving our state’s business climate. Governor Robert Orr concluded in 1984 that combined reporting would be “extremely detrimental to Indiana’s economic growth.” In his open letter to all corporate taxpayers, he offered his assurance that Indiana “does not, and will not, require combined reporting.” That position proved significant in attracting the large manufacturing facilities built by multi-national companies that presently employ thousands of Hoosiers across the state.

Why would you want to reverse this course, abandon the certainty that comes with 50 years of tax law and jeopardize our image as the most business-friendly state in the Midwest and among the top in the nation? This was the core of the Indiana Chamber’s testimony to the interim committee. As for those who view a possible change to combined reporting as a means for dealing with what they label a “compliance issue”, the Chamber committed to work with them. We will need to find less drastic ways to address their concerns and identify ways to respond to the situations they believe represent noncompliance.

It should be noted that concerns with transfer pricing issues seem to have served as the impetus for much of the larger discussion of combined reporting. Consequently, focusing on those issues would provide the potential for reaching resolutions, without a major structural conversion to mandatory unitary combined reporting. In fact, Appendix A to the Transfer Pricing study points to several possibilities that deserve further exploration.

View the combined reporting study and transfer pricing study.

Trump Tax Plan 2.0

19145168Republican presidential candidate Donald Trump recently announced revisions to his tax plan. And it has already been broken down and analyzed by the Tax Foundation. Individuals would be subject to just three possible rates: 12% for up to $37,500 in income; 15% for up to $112,500; and, 33% for over $112,500 (all double for married couples.) The top capital gains rate would be 20%. It would also increase the standard deduction to $15,000 (currently at $6,300.) Carried interest would be taxed as ordinary income. And there are other changes including a new childcare cost deduction.

As for business taxes, the plan reduces the corporate rate from 35% to 15%. It has a lesser rate of 10% for repatriated foreign profits. But on the negative side for manufacturers, it takes away the Section 199 domestic production activities deduction. The research credit is left intact. Unfortunately, it is not clear that the reduced corporate 15% rate will be applicable to business pass-through income (stay tuned on that.)

The estate and gift tax would be eliminated. However, the inheritors would eventually have to pay on the full gain realized when they sell the asset, without the benefit of a stepped-up basis.

What about the impact on revenues and our federal debt? Well, the new plan is better in that regard than the original. The static evaluation is that it will reduce revenues (increase the debt) somewhere between $4.4 trillion and $5.9 trillion (depending on the unspecified details) over 10 years; that is roughly half of the estimate of the plan he first outlined. The dynamic analysis, factoring in economic growth improvement associated with tax cuts, lessen the overall impact, but those numbers are inherently more speculative.

See the complete analysis and full breakdown from the Tax Foundation.