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.

State Revenues Under Projections, but Nothing to Worry About Yet

It’s true: The tax collections for the first two months of the new fiscal year and new state budget have fallen slightly below the forecasted target. Specifically, general fund revenues for July and August combined are $65 million short of the projections. That is 3.2% under the combined forecasts for those two months. But to worry about $65 million at this point is not warranted. First, $65 million is only a blip when you consider that we are talking about a $30 billion budget. Secondly, as in surveys and polls, a variance of less than 5% in revenue forecasting is statistically insignificant.

And lastly, there are 22 more months in the biennium. There will inevitably be fluctuations in the revenue numbers throughout the balance of this fiscal year and next fiscal year. The variance could double or it could disappear in the next couple months. The point is – until we experience a full quarter of shortfalls that total more than 5% – concern is premature.

This is not to say that the numbers are meaningless or that they should be ignored. Keeping a close watch on the revenues and reacting accordingly has been a key to Indiana maintaining its strong fiscal status over the last several years. Discrepancies between the forecast and the actual collections can result from many things, as can be noted in the budget agency commentary that often accompanies release of the hard numbers each month. Changes in the law, special transfers and timing issues can all explain monthly anomalies.

However, closer looks at the individual sources, plus year-over-year and month-to-month comparisons can evidence significant trends. Sales tax revenues are by far the largest single source, making even small differences between the actual year-over-year growth and the projected annual growth something to pay close attention to. While corporate income tax collections are not as critical to the bottom line, they are a major source of revenue and have been very strong (46.7% above the target through the first two months). Another positive aspect of the short-term numbers is the modest uptick of gaming revenues (7.2% above target).

So keep in mind that the numbers will fluctuate and most probably balance out over time – if not, adjustments can and will be made to assure that Indiana maintains its prudent fiscal posture.

VIDEO: A Discussion About Northwest Indiana

NWIndianaLife.com recently spoke to our president, Kevin Brinegar, about the key issues facing the northwest Indiana business community. We appreciate the opportunity, and here is their synopsis of the 21-minute interview.

In this interview, Kevin Brinegar of the Indiana Chamber of Commerce discusses the Chamber's relationship with Northwest Indiana. He talks about how important the Region is to Indiana as a whole, given the proximity to Chicago and the variety of infrastructure in place for transportation and industry. He goes on to discuss some of the recent developments coming out of the Region, including the Illiana Expressway and how it will improve traffic flow in and out of the area, as well as the expansion of the Gary Airport, lakefront developments, and how the RDA is helping with improvements on a regional level. Next, he covers some of the positive opportunities coming out of Gary in the future, and how the revitalization efforts are helping the future of this strategically located city. Kevin then talks about the business climate in Indianapolis, and how visionary leaders across industries have helped foster a thriving area of economic growth. He attributes this growth to Indiana having one of the best, most stable climates for business growth, and how well the state has been ranked overall. He sees Indiana's economic future in the hands of the Chamber of Commerce, helping to grow the economy over long periods and directing long-term planning for the years ahead. He goes on to discuss how the Indiana Chamber of Commerce distributes information to the people of Indiana, through emails, newsletters, magazines, blogs, twitter, and more. Some plans the Chamber of Commerce have been implementing include the Indiana Vision 2025 plan and covering the cost of preschool for families to help prepare the next generation. He sees the Porter County Career and Tech Center as a model for engagement with employers as student are learning trades in school.

Throwback Thursday: This Business is Taxing

Today's edition is for all you tax enthusiasts out there. "Ahhhhhhhhh yaaaaaaaaaaaaaaa, it's party time."

Every year, we reach out to the various government agencies that handle tax filings and compile the Indiana Tax Calendar (here is the 2013 version), which lists the most critical tax deadlines facing Hoosier businesses.

Digging in the archives yielded the 1953 Indiana Tax Calendar (pictured). One striking difference is apparent, in that the document now is just a PDF; we don't even print it anymore.

Some interesting notes:

  • We've since removed the word "State" from "Indiana State Chamber of Commerce," lest people think we're part of the government. We are not.
  • A June 15, 1953 entry: "Dog tax penalty becomes operative. Dog subject to killing if without state tag issued by local official upon payment of tax." Yikes! That's a little harsh, 1953 society. "Sparky, where are ze papers?!?!?"
  • A June 30, 1953 entry: "Special federal tax on narcotics and marihuana due. Form 678." Modern day hippie: "Whoa, I went back in time and they taxed my weed and misspelled it, maaaaaaaaaan."

 

Chambers Assisting with Rep. Todd Young Tax Reform Tour

The Indiana Chamber is delighted to partner once again with Rep. Todd Young as he tours the state, working with local chambers to communicate the need for tax reform. A release from his office has dates and more information:

As the House Ways and Means Committee and Senate Finance Committee prepare to roll out reforms to the U.S. tax code, Ways and Means Committee member and Indiana Congressman Todd Young (IN-9) announced on Friday that he will embark on a statewide tour to talk about proposed changes with local businesses. The events are being hosted by the Indiana Chamber of Commerce and local Chambers of Commerce in each area, and other members of the Indiana Congressional delegation will be on hand at some of the events.
 
“We haven’t fundamentally overhauled our tax system in a quarter of a century, and since the 1986 reforms our code has been larded up with provisions that only benefit narrow interests,” said Young. “The net effect is a tax code that is confusing, complex and difficult for individuals and small businesses to comply with. As we try to spur our economy, making the code simpler, fairer and flatter is key.”
 
While the events will be closed to the press to promote candid discussions, a media availability will be held at 1 p.m. local time after each roundtable. Local media will have the chance to talk with Rep. Young, other members of the delegation, and local businesses about what was discussed.
 
WHO: Congressman Todd Young (IN-9), the Indiana Chamber of Commerce, and local Chambers of Commerce
 
WHAT: Tax reform roundtable (closed to press) and media availability (open to press)
 
WHEN & WHERE:

Monday, August 12
Media Availability at 1 p.m. EDT
Indy Chamber
Chase Tower, 19th Floor
Indianapolis, IN
 
Wednesday, August 14
Media Availability at 1 p.m. EDT
Warsaw Kosciusko Chamber of Commerce
Mad Anthony’s Tap Room
113 E Center Street
Warsaw, IN
 
Friday, August 16 with Rep. Larry Bucshon (IN-8)
Media Availability at 1 p.m. CDT
Southwest Indiana Chamber of Commerce
318 Main Street, Suite 401
Evansville, IN
 
Monday, August 19 with Rep. Marlin Stutzman (IN-9)
Media Availability at 1 p.m. EDT
Ft. Wayne Chamber of Commerce
826 Ewing Street
Ft. Wayne, IN
 
Tuesday, August 20
Media Availability at 1 p.m. CDT
Northwest Indiana Forum
6100 Southport Road
Portage, IN
 
Wednesday, August 28
Media Availability at 1 p.m. EDT
One Southern Indiana
4100 Charlestown Road
New Albany, IN
 
Thursday, August 29
Media Availability at 1 p.m. EDT
Bloomington Chamber of Commerce
Uptown Café
102 E Kirkwood Avenue
Bloomington, IN

VC Numbers Look Good in Q2

PricewaterhouseCoopers and the National Venture Capital Association are the leaders in surveying venture capital investment deals and statistics. And the State Science & Technology Institute is the best at putting the numbers in perspective.

Below is part of the analysis from a strong second quarter of this year. Also, SSTI has a spreadsheet that breaks down investments by quarter over the past six years.

In the second quarter (Q2) of 2013, venture investment totaled $6.7 billion over 913 deals, according to the quarterly survey by PricewaterhouseCoopers (PWC) and the National Venture Capital Association (NVCA). Compared to the first quarter of 2013, the amount of venture capital investment increased 12 percent and the number of deals increased 2 percent. Although still well below venture capital investment highs in 2007, Q2 2013 had the largest total amount of investment in a year.

In total, $12.6 billion in venture investments has been made in the first half of 2013 in 1,776 deals. This represents a 3.8 percent decrease in the investment amount compared to the first half of 2012, but a slight uptick, 4 percent, in the number of deals completed.

The software and biotechnology sectors were the largest two recipients of venture capital investments. The software industry received $2.1 billion in investments, although this was a 7 percent drop from the previous quarter. Biotechnology rose 41 percent in investments to $1.3 billion in 103 deals. Other sectors receiving large totals of investments were IT ($654 million) and medical devices ($543 million).

Clean technology, which includes a range of activities across sectors, captured $364 million in 43 deals. This is a 6 percent investment decline and 31 percent deal decline, and is the lowest level since the fourth quarter of 2006.

Breaking investments down into company stage, seed and early stage companies together accounted for 57 percent of deals made, while expansion stage companies had 23 percent and later stage companies had the remaining 20 percent. Early stage companies closed on $137 million in 37 deals in Q2, while early stage companies had their highest levels of investments in six quarters.

First-time financings were also up in Q2, raising 24 percent to $1.1 billion, a 10 percent increase from Q1. The first-time financings were 17 percent of total investment amounts and 33 percent of total investment deals in the quarter.

Compared to the rather pessimistic survey from the first quarter of this year, and despite a decline in clean technology investments, this Q2 report appears to offer some optimism, with more than half of the sectors surveyed increasing in investment dollars.  In addition, a 39 percent rise to $1.9 billion was invested in “internet-specific companies” in Q2, with five of the 10 largest rounds in the quarter in the internet-specific sector. This suggests venture capitalists are looking for investment possibilities in more flexible and nimble companies with less overhead and low-capital-intensive operations.

 

 

In the second quarter (Q2) of 2013, venture investment totaled $6.7 billion over 913 deals, according to the quarterly survey by PricewaterhouseCoopers (PWC) and the National Venture Capital Association (NVCA). Compared to the first quarter of 2013, the amount of venture capital investment increased 12 percent and the number of deals increased 2 percent. Although still well below venture capital investment highs in 2007, Q2 2013 had the largest total amount of investment in a year.

In total, $12.6 billion in venture investments has been made in the first half of 2013 in 1,776 deals. This represents a 3.8 percent decrease in the investment amount compared to the first half of 2012, but a slight uptick, 4 percent, in the number of deals completed.

The software and biotechnology sectors were the largest two recipients of venture capital investments. The software industry received $2.1 billion in investments, although this was a 7 percent drop from the previous quarter. Biotechnology rose 41 percent in investments to $1.3 billion in 103 deals. Other sectors receiving large totals of investments were IT ($654 million) and medical devices ($543 million).

Clean technology, which includes a range of activities across sectors, captured $364 million in 43 deals. This is a 6 percent investment decline and 31 percent deal decline, and is the lowest level since the fourth quarter of 2006.

Breaking investments down into company stage, seed and early stage companies together accounted for 57 percent of deals made, while expansion stage companies had 23 percent and later stage companies had the remaining 20 percent. Early stage companies closed on $137 million in 37 deals in Q2, while early stage companies had their highest levels of investments in six quarters.

First-time financings were also up in Q2, raising 24 percent to $1.1 billion, a 10 percent increase from Q1. The first-time financings were 17 percent of total investment amounts and 33 percent of total investment deals in the quarter.

Compared to the rather pessimistic survey from the first quarter of this year, and despite a decline in clean technology investments, this Q2 report appears to offer some optimism, with more than half of the sectors surveyed increasing in investment dollars.  In addition, a 39 percent rise to $1.9 billion was invested in “internet-specific companies” in Q2, with five of the 10 largest rounds in the quarter in the internet-specific sector. This suggests venture capitalists are looking for investment possibilities in more flexible and nimble companies with less overhead and low-capital-intensive operations.

 

Waltz: Marketplace Fairness Act a Useful Measure

Bill Waltz, the Indiana Chamber's VP of taxation and public finance, penned the following column, which ran in The Journal-Gazette of Fort Wayne.

States have the right to tax activities that take place within their borders. States do not have the right to burden interstate commerce – unless Congress approves.

The Marketplace Fairness Act of 2013 involves both principles.

The act would require online sellers who have no physical presence in a state to collect sales tax from that state’s residents. It recognizes that Internet purchases take place within the buyer’s state but that compelling the seller to collect the sales tax affects interstate commerce.

The 69 U.S. senators who voted for the Marketplace Fairness Act concluded that states should be allowed to require remote sellers to collect the sales tax. But passage in the House is uncertain as opponents raise questions. The legislation should be evaluated on an objective basis.

Here are some of the statements and claims being made about the Marketplace Fairness Act :

•The Internet tax moratorium should not be lifted

•This is a “new” tax

•This will hurt small Internet businesses

•State tax administrators will abuse their power to tax out-of-state businesses

•It will be impossible for sellers to comply with the laws of 8,000 jurisdictions

•Internet businesses will move out of the United States

•Jobs will be lost

First, this has nothing to do with the 1998 federal moratorium prohibiting taxing Internet access or imposing a new tax on the conduct of business over the Internet. This is about applying existing state laws on the taxation of retail merchant transactions.

This is not a new tax. States’ sales tax is due on Internet purchases today and purchasers are legally obligated to pay. The problem is few people do so by self-reporting, shifting the burden to all those self-reporting taxpayers who do meet their legal obligations.

As for hurting small businesses, the act has a small seller exception for any business having less than $1 million in annual sales (and this threshold could be raised).

Many of the abuse objections are refuted by the text of the bill. It expressly prevents states from subjecting a seller to “any other type of taxes, other than sales and use taxes.” It further specifies that “This Act shall not be construed to create any nexus between a person and a state or locality.”

The text also addresses administrative compliance. It contains provisions on “minimum simplification requirements” to assure some uniformity in how each state identifies what is to be taxed and at what level. It calls for a single filing and single audits within any given state. The states are required to provide free software to calculate the tax. Additionally, remote sellers are shielded from liability for inadvertent noncompliance.

There will be complications with any major change in procedure, but the act is very friendly to remote sellers. Also, it is in the states’ interest to keep things as simple as possible in order to collect the tax.

As for businesses and jobs moving overseas, Internet businesses are not likely to relocate unless the costs of production motivate them to do so. Internet businesses will continue to grow and thrive in the U.S. – and create jobs – whether or not they must collect sales taxes.

The jobs focus should be on those lost today as in-state brick-and-mortar retailers have cut back due to the unfair price advantage enjoyed by online sellers.

Opponents can suggest problems where there are none, foster doubt and cater to viewpoints that have no basis in reality. But once these questions are answered fairly and objectively, there is no good reason not to support the Marketplace Fairness Act.