Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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Counties Can Bring an Early End to the Inventory Tax

Auto dealers are running their inventory tax sales again, just like every February. This inventory tax is really the property tax applied to the value of inventories, and March 1 is the assessment date. They'll have to pay taxes in 2004 based on what's in stock on March 1, 2003. So they sell as many cars as they can in February.

The days of the February tax sale are numbered. Tax restructuring will eliminate the inventory tax as of 2007. No need to sell those cars in February if they won't be assessed on March 1.

Taxes in 2007 seem a long way off. But counties can end the inventory tax sooner, and at least 14 counties have done so. Here's how it works.

First, counties can adopt a 100 percent inventory deduction. Inventories will still be valued for the property tax, but then the new deduction subtracts all of this assessed value from the taxpayer's assessment.

That means the assessed value that the local units can tax will be smaller. This need not cost most local governments any revenue, because Indiana's property tax controls fix the amount that local units can raise from the property tax. The tax rate is set to raise this revenue, whatever assessed value happens to be. If assessed value goes down, the tax rate goes up.

The taxes that were paid by businesses on their inventories will be paid by other taxpayers through the higher tax rate instead. This troubled the General Assembly, especially where homeowners were concerned. So lawmakers gave counties a second option.

Counties can add a local homestead credit to the statewide 20 percent credit to offset the shift in inventory taxes to homeowners. The homestead credit is a percentage subtracted from a homeowner's tax bill after it is calculated. Yes, that's the same credit that has been miscalculated for the past 17 years.

Counties figure out how much of the inventory tax is shifted to homeowners, and raise the homestead credit enough to offset the shift. This reduces local revenues because the credit is applied after the tax rate is calculated.

That leads to the third part of the local option. Counties can increase their Economic Development Income Tax (EDIT), or they can newly adopt EDIT at a rate up to one-quarter of one percent above the old maximum rate. The revenue from this income tax is used to make up for the lost revenue from the higher homestead credit.

A local inventory deduction, property tax levy controls which raise the tax rate, an added homestead credit, an added local income tax rate--it's like a little seminar on Indiana local taxation. But who wins and who loses from all these changes?

Businesses that own inventories pay lower taxes. Businesses that have few inventories pay more. They pay the higher tax rate on their property and don't get much of the inventory deduction.

Homeowners as a whole are held harmless, because the homestead credit offsets the higher property tax rate. But there's only one county-wide homestead credit rate, while there are often a few dozen property tax rates. The rate differs depending on where the house is located--which township, city or town, and school district it's in. If the house is in an area with a lot of business property, eliminating inventories will raise the tax rate more, and the homestead credit increase won't be enough to offset the higher rate. If the house is in an area with few businesses, the homestead credit will more than offset the higher property tax rate.

All these homeowners pay the higher income tax rate, but they get added homestead credits for their trouble. Renters, though, don't own property, so they pay the higher income tax rate without receiving any property tax breaks.

Counties that adopt the local inventory deduction are hoping that everyone will win, though. If lower business taxes attract new business investment, there will be more jobs and higher incomes in the county. That's the hope of all of Indiana starting in 2007. Some counties are looking to get a head start.




Writer: Larry DeBoer
Editor: Olivia Maddox