Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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The Last Tax Sale

The groundhog may see its shadow -- or not -  but one thing is certain. If it's February in Indiana, it's time for inventory tax sales.

The inventory tax is the property tax on business inventories, the same property tax that homeowners pay on their houses, that businesses pay on their offices, and that farmers pay on their land. Each year on March 1, businesses add up the value of their inventories and send a form to the local assessor. The next year, the property tax is applied to that inventory value.

Each car will cost an auto dealer $200, $400, $600 in taxes, depending on the price of the car and the local tax rate. So, it pays businesses like auto dealers to run down their inventories as low as they can by March 1. How? By holding a sale and selling the cars to you.

But, back in 2002, the Indiana General Assembly passed a tax restructuring bill to apply a 100 percent deduction to inventories in 2006, for taxes payable in 2007. The Indiana Constitution didn't seem to allow a full inventory deduction, so this past November a constitutional amendment appeared on the ballot to allow it. Seventy-one percent of the voters said "Yes." This means that this February should see the last inventory tax sale.

You can see the new law in the Indiana Code, on the General Assembly's Web site. Go to http://www.in.gov/legislative/ic/code/ and key in the code, 6-1.1-12-42, in the "Search the Indiana Code" box.

Actually, in about two-fifths of the state, tax sales may be gone already. The legislature allowed counties the option to adopt the inventory deduction early, and 38 counties did. In the other 54, inventories may be assessed on March 1, 2006. However, in 2007, all that assessed value will be wiped away by the 100 percent deduction. Next year (2006) will be the last time inventory taxes will be paid. So this year (2005) is that last time there will be a reason to reduce inventories on March 1.

Eliminating the inventory tax should help our economy. There is evidence that lower taxes on inventories cause firms to keep more of inventory on hand. Indiana is criss-crossed with interstate highways, and we'll make a fine location for warehouses distributing goods to the Midwest. We will, that is, once we stop taxing what's in those warehouses. 

With no tax sales, will the prices that consumers pay be higher? It's hard to believe that cutting a tax on cars will raise car prices. Instead, prices probably will be a little lower year round. Dealers probably won't cut their prices by the full amount of the tax savings, so they'll make higher profits and salespeople will earn bigger commissions. It's a win for consumers and businesses.

There's no free lunch, though, so someone has to pay. The property tax on inventories brings in about $400 million a year for local governments. Schools pay teachers, cities pay fire fighters and counties pay sheriff's deputies with that money. It's possible that local governments will try to do with less when the revenue from inventories disappears.

More likely, though, they will collect the same amount of property tax revenue from the remaining taxpayers. That means the tax rate on houses, offices and farmland will have to increase -- $400 million in property taxes will be shifted to other property owners.

In many jurisdictions, taxpayers won't pay very much more. If you live in a place that has a lot of businesses with large inventories, then a lot of inventory taxes must be made up. In some places, tax rate increases will be big enough to notice.

Local governments can choose to protect homeowners from this property tax hike. They can increase a local income tax and use the money for added homestead credits, which reduce homeowner property taxes. Many of the early adopting counties took this option. Most homeowners will still pay higher taxes, but it will come out of the income tax pocket rather than the property tax pocket.

Of course, traditions die hard. Maybe this won't be the last tax sale after all. The question for next year will be, "Can we have inventory tax sales without inventory taxes?"




Writer: Larry DeBoer
Editor: Cindie Gosnell