For the first time in Indiana, taxes on C corporations may be coming to a county near you. Senate Bill 176, which passed the Indiana Senate on February 4, is a proposal to fund mass transit in six central Indiana counties by increasing local option income tax rates on individuals and by creating two new county taxes on corporations based upon income and employee count. Even though the proposal is limited to six counties and first requires approval by the county council and voters, the creation of two new county corporate taxes have statewide implications.
Taxing Corporations is Bad Economic Policy
First, taxing corporations is bad economic policy. The corporate income tax is the most harmful tax to economic growth. The burden is paid by workers who earn lower wages, consumers who pay higher prices, and shareholders who receive less income from their investments. It's the Ronald Reagan line, "corporations don't pay taxes, people do."
Second, the legislation opens a "Pandora's Box" of new county corporate taxes to fund local government spending that will eventually find its way to all 92 counties. Once the power to tax C corporations is permitted by the General Assembly in the six counties, what's to stop it from spreading to Elkhart County to fund any local government project?
"Business Community" Support is Gross Generalization
Third, the oft-repeated line that the "business community" supports mass transit; thus, corporations should have "some skin in the game," is a gross generalization. A review of the supporters of mass transit on the Indy Connect Now webpage shows only one manufacturer alongside several not-for-profits and tax-exempt organizations. Additionally, we have not had one member ask us to support mass transit. Rather, since the latest proposal was introduced, opposition from our membership to the tax provisions in the bill has been clear.
Complex Tax Administration
Fourth, the tax administration in the proposal is complex, confusing, and contradictory. For example, under current law, a corporation that has business income from both within and outside Indiana must apportion its income to the State by means of a single-factor sales formula. However, under the mass transit tax proposal, the amount of a corporation's income subject to taxation by the county is based upon a three-factor apportionment formula (payroll, sales, and property assessed value).
For the County Corporate Employment Tax, tax liability is based upon the total number of full-time employees in the county during that month, and the tax is to be paid monthly to the county treasurer with the Department of Revenue required to conduct an audit at the county treasurer's request.
The corporate tax rates are another concern. The rates are to be at least equal to 10% of the average annual operating costs of the project for the first five years. You read that correctly: the tax rates will be determined by the spending needed to operate the project. This differs from other local income and property taxes that have a determinable cap.
The corporate tax provisions in the mass transit proposal are a bad idea.
Formed in 1901, the Indiana Manufacturers Association is the second oldest manufacturers association in the country and the only trade association in Indiana that exclusively focuses on manufacturing. The Indiana Manufacturers Association, representing more than 1,400 companies, is dedicated to advocating for a business climate that creates, protects and promotes quality manufacturing jobs in Indiana. The staff of the Indiana Manufacturers Association has more than 140 years of combined governmental affairs experience and is recognized as experts in many areas including tax, environment, labor relations, human resources and healthcare.