Study: State tax code stifles small businesses
The Associated press September 15, 2012 4:28PM
Updated: October 17, 2012 6:48AM
A new study of Indiana’s business tax structure suggests the state’s tax code discourages the small, home-grown businesses often considered the engines of job creation.
The Ball State University study found several tax code inequities that result in larger, service-oriented businesses paying almost uniformly a smaller share of total revenue in state taxes than smaller, manufacturing-based firms.
“The worse thing you can be in Indiana is a small manufacturing company that has organized itself as a corporation. These are exactly the kind of companies we want to be creating jobs,” said Michael Hicks, director of Ball State’s Center for Business and Economic Research.
Hicks and co-author Hilary Fichter ran simulations for companies in a variety of sizes based on revenue and with differing legal structures, such as corporation, limited liability corporation and not-for-profit. Their study also looked at a wide range of industries, including manufacturing, retail and personal services.
Smaller companies generally had higher effective tax rates than larger companies because overhead tends to be higher for smaller firms, the report says.
The study also found that companies that produce goods had higher effective tax rates than companies that provide services. Hicks said this is because sales tax doesn’t apply to services and because manufacturers tend to have more property than service companies.
Finally, companies organized as corporations in Indiana must pay 8.5 percent in income tax, while those organized as LLCs pay only 3.4 percen, the same income rate rate as individuals.
As a result, big out-of-state companies like Walmart that register to do business in Indiana as an LLC are taxed at a much lower rate than companies headquartered in the state, such as Eli Lilly and Co.
“This tax rate is an inequity affecting Indiana corporations rather than out-of state-companies with facilities in Indiana,” the report says.
Gov. Mitch Daniels’ office declined to comment on the report, but Indiana Economic Development Corp. spokeswoman Katelyn Hancock defended the state’s tax structure in an emailed statement.
“Most Hoosier businesses pay the same income tax rate as individuals (3.4 percent) and Indiana recently lowered our corporate income tax rate,” she said.
State lawmakers last year voted to reduce the rate from 8.5 percent to 6.5 percent over four years, beginning in fiscal 2013.
Hancock blamed uncertainty about changes to the federal tax code for any hesitation on new investment and hiring among Indiana businesses.
Business representatives agreed that Indiana’s tax climate is competitive, but they also said the report reinforces the fact that it’s not perfect.
David P. Lewis, Lilly’s vice president of global taxes, said that even at the lower 6.5 percent corporate tax rate, “Indiana’s taxation of businesses in the corporate form will remain higher than 19 other states.”
“Remedying this higher rate, relative to Indiana’s lower 3.4 percent individual income tax rate applicable to other forms of doing business, will further improve Indiana’s already highly rated business climate,” he said.
Indianapolis Chamber President Scott Miller said the study raises questions that warrant further study.