Taxing Inventory: An Analysis of its Effects in Indiana

Professor of Agricultural Economics, Purdue University ewer than ten states tax the assessed value of business inventories as part of the property tax; Indiana is one of them. For years businesses have pressed the Indiana legislature to reduce or repeal this "inventory tax," but a concensus on its eradication has yet to be reached. Most recently, the 1999 session of the Indiana General Assembly debated bills to reduce or eliminate the inventory tax. The Governors’ Citizens Commission on Taxes had placed elimination of this tax third from the top of their priority list in their December 1998 report (Citizens Commission on Taxes, 1998). The Senate Republicans proposed a ten year phase out of the tax, replacing lost local revenue with state funds. The House Democrats proposed to exempt the first $12,500 in assessed value of inventories, also replacing lost local revenue with state funds. What passed, in the end, was a $12,500 exemption for all personal property, including business inventories, business equipment and individually owned personal property such as mobile homes and recreational vehicles. To this extent the inventory tax lives on, as do the motives for its alteration. One of the attractions of inventory tax reduction or elimination is the economic development benefits that it might bring. Proponents of elimination point to Indiana’s location at the crossroads of many interstate highways (Styring, 1994). They argue that Indiana could be a major warehouse distribution center if the property tax on inventories was removed. The result could be increases in jobs, incomes and sales. Added income and sales could generate added state revenue through income and sales taxes. Some claim that this additional revenue would be enough to completely offset the cost of the inventory tax cut. Those who support the inventory tax are just as resolute as those who oppose it. They cite the fact that property taxes on inventories raised $395 million for Indiana local governments in 1998 (Indiana Legislative Services Agency, 1998). Indiana assessed inventories at $4.3 billion, 8% of the state’s total assessed value.1 Would the reduction or elimination of property taxes on inventories increase the amount of inventories held in Indiana? Indiana data can be used to provide evidence on this question. In 1998 average property tax rates on inventories among Indiana counties varied from a low of $4.46 per $100 assessed valuation to a high of $18.46 per $100 assessed valuation. If inventory taxes inhibit inventory location, one would expect high tax rates to inhibit location more than low tax rates. All else equal, if inventory taxes affect inventory location, there would be more inventories in low tax counties and less in high tax counties. This essay analyzes the response of inventory location to property tax rates in Indiana in 1998, then uses the results to estimate the increase in state revenue if the tax on inventories was eliminated. The analysis attempts to explain what determines the gross assessed value of inventories, which is the sum of taxed inventory assessments and the assessed value of untaxed inventories in enterprise zones. Data are available for the assessed values of business inventories for Indiana counties for 1997-98 (State Board of Tax Commissioners, 1999). Regression analysis may be used to estimate the effects of tax rates and other factors on inventory location.2