CHICAGO -- Indiana lawmakers returned to work Tuesday for a 10-week winter session that will be highlighted by Gov. Mike Pence's controversial proposal to eliminate the property tax on business equipment and machinery.
Pence promotes the measure as a key to making Indiana one of the most business-friendly states in the U.S.
Pence named the tax cut as one of his top priorities in 2014 in a recent address. Ohio and Illinois have already eliminated the personal property tax — most of which goes to fund local governments — and Michigan is contemplating the move.
But critics, led by local officials and advocates, say it would devastate cities and towns that rely on the revenue, which totals $1 billion.
The city of Whiting, population 5,000, would suffer the loss of a full 71% of its general fund revenue if the measure is approved, according to a recent analysis.
"A reduction or elimination of the personal property tax will financially cripple the entire state from an urban perspective," Whiting Mayor Joseph Stahura said Wednesday in a telephone interview. "At this point I think it's so crazy, no way will it pass."
Whiting, located near Chicago in Lake County, Ind., is the home to an oil refinery owned by BP, which is the city's largest taxpayer and landowner. Eliminating the equipment tax the company pays would mean a 71% cut into the city's general fund revenue, Stahura said. Public safety takes up 55% of the general fund budget, he added.
The Indiana Association of Cities and Towns has been lobbying hard against the measure. Critics say a final bill needs to feature 100% revenue replacement or it will be too hard on local communities.
The replacement revenue should come from the state, Stahura said, because of the lack of local revenue-raising options for Indiana governments.
"The ink is still drying on our property tax caps," he said, referring to 2009 legislation that capped all property tax revenue and left many local governments struggling. "It's going to be very difficult to come up with language to make it happen unless there's replacement revenue that's state-based and relatively neutral."
BP's oil refinery employs 2,200 with an additional roughly 4,500 contractors, nearly all of whom commute to Whiting from rural areas, Stahura notes. "We'll end up being left holding the bag because we have the pleasure of having a large manufacturer," he said, adding other cities that host steel mills, like Gary, will feel the heat as will the hosts of Honda and Subaru plants in the state.
One state senator has unveiled a bill that could create a warning system for fiscally stressed cities like Gary.
Sen. Ed Charbonneau, R-Valparaiso, two years ago introduced a bill that would allow local governments to file for Chapter 9 bankruptcy. The measure failed, and local governments in Indiana are still not allowed to declare bankruptcy.
Charbonneau's new bill, Senate Bill 106, would require the Department of Local Government Finance to develop indicators of fiscal health for local governments and school districts. It would allow stressed local communities to request technical help from the state and would require the state to decide whether additional legislative powers are needed to address the problem.
"As lawmakers, it is our responsibility to ensure that fiscal integrity and responsibility are paramount to essential government functions," Charbonneau said in an email to the Bond Buyer.
Pence will give his state of the state address next Tuesday.
