Part II of TCCRI's recently published State Budget & Taxation Task Force Report analyzed the problems posed by imposing property taxes on tangible personal property used in business or for the production of income. What follows is an excerpt from the Report on that topic.
Part of the state’s heavy property tax burden is reflected in its broad general rule that tangible personal property used in a business or for the production of income, such as a business’s machinery, furniture, supplies, and inventory- is subject to local property taxes. This tax on tangible personal property tax used for the production of income is referred to herein as the “business personal property tax (“BPPT”), and tangible business personal property is referred to herein as “BPP.”
Generally, taxpayers must submit a rendition statement of all tangible personal property used for the production of income that they own, or manage and control as a fiduciary, as of January 1st of a given year.[i] The rendition statement is filed with the appraisal district office in the county in which the property is taxable.[ii] Taxable property is then subject to local governments’ standard property tax rates.
The BPPT is poor tax policy for several reasons. First, it violates the principle of “horizontal equity”- the idea that similarly situated taxpayers should be treated equally. Under current Texas law, a business must pay property taxes on the tangible personal property it holds for the production of income (inventory, furniture, equipment, supplies, etc.). Intangible property, however, is generally exempt from the BPPT (although a few types of intangible property are taxable). A retailer, for example, potentially faces a significant burden under current law in that its inventory is subject to property tax. Similarly, a manufacturing business may face high taxes as a result of the machinery it uses in the manufacturing process. In contrast, service-oriented businesses, such as software companies and accounting and law firms, are far less likely to face significant property taxes on their property because the bulk of their assets are often intangible.
Second, the BPPT imposes significant compliance costs on businesses. In cases where taxation is appropriate policymakers should aim to minimize the transactional and compliance costs associated with the tax. However, property taxes are generally costly to administer and comply with when compared to other forms of taxation. Under the current BPPT system, a business must determine the value of its tangible assets in preparing its rendition statement to the applicable appraisal district. Although a taxpayer may submit a good faith estimate of value, the taxpayer must be prepared to defend this estimate. Even a small business may have dozens of items for which a value must be reported, and determining the value of an item can involve significant research by the taxpayer. Alternatively, a taxpayer may provide the historical cost of the item of property and the year in which it was purchased, but this requires a taxpayer either to keep records of his or her purchases for a long period of time, and in some cases to know what the previous owner of an item of property paid for it. A dispute between a taxpayer and the appraisal district over the value of the taxpayer’s tangible personal property must be settled at an appraisal review board hearing or in court. Many taxpayers opt to retain professional assistance in calculating or contesting their BPPT liability, which of course imposes further costs on them.
A third aspect of the BPPT which makes it poor policy is that it applies to businesses even when those businesses are operating at a loss. Businesses often incur losses in their first several years of existence. Startups, struggling businesses, and capital-intensive businesses are especially vulnerable to shouldering a tax burden which is entirely disconnected from their profitability or their ability to pay the tax. Ideally, startups should be directing their cash flow into expanding their workforces and developing their offered products and/or services, rather than dealing with an administratively burdensome tax. The burden of the BPPT on small and new businesses is exacerbated by the lack of a cap on the tax; in contrast, annual increases in the appraisals of residential homesteads, for example, are generally capped at 10 percent.
Fourth, the BPPT distorts economic behavior. While all taxes affect behavior to some extent, policymakers should aim to disrupt the interactions of businesses and consumers as little as possible so that a free market can function most efficiently. In the case of the BPPT, businesses have an incentive to minimize their capital investment and inventory holdings. For example, a business considering a purchase of expensive machinery to produce goods more efficiently may opt instead to use less efficient manual labor in light of the BPPT. In turn, this decision results in lower productivity, stunting economic growth. As the Tax Foundation has stated, “There is evidence that the elimination of [the BPPT] increases investment in capital. In Ohio, policymakers exempted manufacturing equipment from the state’s [BPPT], resulting in greater capital investment and a shift from labor.”[iii] Similarly, a company may refrain from ordering additional inventory due to concern that its holdings will be subject to the BPPT.
Policy Recommendation (Main): Eliminate the BPPT in its entirety.
The Legislature should eliminate the BPPT entirely based on the aforementioned reasons. This could carry a biennial cost of $14 billion or more, and accordingly might require a phase-in similar to that in HB 2589. If the BPPT cannot be eliminated, consider the options below.
Policy Recommendation (Alternative): Exempt BPP from School District M&O Taxation.
Policy Recommendation (Alternative): Increase the BPPT exemption to $50,000 or more.
Policy Recommendation (Alternative): Exempt businesses that have gross receipts under the franchise tax no-tax threshold (currently $1.23 million) from the BPPT.
Policy Recommendation (Alternative): Exempt inventory from the BPPT or from School District M&O.
You can read this section in its entirety and the rest of the report here.
------------------------------------------------------------------------------ [i] Section 22.01(a), Tax Code. [ii] Section 22.23, Tax Code. [iii] Garrett Watson, “States Should Continue to Reform Taxes on Tangible Personal Property,” Tax Foundation (Aug. 2019), https://taxfoundation.org/tangible-personal-property-tax/#_ftnref28.