Rural states are keeping a closer eye on business equipment taxes
Last year, agriculture groups warmly received the Nebraska Legislature’s passage of a major tax package providing income tax credits for school property taxes paid on real estate, like homes, buildings, and farmland.
Less reported, though, is that to help pay for the change, the Unicameral also ended a different type of property tax relief impacting the owners of business equipment. Similar states have been working to keep a lid on this tax, known as the tangible personal property tax, to attract employment in industries like manufacturing, which can also bolster rural economies.
Personal property tax can apply to high-tech business equipment like farm or manufacturing machinery, computers and robotics, or pretty low-tech things including office desks and chairs.
Nebraska’s now defunct Personal Property Tax Relief Act worked similarly to the credit you might notice on your real property tax bill. The state previously picked up the tab for the local taxes due on the first $10,000 in assessed value of taxable business equipment.
The Nebraska Department of Revenue projected that ending the program would save the state about $15-$17 million a year, which is only a fraction of the $227.7 million in personal property taxes Nebraskans paid in 2020.
Of course, businesses that lost the exemption for personal property taxes are now eligible to collect more credit on their school property taxes if they own land or buildings. But the dollar amount of the tax is not the only concern. When the Personal Property Tax Relief program was in existence, even taxpayers with less than $10,000 in equipment were expected to file an annual tax return detailing the value of the personal property owned by their business.
While this particular property tax is not well known to people who don’t run businesses, states and employers are keeping an eye on its impact on jobs and growth. News Channel Nebraska reported about a Nebraska-based manufacturer that chose to expand in Idaho because of better access to workforce talent and the state’s lighter touch on property taxes on business equipment.
In late January, Montana Gov. Greg Gianforte announced a tax package that would aim to compete with states like their fast-growing neighbors in Idaho. He proposes to modestly cut the state’s personal income tax to a rate just slightly lower than Nebraska or Idaho.
But the package also included a proposal to increase Montana’s business equipment exemption.
Six other Midwestern states have no personal property tax, or very little, including our neighbors in Iowa and South Dakota, along with Illinois, Minnesota, North Dakota, and Ohio. But states that levy the tax may still offer a more significant exemption that removes the requirement for some taxpayers to file, or at least imposes lower property tax rates than Nebraska.
Montana already exempts the first $100,000 of personal property from taxes. Now the governor wants to double that to $200,000.
This change could save small businesses money on their tax bills, but the more noteworthy improvement is that taxpayers who own less valuable equipment would no longer be required to file annual tax forms, saving them time and money on tax compliance. The Gianforte administration says it will save 4,000 small businesses from having to file.
With stronger state legislative majorities in hand following the recent elections, leaders in a number of more rural states like Montana are considering tax changes to help businesses recover after last year’s pandemic-induced recession.
Some policymakers are considering fundamental changes to their state tax codes, with movements in West Virginia, Mississippi, and Arkansas calling for an end to state income taxes altogether.
While it’s good to be bold and clear with public policy, in most cases, states don’t repeal entire sections of their tax codes, and certainly not overnight. Even in the case of states that aim to get rid of personal property taxes, slow and steady often wins the race. Gradually raising exemptions for equipment over time makes the burden lighter while not completely depriving governments of revenue or forcing other tax rates higher.
That makes Montana’s focus on the mundane, but achievable, worth studying. Incremental changes that become policy usually have a more meaningful impact for more people than tantalizing ideas that don’t become law.