Many state and local governments impose ad valorem property taxes on tangible personal property (TPP), in addition to property taxes levied on land and structures. TPP taxes are levied on movable and tangible property, such as business equipment, machinery, inventory and furniture.
Currently, 43 states include TPP in their property tax base. In 2017, states’ dependence on the TPP tax ranged from 1.79% to about 29% of the state’s tax base. Between 2006 and 2017, the TPP’s average share of the state tax base fell from 11.27% to 9.98%.
Taxes on TPP increase tax complexity and encourage companies to reallocate investments to avoid taxation. In addition, different types of TPP often receive preferential treatment depending on their use and location, distorting economic decisions.
State and local governments can alleviate the impact of the TPP tax through various measures, including:
– Repeal of TPP taxes;
– Implementing or extending de minimis exemptions for small businesses;
– Allowing localities to reduce TPP taxes through adjustments to assessment rates;
– Simplifying rules related to depreciation and reporting taxable TPP.
The recent experience of states that have expanded tax exemptions and offered local reductions provides a model for future tax reforms. States should seek solutions that reduce TPP tax burdens without compromising needed revenue for local governments.
Introduction
Property taxes represent one of the main sources of revenue for state and local governments, accounting for approximately 31.5% of total US state and local tax collections in fiscal year 2016. Most of this revenue goes to local governments, funding essential services such as public education, which received around 72% of local revenue in that period.
While most people are familiar with real estate property taxes, many states also tax tangible personal property of individuals and businesses. These assets include items such as business equipment, furniture and vehicles, as opposed to intangible assets such as stocks and patents.
Although they represent a small portion of state and local revenues, TPP taxes impose high compliance costs, distort investment decisions and are considered an outdated form of taxation. This article examines the evolution and administration of TPP taxation in recent years, highlighting recent reforms and proposing guidelines for reducing the tax burden without harming local government revenues.
Overview of Taxes on Tangible Personal Property
In the United States, taxation on personal property arose alongside taxation on real estate. Initially, property taxes worked in a similar way to a wealth tax. However, over time, personal property taxation declined due to administrative complexity and changes in tax policies.
In the 19th century, policymakers began to limit property taxes to real estate and certain types of personal property, such as inventory and machinery. In the 20th century, personal property for individual use was gradually excluded from the tax base, and the focus shifted to corporate property.
On the international stage, taxation on TPP has been largely eliminated. Among the 36 countries in the Organization for Economic Cooperation and Development (OECD), only seven still tax tangible personal property: Austria, France, Germany, the Netherlands, Japan, the United Kingdom and the United States.
In the US, the TPP tax base has been progressively reduced due to exemptions granted to specific sectors. For example, states often exempt agricultural, manufacturing and renewable energy companies. In addition, many states offer exemptions to stimulate economic development, making them conditional on job creation or local investment.
Examples of state incentives include:
– Maryland: allows local governments to grant tax credits for the expansion of production facilities.
– Idaho: authorizes exemptions for investments over $500,000 in new factories, valid for up to five years.
Seven states (Delaware, Hawaii, Illinois, Iowa, New York, Ohio and Pennsylvania) completely exempt the TPP from taxes. Another five states (Minnesota, New Hampshire, New Jersey, North Dakota and South Dakota) exempt most TPP, except for regulated sectors such as public utilities and oil and natural gas refineries.
How Tangible Personal Property is Taxed
Taxes on TPP are mainly levied by local governments, but regulated at the state level. There is great variation in how they are applied, including differences in property classifications, assessment rates and exemptions. While 23 states allow municipalities to reduce the TPP tax, 27 states do not offer this option.
The process of calculating and paying the TPP tax is complex and varies between states, counties and municipalities. Companies need to identify which goods are taxable, a criterion that differs from jurisdiction to jurisdiction. In addition, states often exclude certain goods from taxation, increasing administrative complexity for taxpayers.
Important note: stock is generally excluded from the calculation process
Payment Collection Process and Notification in the Event of Non-Payment
If the company fails to pay the tax on tangible personal property within the stipulated period, there is a collection process and penalties apply. If the return is not filed, the company may face a fine of 25% of the total tax due for each year in which the failure occurs. For returns filed late, the penalty will be 5% of the tax due for each month or fraction of a month late, up to a maximum of 25% of the total tax. If the company omits assets from the return, a fine of 15% will be imposed on the tax relating to the assets not reported.
In addition to the financial penalties, the company may be notified by the Florida Department of Revenue and the county property assessor of the delinquency. If the tax remains unpaid, collection can lead to lawsuits, liens on tangible property and other tax foreclosure actions to recover the amounts owed. Compliance with these tax obligations is essential to avoid additional burdens and possible negative impacts on the company’s operations.
Conclusion
Taxes on tangible personal property impose significant challenges on businesses and state and local governments. Although they represent a smaller share of total revenue, they create high compliance costs and distort the economy by influencing investment decisions and business location.
To mitigate these impacts, states should continue to reform TPP taxation, considering measures such as:
– De minimis exemptions for small businesses;
– Reducing local assessment rates;
– Simplification of depreciation rules and declaration of taxable assets;
– Gradual elimination of the tax, compensating for lost revenue with other sources less harmful to economic growth.
The experience of states that have already implemented reforms can serve as a model for future adjustments. By reducing dependence on the TPP tax, states can create a more favorable environment for economic development, while ensuring that local governments have the necessary resources to provide essential services to the population.
Written by Marcos Ferreira, Content Analyst at Drummond Advisors
Read more: Property taxes in the USA: how they work and how they differ from state to state