States Moving Away From Taxes on Tangible Personal Property

October 15, 2012

Many people are aware of property taxes, but few are aware of the fact that these taxes include tangible personal properties (TPP). TPP taxes items such as equipment, furniture and jewelry. States have started to exempt many household items from the TPP tax, meaning that mostly businesses have to deal with the tax, say Joyce Errcart, Ed Gerrish and Scott Drenkard of the Tax Foundation.

The TPP is unpopular and unnecessary, which explains the trend toward reducing and virtually eliminating the tax.

  • All states except Oklahoma have exempted goods that can't be used for the production of income from the TPP tax.
  • In 2009, TPP from cities in Texas accounted for only 11 percent of all assessed property.
  • The average statewide personal property of total property values are around 5 percent to 15 percent.
  • The revenues from TPP comprised just 2.25 percent of state and local tax revenue.

Since most household items are exempt from the tax, mostly businesses have to fill out the forms and list all the taxable property. For businesses, the TPP is distortionary because it can disincentivize buying equipment or accumulating capital. This has the effect of forcing businesses to forgo technologically-advanced equipment because of the potential tax on the item.

There are three principles that tax policies should adhere to that the TPP doesn't:

  • Simplicity: The TPP is a taxpayer action and requires individuals and businesses to fill out complex paperwork.
  • Transparency: Since the tax offsets a business's revenue, the cost must be made up by imposing higher cost on the consumers.
  • Neutrality: Businesses are encouraged to defer investments and hold off on buying equipment.

Since the tax does not constitute a large portion of revenues, completely eliminating it would have a stimulating effect. Businesses could make smarter purchasing decisions and invest capital rather than accumulate it.

Because the TPP is mostly taxed locally, the most feasible option would be to give local governments the option to eliminate or at least reduce the TPP tax. This creates competitions as businesses can relocate to localities that don't have the tax.

Source: Joyce Errcart, Ed Gerrish and Scott Drenkard, "States Moving Away From Taxes on Tangible Personal Property," Tax Foundation, October 4, 2012.

 

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