Reluctant “No” On The Statewide Referendum To Eliminate Business Inventory Ad Valorem Tax

Given that I generally telegraph my feelings in my posts well in advance, the “my ballot” post from yesterday had few surprises for most. But a few commenters posted (or emailed, or called..) as to why I could oppose an elimination of a tax on businesses.

As a conservative, we generally view eliminating a class of tax as a good thing.

As an economist (by training, anyway), I understand that businesses don’t pay taxes, consumers do.

Yet, I’m opposed to this referendum. Thus, a lot of “WTF?”.

I was able to resolve one of my issues with this legislation yesterday after confirming this only eliminates the state portion of the tax. My primary concern was that this was yet another attempt by the general assembly to claim they cut taxes when the revenues would have otherwise gone to local governments. I.e., axe the tag tax; i.e., Great Tax.

I did learn in my research, however, that there was a bill last session, sponsored by Jay Powell and Ed Lindsey, and others, that would have allowed local governments to eliminate these taxes at the local level for economic development. So long as local control is preserved, I’m all for it. Unfortunately, Governor Perdue vetoed the bill, but I am assured by Rep. Lindsey that they will reintroduce this bill this session, and I will strongly support it’s passage.

So, back to my now more relecutant opposition to this referendum, I’ll refer back to one of the better classes/teachers I had in Econ. We learned at some point the priciples of fair taxation (not in any way to be confused with the FairTax!) that a tax, to provide the least distortion to an economy while raising revenue, should be as broad based and low as possible, with the fewest exemptions.

Yet, the modus operandi of the General Assembly the last few years seems to be to systematically create a lottery to see who wins tax breaks. As Republicans, we seem to enthusiastically go along, claiming that any tax cut is a good tax cut. Yet, inventory taxes are the least likely to spur economic development in most cases. In a Just-In-Time inventory world, inventories are located closest to the customers. Only a few cases at the margin will companies move inventory to avoid taxation. Thus, this is a broad based tax that a cut is not likely to spur additional economic growth to offset the lost revenue.

As such, I favor waiting on this tax cut until the commission currently studying a comprehensive statewide tax reform can release it’s findings. Rather than the patchwork of incompatible tax cuts we’ve crafted over the past decade, I prefer a targeted, comprehensive approach.

If eliminating business inventory taxes is the solution, I can wait a year for it to be part of a comprehensive solution.

26 comments

  1. REB says:

    If you think that “businesses don’t pay taxes, consumers do,” I question that economics training. Unless demand is completely inelastic, the tax burden will be shared by both producers and consumers.

    • jiminga says:

      It’s pretty simple math…add the cost of production/acquisition, freight, storage, overhead, etc., then add taxes and profit margin, and you get the price . All business taxes are passed to the consumer. Businesses only act as tax collectors for the local, state, and federal governments, making business taxes simply taxes on consumers.

      • REB says:

        It’s even simpler economics, but unfortunately I can’t draw a supply and demand curve in the comments.

        However, the folks at wikipedia can: http://en.wikipedia.org/wiki/Tax_incidence

        The reason your “pretty simple math” is wrong is that competition in a free market will, in most situations, prevent producers from being able to pass the whole tax on to consumers. One producer will inevitably say to themselves, “I bet I could sell a greater quantity and make a bigger profit if I only increase my price by 99 cents instead of $1.00.”

        • So REB, let me see if I understand what you’re saying here. You’re saying that at the point which a business has paid all of it’s operating costs plus taxes, even if there is no profit, or if it costs them money to operate, they’ll still continue producing? So businesses make products not to make a profit, but out of the goodness of their hearts? Where do the businesses get the money to pay the taxes if not adding it in as a cost of doing business and including those costs when pricing their products for sale? Businesses don’t just print money and they don’t grow it on trees, thus the money to pay the taxes has to come from somewhere. If it’s not through padding the price of their products, then where does it come from?

          • REB says:

            First, I’m not necessarily disagreeing with Charlie’s post. He makes an interesting point. My only point is it’s ignorant to say, “businesses don’t pay taxes, consumers do.” Yes, most of the time a portion of the tax burden is passed on to consumers and results in higher prices. At the same time, some of it is taken as a hit directly by the producers and reduces their profit.

            “If it’s not through padding the price of their products, then where does it come from?”

            I just told you, some of it is through padding the price; some of it comes straight from the business’ bottom line. The only time a tax increase is paid completely by consumers is if consumer demand is completely inelastic. Alternatively, a tax increase would fall completely on the producer if supply was completely inelastic. Since in real life supply and demand are almost always somewhat elastic, consumers and producers both get screwed by the government. The extent of who gets screwed more depends on the slopes of the supply and demand curves.

            Nobody said anything about businesses operating at a loss out of some altruistic spirit.

            • Charlie says:

              Same caveat applies to this post as the one before it. It was late, today’s the day before election day, and I’ll be at the “real job” late. Thus, rushed out a couple of posts in the wee hours to get these topics started.

              Short answer, you’re both right. It’s somewhat semantic terms, and each has a defensible position that I won’t even attempt to try and clarify until I can dust off 20 year old textbooks and make sure I’m using my ecogeekspeak correctly.

              In the mean time, please carry on.

  2. saltycracker says:

    “Yet, the modus operandi of the General Assembly the last few years seems to be to systematically create a lottery to see who wins tax breaks. ”

    That statement gets to the bottom line, pun intended, all the rest is just entertainment.

    Voting No should be considered a message for fair taxation.

  3. Doug Grammer says:

    Vote to get rid of the tax. Charlie is correct that businesses pass the inventory taxes and other cost of doing business directly on to the consumer. When this tax is lifted, there will be more profit for business if they keep the prices the same. At the same price they could have enough capital to hire someone or expand. Or they could drop their price to gain more market share and consumers get goods at a cheaper price.

    • Joshua Morris says:

      What about whittling this thing down to the core principle? Why should any business (or private individual) be taxed on something they own? It’s Marxist. The inventory sitting on a business’ shelves is doing nothing to produce income or wealth for a company, and there’s no acceptable reason in a free society to tax anyone for owning something.

        • Goldwater Conservative says:

          Be specific, the last sentence of J.M.s statement was a good point. That being said, Mr. Morris, if you are going to join the crowd of right-wingers that throw words like marxist and socialist you really should know what you are talking about.

          I will leave you on your own to research marxism, but i do know that you do not have a profound enough understanding of political economy or philosophy to make a legitimate interpretation of your own at this point in your life. I am sure you can make a few good points, but a good point does not a philosophy make.

          There are acceptable reasons to tax people for what they own, I just so happen to believe it is democratically unjust. Companies, however, are not people and there role in an economy is far more substantial. Were the referendum written in a way that taxed overstock that would be one thing, but nothing I have read indicates that it applies only to that kind of situation.

          I suspect there is more to this story that we are not getting. I have no clue what the current law says about this or why it was instituted. I have no clue what current exemptions exist under the current rules. Despite the discussion about “making GA competitive” with every one else, this is probably not going to matter.

          Personally, I passed on voting on this. I do not like falling for conservative sleight of hand. Why this made the ballot and Sunday Sales did not is beyond my logical comprehension. I also did not want to encourage warehouses to sit on product for stupid periods of time and I know some warehouses and distribution companies stock up on crazy amounts of product that can not and will not sell so they can claim to have an artificially high net value as a company (I will not name names, but I just took a loss about 4 months ago because of a Marietta based company that just went bankrupt engaged in this practice for a deceptively long period of time and as an investor that lost money because of this I am still infuriated). Having a tax on overstock makes sense in that regard. Outside of that it is pretty stupid.

          • Doug Grammer says:

            If the company has assets, it has assets. If it’s not turning a profit, then it’s not turning a profit. Do more research before you invest.

            There’s always an exception to the rule, but in general, more times than not, this amendment is a bad idea.

            You can’t tax a nation into prosperity.

            • Goldwater Conservative says:

              Tax cuts do not equal prosperity either, Doug. Furthermore, prosperity and growth can exist with high taxes. Going even further from that, what evidence exists that shows a direct causal relationship between taxes and growth or tax and “prosperity” (prosperity is a difficult concept operationalize in any one way). After 80+ years of hearing that garbage I have reached a tentative conclusion that they only people that really blame taxes for business failures are those that can not successfully run businesses themselves and are simply looking for a scapegoat.

              You are right about the research aspect of investment decisions. Unfortunately few people have the time and are given the opportunity to walk the floor and access the inventory databases of the companies in which they invest. If your portfolio is diverse enough it is near impossible. You simply rely on the information you are given. I know, we have a division of labor and investment firms exist to fill that role…and I made the decision to handle my own portfolio so I would have something to do during the day.

              I merely stated that this exemption being proposed can be viewed as something of an investor protection measure. We see consumer protection measures instituted all the time and violations that result in huge law suits as well as fines. It only applies to a few businesses and, again, it will not likely do anything to stimulate growth in that sector here in GA. It is just another example of a tax cut that will result in the loss of revenue. Sure $2million is not much…when will it stop though. How many $2million tax breaks will the legislature ask the people to make before our schools, courts and law enforcement are out of business?

          • Joshua Morris says:

            Goldie, you’re pretty full of yourself. As much as you don’t understand what Goldwater believed or what his conservatism was about, I’ll stick with my own study of ideologies.

  4. Goldwater Conservative says:

    All in all, at least for this tax measure, something tells me more was spent, collectively, on lobbying than this tax break will save.

    Costs get passed on in more ways than one. If you are really worried about a tax that applies to warehouses and raises about $2million each year then you need to start worrying about the costs being passed on to consumers through lobbying and advocacy. From the stand point of an investor I am even more infuriated. That money spent on lobbying and those millions being spent on this election cycle should be reinvested into the company or handed out to me and the rest of the investors in any given company.

    Sure, some people make the argument that those donations are investments that will pay off in time through deregulation and tax breaks. After 30+ years of this behavior I have yet to have a confirmation that there has been additional profits made….and mostly because this happens every year! Sure that $600million spent this year by companies directly may pay off…if they never have to do it again. That is not the case though. Year after year after year it is the same crap. Defend the GOP majority, break the Democratic Majority, defend the GOP majority…and on and on and on. At this rate I will never see a profit saved or turned because of these efforts.

  5. Kilkenny Kid says:

    Charlie – you’re dead wrong again. Not sure what school of economics this theory comes from – Obama U maybe? Ask businesses in Savannah about the inventory tax. It makes retailers on the SC side of the river more competitive since they have no inventory tax in SC. Big picture: all ad valorem taxes need to go away. Choice is clear – Vote YES on Refrendum A

  6. OleDirtyBarrister says:

    Charlie:

    Did you formerly post under a different nom de net?

    The bill that you apparently reference was H.B. 1082. It would have broadened the counties’ authority to offer a free port exemption under OCGA 48-5-48.2. The purpose of H.B. 1082 was to broaden the property exempt from taxation if freeport status was chosen to bring GA’s code more in line with other states. The fact that the scope of the existing freeport exemption was not broadened does NOT justify voting “No” on the current ballot. The freeport exemption is still in the Code in its current, imperfect state the aforementioned Code section and can be passed by county voters. If anything, eliminating the state personal property tax on such property provides MORE incentive for counties to vote in freeport status, even in the absence of modifications to Code section 48-5-48.2.

    Sorry Charlie, but you are way off on this one.

  7. Jawgadude says:

    CHARLIE – FAIL… Charlie this measure only applies to the “State” portion of the tax – not the local city, county, schools. It will still be up to local governments whether they wish to tax inventory or whether to have have partial or total freeport.

    • Charlie says:

      “I was able to resolve one of my issues with this legislation yesterday after confirming this only eliminates the state portion of the tax. ”

      Reading comprehension fail.

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