The Tax Foundation just released a publication urging states to continue reforming taxes on tangible personal property (TPP). This is advice Missouri should take.
Tangible personal property taxes fall under the large umbrella of property taxes. TPP is property that can be moved or touched, like business equipment and furniture. This is separate from real property (land and structures) and intangible property (stocks, bonds, intellectual property).
The Tax Foundation study reported personal property as a percentage of the state property tax base for all 50 states. This number tells us how much states are relying on personal property as part of their property tax base. Nationally, personal property made up 9.98% of the average state property tax base in 2017. Missouri’s number is nearly double that; personal property made up 18.79% of Missouri’s property tax base in 2017.
Okay, Missouri is relying heavily on TPP taxes. So what?
Well, TPP taxes are inefficient and distort decision-making. With respect to businesses, taxes on machinery, inventory, and other capital discourages them from expanding and investing. Businesses can avoid the TPP tax by moving to lower tax areas and changing their capital investment decisions. They also pass along the tax costs to consumers by raising prices. All of this alters the business environment and reduces business investment. Distortions occur on the consumer side of the market as well when TPP, like cars, are taxed—as they are in Missouri. We see a lot less of these distortions with real property taxes because they are much more difficult to avoid (you can’t move your land to a lower tax area) and the costs generally cannot be dispersed to third parties.
In general, property taxes are more efficient than other taxes, but tangible personal property taxes are less efficient than real property taxes. Missouri’s heavy reliance on such an inefficient form of property tax is a red flag. If we want to create a tax environment that encourages business investment, maybe we need to rethink our property tax base.