Monday, May 24, 1999

Changes and Enhancements for
Enterprise Zone Tax Incentives/Inventory Tax Reform

Legislation Helps Enterprise Zone Redevelopment Efforts____

Although only 1 0% of all bills enrolled during the 1999 Legislative Session passed both houses to the Governor's desk, State Enterprise Zones managed to win a package of legislation that will enhance and attract new investment for all enterprise zones and urban cities. For Lafayette, small businesses and residents in the enterprise zone are the big winners this session.

The passage of HB 1983, HB 1909 and HB 1001 enhances the zone's ability to renovate vacant property, to encourage more zone businesses to hire zone residents and to enable businesses to more easily reinvest in their operations. HB 1983 became law with the Governor's signature Monday, May 24th.

The state trade association of enterprise zones, the Association of Indiana Enterprise Zones (AIEZ), gave enterprise zones across the state a forum to advocate for much needed change to enhance redevelopment efforts as well as to facilitate zone business investment and expansion.

State enterprise zones are geographic areas designated by local city councils and the State of Indiana specifically targeted for revitalization. These inner city areas have the characteristics of higher unemployment older more dilapidated buildings and infrastructure and a higher incidence of poverty. Businesses located in enterprise zones can take certain tax incentives in return for reinvesting in their business in the form of new jobs, new equipment or redevelopment of their real property. In addition, businesses taking tax incentives must also give back to the community by making a contribution to the local Urban Enterprise Zone Association.

Currently, all businesses are eligible to take the Inventory Tax Exemption. Other tax credits include:

Employee Wage Deduction: Residents of the zone can take a tax deduction from their taxable salary and wages and lower their individual state tax if they are employed by a qualified zone business.

Employer Expense Credit: If a zone business hires a zone resident, that business can take a credit on their state tax liability.

Gross Income Tax Exemption: Qualified zone businesses may exempt increases in gross income from state tax.

Investment Cost Credit: Individuals making new investments in enterprise zone companies may receive up to a 30% tax credit against their personal state tax liability.

Loan Interest Credit: Any Indiana taxpayer, whether individual or business, may receive a state tax credit of 5% of the interest income earned on loans made to enterprise zone businesses or on loans for improvements to real property, including residential property.

HB 1983 redefines what types of businesses can take zone tax incentives. HB 1983 now explicitly permits all for-profit businesses to take the Loan Interest Credit and the Employer Expense Credit.

HB 1983 also adds new members to the State Urban Enterprise Zone Board. These are: Indiana Workforce Development, Business Modernization and Technology, Indiana Department of Environmental Management, Indiana Development Finance Authority, State Board of Tax Commissioners and the Indiana Department of Revenue. "Having these new members as part of the enterprise zone team and bringing their expertise to the program will have a very positive impact and will bring more resources to address the needs of inner cities," says Dennis Carson, Lafayette Director and AIEZ President.

Other bills affecting Enterprise Zones help Zone Associations squarely address revitalizing their areas. HB 1909 sets aside a pool of money specifically to help zones associations revitalize property that could be environmentally contaminated, property otherwise known as "brownfields." "Knowing that resources are available will give a real boost for brownfield redevelopment. HB 1909 gives us a real tool in our arsenal to get these properties productive and on the tax rolls," says Carson.

Other elements of this session's tax reform will help small business' bottom line with inventory tax relief. HB 1001 exempts the first $12,500 of assessed value of inventory. Depending on how the State chooses to administer the credit, many enterprise zone small businesses and others across the state will no longer have inventory tax liability. For those businesses located in the zone with over $12,500 in assessed valuation, the enterprise zone inventory tax exemption still applies at 100%.

The Lafayette UEA and the Association of Indiana Enterprise Zones are already working on the next round of legislative reforms to the zone program. Lafayette UEA through AIEZ will be working closely with the Indiana Department of Commerce over the summer and fall on two key studies leading to additional legislative changes next session:

1. Updating guidelines to the Investment Cost Credit to better meet today's business needs.
2. Identifying new or revised tax incentives applicable to enterprise zones that not only serve as enhancements to redevelopment efforts in older urban areas but also enable zone association to continue offering meaningful programs for zone residents and businesses. The Lafayette Zone will loose 20% of its revenues due to inventory tax reform. Identifying other tax incentives that would be more meaningful in helping businesses grow and create jobs could replace the inventory tax credit as a key zone incentive.

"As enterprise zone directors, we welcome inventory tax reform. However, this clearly points to the need to update the enterprise zone program with incentives that address the redevelopment issues of cities and support the direction our Indiana's economy is heading," explains Carson.