The Inventory Tax Is Bad For Business And The Economy
Posted by John Hitchcock on 2011/05/09
I have found that at least 3 states of the original 15 are no longer assessing inventroy tax, so the list grows shorter.
Here is the final list. As you will see, many states are discovering that the inventory property tax is a dis-ensentive to business and are phasing it out.
There are several states which charge a personal property and inventory tax on businesses. Ohio was one of those states but phased out its inventory tax in 2008. You may want to go to that link and see if your state is on that list, and then contact your State Legislators and Governor to ask that that tax be repealed. The tax is bad for business and for the economy.
Ohio Tax Guidelines for 2007 (pdf) gives this information (page 5):
What property is taxed?
Tangible personal property used in business is taxed. This includes machinery and equipment, furniture and fixtures, small tools, supplies and inventory held for manufacture or resale.
That means in 2007, all equipment was taxed every year along with all raw material, goods in process, and finished goods. Which is bad for business and bad for the economy. But it’s the inventory (raw material, goods in process, finished goods) which is important here. The rate itself isn’t important. What is important is that it exists and its mere existence affects cost, profitability, business decisions. (It did exist in Ohio and does exist in other states.)
Assuming the inventory tax doesn’t alter behavior (assuming is always bad), how is it harmful?
The inventory tax is just another hidden tax the economically obtuse short-sighted Ruling Class Big Government uses to generate money to spend. How is it a hidden tax? The consumer doesn’t see the affect it has on both the wholesale price and the retail price of the goods the consumer buys, as the manufacturer, the wholesaler, the retailer all pay the inventory tax and add it to the cost of the product before the consumer buys it and pays sales tax on top of multiply-taxed product.
Here’s a picture:
1. Pieces/Parts Unlimited makes widget parts. At the end of the year, Pieces/Parts unlimited pays a tax on its raw materials and all the widget parts it currently has in stock. It then adds the cost of that tax onto the widget parts. It ships the widget parts on to Widgets Galore, with the added inventory tax cost.
2. Widgets Galore makes widgets. At the end of the year, Widgets Galore pays a tax on the widget parts it has in stock (its raw materials) and all the widgets it hasn’t shipped out yet. It then adds the cost of that tax onto the widgets. Widgets Galore then ships the widgets on to Widget Warehousers, with the added inventory tax cost.
3. At the end of the year, Widget Warehousers pays a tax on the widgets it hasn’t shipped out yet. It then adds the cost of that tax onto the widgets. Widget Warehousers then ships the widgets on to Widgets 4 U.
4. At the end of the year, Widgets 4 U pays a tax on the widgets it hasn’t sold yet. It then adds the cost of that tax onto the widgets. Widgets 4 U then sells the widgets to you, plus sales tax.
(1) paid inventory tax on the inventory. (2) paid inventory tax on the (inventory + tax). (3) paid inventory tax on the ((inventory + tax) + tax). (4) paid inventory tax on the (((inventory + tax) + tax) + tax). You paid sales tax on the ((((widget + tax) + tax) + tax) + tax). Isn’t that a nice little hidden tax scam some state governments have going? But like I said earlier, that’s economically obtuse and short-sighted because economies are dynamic: they react to price pressures.
But the inventory tax does indeed affect behavior. The tax could price a product out of consumers’ reach. Businesses which are on the edge of life could be forced to close their doors because they can’t raise the prices enough to recoup their tax losses, because consumers stopped buying the products due to their being too expensive. That means a definite downward pressure on businesses and the economy.
Businesses have a way of getting around the inventory tax. It’s called having as little inventory as possible at the end of the year. But that costs money as well, and still doesn’t get the businesses completely clear of the tax. I made a simplistic chart to show two business models: A steady, year-round model and a seasonal-affected model. The steady model doesn’t concern itself with the Inventory Tax while the seasonal model could be used to deal with the Inventory Tax. But first, let me explain the parameters and assumptions I made in creating the chart.
The company has 100 employees earning $10.00 per hour.
The steady workforce works a constant 40 hour work-week for all 52 weeks.
That means each employee works 2,080 hours per year, for a total of 208,000 man-hours.
The seasonal-affected workforce breaks down in this fashion:
The last 6 weeks of the year, 50 are laid off while the other 50 work 40 hours per week, for the purposes of drawing down inventory.
Weeks 11-34, a 24-week stretch, all 100 work 45-hour weeks.
The rest of the time, all 100 work 40-hour weeks.
Total man-hours for the year are 208,000.
Of course, all overtime is paid at a rate of time and a half.
(More on the employees later.)
Since no employee makes over $100,000, the employer share of social security tax and medicare tax combined is .0765 of all income.
As you can see, the seasonal-affected workforce costs an additional $60,000 in payroll and $4,590 in employer-paid Social Security and Medicare taxes for the same work-load.* The steady, year-round workforce is a much more cost-effective business model which would allow for greater profitability, expansion, more employees, and lower-priced product. Except for the Inventory Tax. The seasonal-adjusted workforce, while less efficient, is less costly due specifically to the additional cost of that hidden tax. But it produces higher-priced product, less profitability, less expansion (and even possibly contraction) fewer new-hires (and possibly even permanent layoffs).
Now, back to the employees themselves. In the seasonal-affected workforce, half the employees are out of work and getting paid half-pay in Unemployment Benefits, so they suffer hardship. Who are these employees that get to suffer hardship as the businesses try to be cost-effective? Most likely, they’re the newest employees, the ones lower on the economic rung. Definitely, if it’s a Union shop, it’s the lowest employees. The working poor in the plant.
And those laid off employees will be buying less of the manufacturer’s product, meaning lower sales and more downward pressure on the economy.
So as you can see, the Inventory Tax harms businesses, employees, customers and over-all economic growth. It also cuts short the tax revenue States and the Federal government can draw. It’s a lose-lose-lose for all concerned.
*There is another cost which increases the disparity between the steady work-force and the seasonal-adjusted work-force. Unemployment Tax that the employer pays. The federal government has its own range of rates and each state has its own range of rates to add to the federal government’s rate. The range of rates depends in part on whether an employer lays people off or “never lays people off.” If an employer or an employer classification has a high layoff rate, that employer or employer classification pays a higher rate.
The Federal Unemployment Tax Rate is.062 of the first 7000 or $434 but it has a Discount which can drop it down to .008 of the first 7000 or $54. The Ohio Unemployment Tax Rate (pdf) has a minimum of .003 of the first 9000 or $27 and a maximum of .092 of the first 9000 or $828. That means an Ohio business can expect to pay anywhere from $81 per year per employee to $1,262 per year per employee in Unemployment Tax.
Cross-Posted on Caffeinated Thoughts
Cross-Posted on Common Sense Political Thought
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