2018 Indiana Tax Incentive Evaluationiga.in.gov/.../19f338a0/2018-tax-incentive-review-final.pdfreview will be conducted over a five-year cycle during which each state and local tax

2018Indiana Tax Incentive

EvaluationOffice of Fiscal and Management Analysis

Legislative Services Agency

Office of Fiscal and Management Analysis

Office of Fiscal and Management AnalysisOffice of Fiscal and Management Analysis


The Office of Fiscal and Management Analysis (OFMA) is a division of the Legislative Services Agency that performs fiscal, budgetary, and management analysis for the Indiana General Assembly.

Jessica Harmon, DirectorHeath Holloway, Deputy Director

Christopher Baker, Incentive Review TeamBill Brumbach

Mark GoodpasterCorrin Harvey

Randhir Jha, Incentive Review TeamAllison LeeuwDavid LusanKathy Norris

Seth Payton, Incentive Review TeamHeather Puletz

Alexander RaggioKaren Firestone Rossen

Kasey SaltRavi Shah

Robert J. Sigalow, Incentive Review TeamAustin Spears, Incentive Review Team

Lauren Tanselle, Incentive Review TeamLia Treffman

Contents


ContentsPreface................................................................................................................................................................iExecutive Summary...........................................................................................................................................1Introduction........................................................................................................................................................2

Tax Incentive Review Process........................................................................................................................... 2Definition of Tax Incentive.................................................................................................................................. 2Tax Incentive Review Purposes and Approaches............................................................................................ 2Tax Incentive Review Report.............................................................................................................................. 3Tax Incentive Review Schedule......................................................................................................................... 3

Hoosier Alternative Fuel Vehicle Manufacturer Investment Credit (IC 6-3.1-31.9)...................................... 6Tax Credit Description........................................................................................................................................ 6Credit Use............................................................................................................................................................ 6

Tax Credit for Natural Gas Powered Vehicles (IC 6-3.1-34.6)........................................................................ 8Economics of Converting Fleets to Natural Gas..............................................................................................9Natural Gas Powered Vehicles.........................................................................................................................10

Coal-Related Incentives.................................................................................................................................. 11Coal Conversion System Property Tax Deduction (IC 6-1.1-12-31)..................................................................... 11Incentives to Increase the Use of Coal Combustion Products (IC 6-1.1-12-34.5; IC 6-1.1-44).......................... 11Coal Combustion Product Property Tax Deduction (IC 6-1.1-12-34.5)................................................................ 12Recycled Coal Combustion Byproduct Personal Property Tax Deduction (IC 6-1.1-44)................................... 13Coal Gasification Technology Investment (IC 6-3.1-29)........................................................................................ 13

Approval of Tax Credit..................................................................................................................................... 14Coal Gasification Technology.......................................................................................................................... 15Cost of Project.................................................................................................................................................. 15

Renewable Energy Property Tax Deductions............................................................................................... 17Total Cost Savings Analysis................................................................................................................................... 19Solar Energy Heating or Cooling System Property Tax Deduction (IC 6-1.1-12-26).......................................... 19

Residential Scenario: Installation of a Solar Energy Hot Water Heater....................................................... 20Commercial Scenario: An Industrial Facility with a Solar Energy Heating Device.................................... 20

Solar Power Device Property Tax Deduction (IC 6-1.1-12-26.1)........................................................................... 21Residential Solar Panels Scenario.................................................................................................................. 21Commercial Solar Panels Scenario................................................................................................................ 21

Geothermal Energy Device Property Tax Deduction (IC 6-1.1-12-34).................................................................. 22Residential Scenario......................................................................................................................................... 22Commercial Scenario....................................................................................................................................... 22

Wind-Power Device Property Tax Deduction (IC 6-1.1-12-29).............................................................................. 23Homestead Wind Turbine................................................................................................................................. 23Industrial Wind Turbine.................................................................................................................................... 23

Hydroelectric Power Device Property Tax Deduction (IC 6-1.1-12-33)................................................................ 24Brownfield Revitalization................................................................................................................................25

Brownfield Revitalization Zone Property Tax Abatement (IC 6-1.1-42)............................................................... 25The Brownfield Revitalization Zone Designation Process........................................................................... 25Brownfield Revitalization Zone Property Tax Abatement............................................................................. 25Usage of the Abatement................................................................................................................................... 26Other Brownfield Programs Available in Indiana.......................................................................................... 26

Resource Recovery System Property Tax Deduction (IC 6-1.1-12-28.5).................................................... 28Local Option Hiring Incentive (IC 6-3.5-9)..................................................................................................... 29Aviation-Related Incentives........................................................................................................................... 31

Sales and Use Tax Exemptions.............................................................................................................................. 31Sales Tax Exemptions for Certain Aircraft (IC 6-2.5-5-8; IC 6-2.5-5-42).............................................................. 31

Aircraft Acquired for Rental or Leasing (IC 6-2.5-5-8)................................................................................... 31Purchases by Nonresidents (IC 6-2.5-5-42).................................................................................................... 32Utilization of Exemptions................................................................................................................................. 32

Sales Tax Exemption for Aircraft Parts (IC 6-2.5-5-46)......................................................................................... 33

Contents


Sales Tax Exemption for Aviation Fuel (IC 6-2.5-5-49)......................................................................................... 33Property Tax Deductions......................................................................................................................................... 35Aircraft Property Tax Deduction (IC 6-1.1-12.2).................................................................................................... 35Intrastate Aircraft Property Tax Deduction (IC 6-1.1-12.3)................................................................................... 36

Sales Tax Exemption for Recreational Vehicles and Cargo Trailers (IC 6-2.5-5-39; IC 6-2.5-2-4)............ 38Comparison to Other States........................................................................................................................... 38Examples.......................................................................................................................................................... 40Estimated Revenue Impact............................................................................................................................. 41

Motorsports-Related Incentives.................................................................................................................... 42Sales Tax Exemption for Certain Racing Equipment (IC 6-2.5-5-37).................................................................. 42Motorsports Investment District (IC 5-1-17.5)....................................................................................................... 44

Indiana Motorsports Commission.................................................................................................................. 44Indianapolis Motor Speedway Motorsports Investment District................................................................. 45Improvements and Bonds............................................................................................................................... 45Literature Review............................................................................................................................................. 46

Adoption Tax Credit (IC 6-3-3-13).................................................................................................................. 48Federal Tax Credit............................................................................................................................................ 48Indiana Tax Credit............................................................................................................................................ 49Other Adoption Resources.............................................................................................................................. 51Literature Review............................................................................................................................................. 52

Promotional Free-play Deduction (IC 4-33-13-7; IC 4-35-8-5)...................................................................... 53Gaming Industry............................................................................................................................................... 53Free-play Promotion........................................................................................................................................ 53Free-play Tax Deduction.................................................................................................................................. 54Indiana Gaming Trends................................................................................................................................... 56Literature Review............................................................................................................................................. 58

Appendix A. 2018 Property Tax Incentive Survey Methodology................................................................. AAppendix B. Tax Incentive Review Statute (IC 2-5-3.2-1)............................................................................ BAppendix C. Tax Incentive and Incentive Program Descriptions............................................................... DReferences....................................................................................................................................................... I

Preface

Office of Fiscal and Management Analysis i

PrefaceIC 2-5-3.2-1 establishes an annual review, analysis, and evaluation process for state and local tax incentives. The annual review will be conducted over a five-year cycle during which each state and local tax incentive will be reviewed at least one time. The annual tax incentive review is conducted by the Office of Fiscal and Management Analysis, Legislative Services Agency. The Office of Fiscal and Management Analysis must submit an annual report of the tax incentive review to the Legislative Council and the Interim Study Committee on Fiscal Policy. The five-year review cycle began in 2014. The prior-year reports can be found on the Indiana General Assembly’s website at https://iga.in.gov/legislative/2018/publications/tax_incentive_review/. Pursuant to IC 2-5-3.2-1, this report:• Specifies the review schedule for 2019-2023• Reviews, analyzes, and evaluates the following tax incentives and incentive programs:

◦ Hoosier alternative fuel manufacturer investment credit◦ Tax credit for natural gas powered vehicles◦ Coal conversion system property tax deduction◦ Coal combustion product property tax deduction◦ Recycled coal combustion byproduct personal property tax deduction◦ Coal gasification technology investment credit◦ Solar energy heating or cooling system property tax deduction◦ Solar power device property tax deduction◦ Geothermal energy device property tax deduction◦ Wind-power device property tax deduction◦ Hydroelectric power device property tax deduction◦ Brownfield revitalization zone property tax deduction◦ Resource recovery system property tax deduction◦ Local option hiring incentive◦ Sales tax exemption for certain aircraft◦ Sales tax exemption for aircraft parts◦ Sales tax exemption for aviation fuel◦ Aircraft property tax deduction◦ Intrastate aircraft property tax deduction◦ Sales tax exemption for recreational vehicles and cargo trailers◦ Sales tax exemption for certain racing equipment◦ Motorsports investment district◦ Adoption tax credit◦ Promotional free-play deduction

• Provides descriptive information and data relating to the tax incentives and incentive programs subject to review in 2018• Analyzes and evaluates the effectiveness and economic impacts of the tax incentives and incentive programs subject to

review in 2018 We would like to acknowledge the following agencies for their assistance in providing data that is presented and analyzed in this report:• Department of State Revenue• Indiana Economic Development Corporation• Department of Local Government Finance• All the local officials who provided data and talked with us

https://iga.in.gov/legislative/2018/publications/tax_incentive_review/.

https://iga.in.gov/legislative/2018/publications/tax_incentive_review/.

Executive Summary

Office of Fiscal and Management Analysis 1

Executive SummaryThe five-year tax incentive review schedule was developed to allow for analyses of incentives that share a common purpose, encourage similar activities, or have the same expected outcomes to be analyzed in the same year. In the last year of the five-year cycle, we analyzed the remaining incentives. While some incentives do share a common theme (achieving environmental objectives), many of the incentives either target a specific industrial sector or stand on their own.

Indiana has 13 tax incentives intended to encourage activities that promote environmental objectives. These incentives target specific projects to address the additional expense to adopt new alternative energy technology, use products made from certain recycled materials, or remediate brownfields.• The Hoosier alternative fuel vehicle manufacturing tax credit was never awarded in the 10 years it was in effect.• The limited claims of the tax credit for natural gas powered vehicles suggest that a small number of businesses were able to

benefit from the credit. In part, the limited influence of the credit may be related to the lack of access to refueling infrastructureand fuel prices.

• The coal gasification technology investment credit was established to encourage the use of Indiana coal to produce synthesisgas to generate electricity and for the production of synthesis gas to be used as a substitute for natural gas. The credit has beenapproved for one project. The low utilization of the credit indicates that coal gasification technology may not be competitive incurrent energy market conditions.

• Three property tax deductions exist or have existed to encourage the conversion of coal to gas or to use products that containcoal combustion materials: The coal conversion system deduction, coal combustion product deduction, and recycled coalcombustion byproduct personal property tax deduction. Responses to a survey conducted by the LSA indicate that neither ofthese deductions have been claimed in the past five years.

• Indiana has five property tax deductions intended to encourage the installation of renewable energy devices to provide electricity,heating, or cooling. Specifically, Indiana provides property tax deductions for the following: solar energy heating or coolingsystems, solar power devices, geothermal energy devices, wind-power devices, and hydroelectricity devices. These programshave the potential to influence the decisions of limited group of property owners under very specific conditions.

• The brownfield investment revitalization zone property tax abatement was established in 1997 to encourage private investmentin brownfield remediation and reuse in designated areas. There have been no claims for this abatement in the past five years.

• The resource recovery system property tax deduction is intended to encourage the conversion of solid or hazardous wasteinto energy or other useful products. Enacted in 1979, the deduction was phased out for all eligible properties except for theIndianapolis Resource Recovery Facility. This facility still qualifies for a 95% deduction of gross assessed value.

Indiana provides five tax incentives to the aviation industry to encourage the purchase of certain aircraft, aircraft parts, and aviation fuel. The sales tax exemptions for the purchase of certain aircraft, aircraft parts, and aviation fuel are likely necessary for Indiana aviation facilities to remain competitive, given the mobility of the industry. There are two property tax deductions intended to encourage aviation activity: property tax deduction for certain aircraft and a deduction for aircraft used to provide commercial intrastate airline service. Unlike the sales tax exemptions, these incentives are not utilized.

The sales tax exemption for recreational vehicles and cargo trailers likely benefits Indiana recreational vehicle dealers as they compete for sales with states that have similar exemptions.

The promotional free-play wagering tax deduction allows Indiana gaming facilities to deduct a fixed amount of free-play promotions from their adjusted gross income. The purpose of the promotional free-play deduction is to increase the competitiveness of Indiana gaming facilities by increasing gaming activity in Indiana and stabilizing the number of casino-related jobs and tax base. While no overall conclusion can be drawn about the impact of the promotional free-play deduction, the deduction may have allowed some casinos to increase free-play offerings.

Indiana is one of three main hubs of the motorsports industry. The sales tax exemption for certain racing equipment directly benefits the motorsports industry and likely encourages motorsports business transactions in Indiana. However, the full-extent of the incentive is unknown due to data limitations. The motorsports investment district is a unique economic development program that allows Indiana to invest $92.76 million for improvements at the Indianapolis Motor Speedway. It is difficult to determine the full return on investment from this program. However, growth in incremental sales tax and income tax indicate that there may be an increase in economic activity. In addition, growth in admission fees suggests either admissions have increased or that spectators are willing to pay more for tickets.

The local option hiring incentive was intended to encourage local job creation by allowing counties and cities to use local income tax revenue to make payments to qualifying businesses related to the creation of new jobs. No qualified civil units have reported using the local option hiring incentive to the Indiana Economic Development Corporation.

In 2014, Indiana enacted an adoption income tax credit to supplement the federal adoption tax credit that helps families offset the cost of adoption. The data are insufficient at this time to determine whether this program is effective.

Introduction


IntroductionA tax incentive is a provision of the tax code aimed at encouraging a taxpayer to conduct specified activities or undertake cer-tain behavior by reducing the taxpayer’s tax liability in relation to the targeted activity or behavior. Over the course of the last 30 to 40 years, tax incentives have become a significant and growing part of local tax laws, state tax codes, and the federal Internal Revenue Code. At the forefront of this expansion in tax incentive use has been the growth in the number and scale of economic development tax incentives tied to business employment, wages, and investment. In contrast to direct spending programs, tax incentive programs direct public funding to certain purposes by foregoing tax revenue. Moreover, tax incentive programs are different than direct-spending programs because tax incentives typically are not subject to the periodic scrutiny that direct-spending programs are subject to through the normal budgetary process.

Tax Incentive Review ProcessIC 2-5-3.2-1 establishes an annual review, analysis, and evaluation process for state and local tax incentives. Appendix B contains the text of IC 2-5-3.2-1. The tax incentive review is conducted by the Office of Fiscal and Management Analysis, Legislative Services Agency. The annual tax incentive review is to be conducted over a five-year cycle with each tax incentive being reviewed at least one time during that review cycle. The statute requires the Legislative Services Agency to develop and publish a multiyear review schedule specifying the year in which each tax incentive will be reviewed.

The five-year review cycle must be conducted twice. The first five-year review cycle began during the 2014 legislative interim and will be completed with the review of the incentives in this report. The second five-year cycle will begin during the 2019 legislative interim and will be completed with the tax incentive review conducted during the 2023 legislative interim.

The statute requires the Legislative Services Agency to submit a report containing the results of the annual tax incentive review to the Legislative Council and the Interim Study Committee on Fiscal Policy. The report must be submitted before October 1 each year. The statute requires the Committee to hold at least one public hearing between September 30 and November 1 at which the Legislative Services Agency presents its report and the Committee receives information concerning tax incentives. In addition, the Committee is required to submit to the Legislative Council its recommendations relating to the tax incentive review. The statute requires the General Assembly to use the Legislative Services Agency’s report and the Committee’s recommendations to determine whether a tax incentive (1) is successful, (2) is provided at a cost that can be accommodated by the state’s biennial budget, and (3) should be continued, amended, or repealed.

Definition of Tax IncentiveIC 2-5-3.2-1 defines a tax incentive as a benefit provided through a state or local tax that is intended to alter, reward, or subsidize a particular action or behavior by the tax incentive recipient, including a tax incentive providing a benefit intended to encourage economic development.

A tax incentive includes an exemption, deduction, credit, preferential rate, or other tax benefit that reduces a taxpayer’s state or local tax liability or results in a tax refund. A tax incentive also includes a program where revenue is dedicated by a political subdivision to pay for improvements in an economic or sports development area, a community revitalization area, an enterprise zone, a tax increment financing district, or a similar area or district.

Tax Incentive Review Purposes and ApproachesIC 2-5-3.2-1 specifies that the purpose of the annual tax incentive review is to (1) ensure tax incentives accomplish the purposes for which they were enacted, (2) provide information to allow the inclusion of the cost of tax incentives in the biennial budgeting process, and (3) provide information needed by the General Assembly to make policy choices about the efficacy of tax incentives. IC 2-5-3.2-1 lists a variety of descriptive and analytical information that could accomplish these tax incentive review goals. This information is as follows:• The attributes and policy goals of the tax incentive.• The tax incentive’s equity, simplicity, competitiveness, public purpose, adequacy, and conformance with the purposes of

the legislation enacting the incentive.• The activities the tax incentive is intended to promote and the effectiveness of the tax incentive in promoting those

activities.

Introduction


• The number of taxpayers applying for, qualifying for, or claiming the tax incentive, and the tax incentive amounts (indollars) claimed by taxpayers.

• The tax incentive amounts (in dollars) claimed over time.• The tax incentive amounts (in dollars) claimed by industry sector.• The amount of income tax credits that could be carried forward for the ensuing five-year period.• An estimate of the economic impact of the tax incentive, including a return on investment calculation, cost-benefit analysis,

and direct employment impact estimate.• The estimated state cost of administering the tax incentive.• The methodology and assumptions of the tax incentive review, analysis, and evaluation.• The estimated leakage of tax incentive benefits out of Indiana.• Whether the tax incentive could be made more effective through legislative changes.• Whether measuring the economic impact of the tax incentive is limited due to data constraints and whether legislative

changes could facilitate data collection and improve the review, analysis, or evaluation.• An estimate of the indirect economic activity stimulated by the tax incentive.

Tax Incentive Review ReportIC 2-5-3.2-1 requires the Legislative Services Agency to submit a report containing the results of the annual tax incentive review to the Legislative Council and the Interim Study Committee on Fiscal Policy. The report must be submitted before October 1 each year. The report must include at least the following:• A detailed description of the review, analysis, and evaluation for each tax incentive reviewed.• Information to be used by the General Assembly to determine whether a reviewed tax incentive should be continued,

modified, or terminated, the basis for the recommendation, and the expected impact of the recommendation on the state’seconomy.

• Information to be used by the General Assembly to better align a reviewed tax incentive with the original intent of thelegislation that enacted the tax incentive.

Tax Incentive Review ScheduleA total of 24 tax incentives and one incentive program were scheduled for review in 2018, and 38 incentives were evaluated between 2014 and 2017. The tax incentives included on the review schedule are associated with the corporate income tax and individual income tax (27 tax incentives), the property tax (22 tax incentives), the sales tax (6 tax incentives), and other taxes (1 tax incentive). The 6 incentive programs are tax increment financing (TIF), enterprise zones (EZs), community revitalization enhancement districts (CREDs), professional sports and convention development areas (PSCDAs), certified technology parks (CTPs), and the motorsports investment district. The review schedule for 2018 is specified in Table A.1.

Table A.1. Tax Incentives and Incentive Programs Scheduled for Review in 2018Tax Tax Provision2018

Corporate Income Tax (C)/ Individual Income Tax (I)

• Adoption Tax Credit (Effective 2015) (I)• Hoosier Alternative Fuel Vehicle Manufacturing Investment Credit (C)(I)• Coal Gasification Technology Investment Credit (C)(I)• Tax Credit for Natural Gas Powered Vehicles (C)(I)• Local Option Hiring Incentive (I)

Property Tax • Aircraft Deduction• Brownfield Revitalization Zone Deduction• Coal Combustion Product Deduction• Coal Conversion System Deduction• Geothermal Energy Device Deduction• Hydroelectric Power Device Deduction• Intrastate Aircraft Deduction• Recycled Coal Combustion Byproduct Personal Property Tax Deduction• Resource Recovery System Deduction• Solar-Energy Heating or Cooling System Deduction• Solar Power Device Deduction• Wind-Powered Devices Deduction

Introduction


Table A.2 specifies the review schedule for the second five-year cycle beginning during the 2019 legislative interim. Appendix C contains the list of tax incentives and incentive programs on the review schedule, including descriptions.

Table A.2. Tax Incentives and Incentive Programs Scheduled for Review 2019-2023Tax Tax Provision

2019Corporate Income Tax (C)/ Individual Income Tax (I)

• Residential Historic Rehabilitation Credit (I)• Neighborhood Assistance Credit (C)(I)• Individual Development Accounts Credit (C)(I)

Property Tax • Low-Income Housing Exemption• Personal Property Abatements in an Economic Revitalization Area• Real Property Abatements in an Economic Revitalization Area• Tax Increment Financing


• Earned Income Tax Credit (I)• Indiana 529 College Savings Account Contribution Credit (I)• Indiana Colleges and Universities Contribution Credit (C)(I)• Indiana Partnership Long-Term Care Insurance Premiums Deduction (I)• School Scholarship Contribution Credit (C)(I)


• Community Revitalization Enhancement District Credit (C)(I)• Enterprise Zone Employment Expense Credit (C)(I)• Enterprise Zone Employee Deduction (I)• Industrial Recovery Credit (C)(I)

Property Tax • Brownfield Revitalization Zone Deduction• Enterprise Zone Investment Deduction• Entrepreneur and Enterprise District Personal Property Exemption• Entrepreneur and Enterprise District Vacant Building Abatement

Other • Community Revitalization Enhancement District• Enterprise Zones• Entrepreneur and Enterprise District Pilot Program

Tax Tax Provision2018

Sales Tax • Aircraft Parts Exemption• Aviation Fuel Exemption• Cargo Trailers/RVs Sold to Certain Nonresidents Exemption• Certain Aircraft Exemption• Certain Racing Equipment Exemption

Other • Motorsports Investment District• Promotional Free-Play Deduction

Introduction


Tax Tax Provision2022

Corporate Income Tax (C)/ Individual Income Tax (I)

• Economic Development for a Growing Economy (EDGE) Credit (C)(I)• Headquarters Relocation Credit (C)(I)• Hoosier Business Investment Credit (C)(I)• Patent-Derived Income Deduction (C)(I)• Research Expense Credit (C)(I)• Venture Capital Investment Credit (C)(I)

Property Tax • Certified Technology Park Deduction• Infrastructure Development Zone Deduction

Sales Tax • Certain Racing Equipment Exemption• Research and Development Property

Other • Certified Technology Parks• Professional Sports and Convention Development Areas• Motorsports Investment District


• Adoption Tax Credit (I)• Coal Gasification Technology Investment Credit (C)(I)• Deduction for Contributions to a Regional Development Authority Infrastructure Fund (C)(I)• Local Option Hiring Incentive(I)

Property Tax • Aircraft Deduction• Coal Combustion Product Deduction• Coal Conversion System Deduction• Geothermal Energy Device Deduction• Hydroelectric Power Device Deduction• Intrastate Aircraft Deduction• Resource Recovery System Deduction• Solar-Energy Heating or Cooling System Deduction• Solar Power Device Deduction• Wind-Powered Device Deduction

Sales Tax • Aircraft Parts Exemption• Aviation Fuel Exemption• Cargo Trailers/RVs Sold to Certain Nonresidents Exemption• Certain Aircraft Exemption

Other • Promotional Free-play Deduction

Hoosier Alternative Fuel Vehicle Manufacturer Investment Credit (IC 6-3.1-31.9)



The Hoosier alternative fuel vehicle manufacturer investment credit was enacted to foster job creation with higher wages, reduce dependence on imported energy sources, and reduce air pollution as the result of the manufacture or assembly of alternative fuel vehicles. The credit was effective beginning in tax year 2007 and expired on December 31, 2016. The credit was never awarded by the Indiana Economic Development Corporation (IEDC).

Tax Credit DescriptionTaxpayers could have requested credits by submitting applications to the IEDC before a qualifying investment was made. A qualified investment was defined as the amount of a taxpayer’s expenditures in Indiana that are reasonable and necessary for the manufacture or assembly of alternative fuel vehicles. The statute defines alternative fuel vehicles as passenger cars or light trucks with a gross weight of 8,500 lbs. or less that are designed to operate on at least one alternative fuel. The alternative fuels listed in statute are:• Methanol, denatured ethanol, and other alcohols• Mixtures containing 85% or more by volume of methanol, denatured ethanol, and other alcohols with gasoline or other fuel• Natural gas• Liquefied petroleum gas• Hydrogen• Coal-derived liquid fuels• Nonalcohol fuels derived from biological material• P-Series fuels• Electricity• Biodiesel or ultra-low sulfur diesel fuel

The credit equaled up to 15% of the taxpayer’s qualified investment. The credit percentage was determined by the IEDC. The credit could be claimed against a taxpayer’s adjusted gross income tax, financial institutions tax, or insurance premiums tax liability. The credit was nonrefundable, but unused credits could be carried forward for up to nine consecutive years. Unused credits could not be carried back. The legislation enacting the tax credit expired on December 31, 2012. In 2012, the tax credit was extended until tax year 2016. The tax credit as not been awarded since the extension.

Before the credit could be approved, the IEDC was required to enter into an incentive agreement with the taxpayer based on a proposed project to manufacture or assemble alternative fuel vehicles that would create new jobs, increase wage levels, or involve substantial capital investment in Indiana. The IEDC would base these agreements on whether or not certain conditions existed, including a certain level of wages, reducing air pollution, and that the receipt of the tax credit was a factor in the applicant’s decision to complete the project. Also, the taxpayer must agree to maintain operations for at least 10 years and pay employees at least 150% of the state’s minimum wage. The taxpayer could not be granted more than one of the following credits for the same project: alternative fuel vehicle manufacturer investment credit (expired), capital investment credit (repealed), community revitalization enhancement district credit, enterprise zone investment cost credit (repealed), Hoosier business investment credit, industrial recovery credit, military base investment cost credit (repealed), military base recovery credit (repealed), or venture capital investment credits.

Credit UseAs mentioned previously, the IEDC has not approved or authorized any alternative fuel vehicle credits. There were a small number of claims within the LSA’s income tax database. However, those claims are likely erroneous and would be subject to audit by the Department of State Revenue.

The non-use of the tax credit could be due to businesses seeking, more lucrative tax credits. This conclusion is based on the fact that there are alternative fuel vehicle component producers and alternative fuel vehicle manufacturers in Indiana. Cummins, Remy, and Delphi produce hybrid, electric, and natural gas engines for heavy- or light-duty vehicles. The Honda Civic Natural Gas Vehicle was the only non-fleet natural gas-fuel sedan manufactured in the United States, and it was manufactured in Indiana.



An examination of the IDEC Transparency Portal shows that a substantial number of vehicle manufacturers in Indiana were awarded refundable EDGE (Economic Development for a Growing Economy) credits. Whereas it was not verified that these contracts were awarded for alternative fuel vehicle projects, it is likely that qualifying manufacturers have sought more lucrative credits like EDGE, or the Hoosier business investment tax credit, or grants from the Skills Enhancement Fund.

The number of alternative fuel vehicles in use has consistently increased in the last two decades. It is estimated that alternative fuel vehicle manufacturing and assembly will continue to grow in the United States. In 2018, the IEDC committed to $3.8 million in other tax credits and $500,000 in training grants to SF Motors, an electric vehicle maker. This demonstrates that the IEDC was able to use different tax incentive programs to provide tax benefits to a company. Based on the lack of use, it could be concluded that the Hoosier alternative fuel vehicle manufacturer investment tax credit did not incentivize investment and jobs in Indiana.

Tax Credit for Natural Gas Powered Vehicles (IC 6-3.1-34.6)


Tax Credit for Natural Gas Powered Vehicles (IC 6-3.1-34.6)The tax credit for natural gas powered vehicles was created in 2013 to encourage businesses to purchase commercial natural gas vehicles (NGVs). The credit was available for a limited time. It was effective for qualifying vehicles put into service between CY 2013 and CY 2016. No new credits have been awarded after December 31, 2016. Even though the tax credit for natural gas powered vehicles expired, it provides an opportunity to discern whether a short-term incentive could affect consumer preferences.

For a vehicle to qualify for the credit, it had to have a gross vehicle weight rating of at least 33,000 lbs. and be powered by either compressed natural gas (CNG) or liquefied natural gas (LNG). Vehicles with a gross weight of 33,000 lbs. are considered heavy-duty vehicles. Vehicles with similar gross weight ratings include cement mixers, dump trucks, fire trucks, fuel trucks, heavy semi tractors, refrigerated vans, semi sleepers, and tour buses (U.S. Department of Energy, n.d.). These types of vehicles all require a commercial driver’s license to operate in Indiana. Also, the eligible vehicle must be purchased or leased from a dealer located in Indiana.

The credit per vehicle equals the lesser of 50% of the difference between the price of the qualified vehicle and the price of a comparably equipped vehicle that is powered by a gasoline or diesel engine or $15,000. Based on the available research, taxpayers would likely receive the maximum $15,000 credit. The credit had two caps: • A single taxpayer could not be granted more than $150,000 per taxable year.• The total annual credits allowed for all taxpayers could not exceed either $3 million or the amount of the alternative fuel

tax collected in the taxable year, whichever value was less.

The alternative fuel tax revenue was significantly less than $3 million. Table 2.1 contains the alternative fuel tax collections for FY 2014 through FY 2017.

Because of the annual aggregate credit limit, the DOR awarded credits on a first-come, first-served basis. The credit could be used to offset individual income, corporate income, financial institutions, and insurance premiums tax. Taxpayers may carry forward unused credits for up to six years, but the credit may not be carried back or refunded. The total number of claims by taxable year are in Table 2.2.

Table 2.1. Alternative Fuel Tax Table 2.2. Tax Credit for Natural Gas Powered Vehicle ClaimsFiscal Year Receipts Tax Year Number of Claims Credit Amounts

2014 $232,400 2014 18 $125,1042015 $864,900 2015 19 $343,3622016 $692,300 2016 N/R N/R2017 $364,700 Source: Data by the Indiana Department of State Revenue, analysis by the Office of Fiscal and Management Analysis.

Source: Indiana Department of State Revenue

This credit is unique because it had a revenue source dedicated to fund the program. The same legislation that enacted the tax credit also temporarily removed the sales tax exemption for CNG and LNG purchased to fuel motor vehicles engaged in public transportation for people and property (IC 6-2.5-5-27(b)). This is known as the alternative fuel tax. The alternative fuel tax equaled 7% of the retail price of the natural gas sold to power a motor vehicle. The alternative fuel tax has expired, and CNG and LNG are currently exempt from sales tax if purchased for public transportation.

In 2015, the statute was amended to allow certain taxpayers to claim a sales tax credit. Taxpayers who put into service a qualifying NGV in CY 2013 were eligible to claim a credit against sales tax liabilities on transactions involving natural gas products purchased after June 30, 2015, and before January 1, 2017, if it was subject to the alternative fuel tax. Taxpayers who qualified for the sales tax credits were subject to different caps. The credit per vehicle was still limited to $15,000, but a taxpayer could claim more than $150,000 in a single year. The sales tax credits could only be used to offset liabilities within those 18 months. They could not be applied to liabilities for any other time.

N/R= Five or fewer filers, count not reportable.



Economics of Converting Fleets to Natural Gas Businesses likely consider several factors when deciding to purchase a NGV. A study conducted for the U.S. Department of Energy found that while NGVs do have lower emissions than conventional fuel vehicles, the primary incentive to replace gasoline and diesel vehicles with NGVs is to save money on fuel costs (Whyatt, 2010). CNG fuel has been historically less expensive than gasoline or diesel. Figure 2.1 compares the average retail gasoline, diesel, and natural gas fuel prices. Table 2.3 contains national average fuel prices in April 2018. However, the initial price of a NGV is more expensive. A Wall Street Journal investigation found that a NGV was about $50,000 more expensive than an equivalent gasoline or diesel-powered vehicle (Tita, 2014).

Table 2.3. National Average Fuel Prices in April 2018Fuel PriceCNG $2.18/GGELNG $2.57/DGEGasoline $2.67/gallonDiesel $3.03/gallonSource: U.S. Department of Energy

Figure 2.1. U.S. Average Retail Fuel Prices

Source: U.S. Department of Energy, Alternative Fuels Data Center.

The average heavy-duty vehicle travels about 68,000 miles a year and uses approximately 12,800 gasoline-gallon equivalent units (U.S. Department of Energy, n.d.). Using the average price information and assuming a NGV and a conventional fuel vehicle use the same amount of fuel to travel one mile, it could take about 4.5 years to save enough money on fuel costs to recoup the additional expense of purchasing a NGV. The discount provided by the tax credit reduces the time needed to regain the upfront costs by about 16 months.

However, the alternative fuel tax imposed while the credit was in effect acted as a disincentive because it increased the price of the fuel for the qualifying vehicles. Using the same assumptions, increasing the average CNG fuel price by 7% would add an additional month to the time needed to save enough money on fuel costs to offset the higher initial price of a NGV.

The financial impact or the alternative fuel tax appears to be minimal, but the perception of imposing the alternative fuel tax could be sufficient to deter some purchases. The adoption of the sales tax credit in 2015 addressed the disincentive by allowing taxpayers who purchased vehicles in the first year of the program to request a credit for the alternative fuel tax paid on the fuel necessary to operate the new vehicles.

While the credit did provide a discount to the price of a NGV, it did not address one of the other disadvantages of NGVs: access to refueling stations (Soltani-Sobh, Heaslip, Bosworth, & Barnes, 2016). Because NGVs usually weigh more due to larger fuel tanks, they require more refueling (Whyatt, 2010). A study by Askin et. al. (2015) suggests that CNG fleets could be viable in urban areas that could support or have access to a dedicated infrastructure. Indiana has approximately 2.7% of the nation’s public access CNG stations. The Indiana Office of Energy Development (n.d.) reports that Indiana has 26 public CNG stations and 1 LNG station. The U.S. Department of Energy also lists 10 private CNG stations. Approximately, 26% of the stations are located near Indianapolis.



Natural Gas Powered VehiclesThe share of NGVs on the road is small compared to gasoline and diesel-powered vehicles. According to the U.S. Department of Energy, there was an estimated 107,000 CNG vehicles on the road nationwide in 2015 (U.S. Department of Energy, n.d.). The demand for NGV varies from year-to-year. The U.S. Energy Information Administration reports that 38,200 CNG vehicles were either manufactured or converted between 2012 and 2016. About 68% of NGVs on the road or produced are classified as heavy-duty (U.S. Energy Information Administration, n.d.). Unfortunately, data on the number of heavy-duty NGVs currently on the road in Indiana are not available. The U.S. Department of Energy does provide estimates of the fuel consumed by Indiana’s transportation sector which can serve as a proxy for vehicle use. Table 2.4 shows the consumption by fuel type in gasoline-gallon equivalent units. All the natural gas consumed by the transportation sector represents less than 2% of the gasoline and diesel consumed in Indiana.

Table 2.4. Transportation Fuel Consumption In Indiana in Gasoline-Gallon Equivalent UnitsYear Gasoline Diesel Natural Gas2011 2,944 1,572 862012 2,921 1,529 612013 2,966 1,708 632014 2,979 1,778 622015 3,041 1,723 612016 3,071 1,643 76

Source: U.S. Department of Energy

ConclusionThe credit was designed to help offset the higher initial cost of purchasing a NGV instead of a gasoline or diesel-powered vehicle. The small number of claims suggests a limited number of businesses were able to benefit from the credit, but it is unknown whether the credit influenced their purchasing decision. It could have influenced businesses considering purchasing NGVs if they had access to the necessary refueling infrastructure and cost was the only consideration. However, the imposition of the alternative fuel tax on the fuel needed to power the vehicles did provide a disincentive, but that was remedied later by allowing certain taxpayers buying new NGVs to receive a sales tax credit for the alternative fuel tax paid on the fuel. The credit by itself was unlikely to result in a widespread conversion of fleets from gasoline and diesel to natural gas. However, if the refueling infrastructure expands and gasoline and diesel fuel prices increase considerably, NGVs may become more appealing to businesses.

Coal-Related Incentives


Coal-Related IncentivesMultiple coal-related incentives exist or have existed to encourage conversion of coal to gas or to encourage use of coal combustion products. Three of these incentives attempt to encourage behavior through property tax deductions and one uses an adjusted gross income (AGI) tax credit. The three property tax deductions are the: (1) coal conversion system property tax deduction; (2) coal combustion product property tax deduction; and (3) recycled coal combustion byproduct personal property tax deduction. The AGI tax credit is the coal gasification technology credit.

The coal conversion system property tax deduction was meant to increase the conversion of coal into a gaseous or liquid fuel or char, but it has not been available for 30 years. The coal combustion product deduction and recycled coal combustion byproduct personal property tax deduction are intended to encourage the use of coal combustion products (CCPs). The CCP deduction attempts to increase the use of CCPs by allowing a deduction for buildings that use CCP material, while the recycled coal combustion byproduct personal property deduction applies to the machinery that makes the CCP. The AGI tax credit was established to encourage the use of Indiana coal to produce synthesis gas that generates electricity, and for the production of synthesis gas to be used as a substitute for natural gas.

Coal Conversion System Property Tax Deduction (IC 6-1.1-12-31)Enacted in 1980, the coal conversion system property tax deduction reduced the property taxes on property used to convert coal into a gaseous or liquid fuel or char. It was available for property taxes paid from 1981 through 1988. The deduction amount was equal to 95% of the system’s assessed value multiplied by the percent of the coal that was converted in the previous year that came from Indiana. The deduction has not been available for 30 years.

Incentives to Increase the Use of Coal Combustion Products (CCPs) (IC 6-1.1-12-34.5) (IC 6-1.1-44)The coal combustion product property tax deduction and the recycled coal combustion byproduct personal property deduction were established to encourage the recycling of the materials left behind after coal is burned to generate electricity. Residual materials are often referred to as coal combustion products (CCPs), coal combustion byproducts (CCBs), or coal ash. Rather than disposing of the material in landfills and surface impoundments, which adds costs and has the potential to damage the environment, some material can be sold for various industrial, agricultural, and environmental uses.

Table 3.1 shows how the five types of CCPs are produced and utilized. Table 3.2 shows the amount of CCPs produced and utilized in the United States in 2013 and the forecasted utilization for 2033 from the American Road and Transportation Builders Association.

Table 3.1. Production and Use of Coal Combustion Product MaterialsCoal Combustion

Product Production Process Some Industrial Uses

Fly Ash When pulverized coal is burned in a dry bottom boiler, emission control equipment captures the powdery material as it moves up the smoke stack.

Used in concrete to increase strength and durability.

Flue Gas Desulfurization Material

To comply with the 1990 Clean Air Act, sulfur dioxide is removed from the gas emissions by the introduction of an alkaline material (often limestone) into the gases to create gypsum.

Drywall, soil amendment that provides calcium and sulfur

Bottom Ash When pulverized coal is burned in a dry bottom boiler, the ash that is too heavy to move up the smoke stack is collected by grates beneath the furnace.

Structural fills and embankments, snow and ice control

Fluidized Bed Combustion Ash

When fluidized bed combustion boilers burn coal, the ash from both the flue and the bottom of the boiler is collected.

Mining applications for environmental protection/remediation

Boiler Slag When pulverized coal is burned in a wet bottom boiler, the ash that falls to the bottom mixes with a quenching liquid that hardens into a black glassy material.

Roofing granules and blasting grit



Table 3.2. U.S. Coal Combustion Product Production and Utilization 2013 and 2033 Projection (in Millions of Short Tons)

2013 2033 (Projected)

Coal Combustion Product Short Tons Produced

Short Tons Utilized

Utilization Rate

Short Tons Produced

Short Tons Utilized

Utilization Rate

Fly Ash 53.4 23.3 44% 54.6 35.7 65%Flue Gas Desulfurization Material 35.2 12.9 37% 38.8 22.3 57%Bottom Ash 14.5 5.6 39% 14.7 7.2 49%Fluidized Bed Combustion Ash 10.3 8.8 85% 11.8 10.6 90%Boiler Slag 1.36 0.91 67% 0.8 0.76 94%Total 114.8 51.6 45% 120.6 76.5 63%NOTE: Utilization rate is calculated from the production and utilization numbers in the report.Source: (American Road & Transportation Builders Association, 2015)

The total short tons of CCPs produced is forecasted to increase by 5% to 120.6 million in 2033, while the short tons of CCPs utilized is forecasted to increase by 48% to 76.5 million. Although the report forecasts the utilization rate to increase for each type of CCP, more than one-third of all CCPs produced in 2033 would be disposed.

There is some evidence that the utilization rate is trending towards meeting or exceeding the forecast. A 2017 report from the American Coal Ash Association stated that 56% of CCPs produced in 2016 were recycled. This was a substantial increase from the 45% utilization rate achieved in 2013 and the highest utilization rate ever recorded in the United States. From 2014 through 2016, the short tons of CCPs utilized actually decreased slightly every year, but because the short tons of CCPs produced fell by a much larger percentage, the utilization rate increased. A report released by the U.S. Energy Information Administration (2018) indicates that coal production in the United States has decreased every year since 2014, with coal consumption falling to its lowest level since 1982.

Indiana has experienced a similar trend in coal consumption. The Indiana Utility Regulatory Commission’s 2017 Annual Report found coal was used to generate 85.5% of the state’s electricity in 2007. In 2016, that number fell to 64.6%, with natural gas and wind’s share of the electricity generation increasing the most. If coal consumption continues to decrease, the CCP utilization rate could exceed the American Road & Transportation Builders Association’s forecast.

While the nation may be trending towards higher utilization overall, individual power plants vary in their ability to recycle CCPs. One Milwaukee-based utility has utilized close to 100% of its CCPs every year since 2002 with some years exceeding 100% due to old ash utilized in landfills (Larson, 2016). Other utilities use very little of their CCPs. Literature indicates that a number of factors contribute to the utilization rates at each facility including the availability of a transportation network to get CCPs to consumers, the cost of disposal, economic activity in the area, state and federal regulations, and the type of CCP produced by the facility.

Coal Combustion Product Property Tax Deduction (IC 6-1.1-12-34.5)Enacted in 2005, the coal combustion product deduction is a property tax deduction available to owners of qualified buildings that are designed and constructed to use materials with a dry weight that consists of at least 60% coal combustion products. The deduction is equal to 5% of the building’s assessed value and is available for three years. The Center for Coal Technology and Research at Purdue University determines if the building meets the requirements to qualify for the deduction.

Since CCPs are commonly used in construction materials, there are various scenarios that could qualify for the deduction. However, the most common use of CCPs, as an additive to concrete, is unlikely to qualify in most circumstances. Fly ash has both beneficial and detrimental impacts on concrete, so the concentration of fly ash must be tailored to the constraints and circumstances of a given project.



While a single ideal concentration of fly ash does not exist, most construction projects could benefit from concrete with less than 60% fly ash. However, some projects can benefit from higher concentrations. For instance, massive structures can benefit from utilizing concrete mixtures consisting of 40% to 60% or more fly ash if reducing heat and thermal cracking are the primary concerns (Thomas, 2007). Drywall that contains gypsum from flue gas desulfurization would meet the 60% CCP requirement, as would roofing granules made from CCPs. There are likely other CCP uses that would qualify for individual construction projects.

The LSA’s 2018 Property Tax Incentive Survey results indicate that no counties granted a coal combustion product property tax deduction in the past five years. Given that the deduction equals only 5% of the building’s assessed value and lasts for just three years (abatements for real property can last 10 years and are typically equal to a substantially larger portion of the property’s assessed value), it is unlikely any potential recipient of the deduction would be incentivized to utilize coal combustion products in the construction of their building unless the CCPs are already competitive when compared with the costs of alternative construction materials.

Recycled Coal Combustion Byproduct Personal Property Tax Deduction (IC 6-1.1-44)Enacted in 2003, the recycled coal combustion byproduct personal property tax deduction allows a manufacturer to receive a personal property tax deduction equal to 15% of the assessed value of the equipment used in the manufacturing of recycled products made from coal combustion byproducts. In order to receive the deduction, the manufacturer must be:(A) A new business(B) An existing business that expands its operations in the year it claims the deduction to include the manufacturing of

recycled components(C) An existing business that already manufactures the recycled components and increases its purchases of coal combustion

byproducts by at least 10% over the highest amount the business spent in the previous three years

The deduction is only available in the first year the investment property is subject to assessment.

The LSA’s 2018 Property Tax Incentive Survey results indicate that no counties granted a coal combustion product property tax deduction in the past five years.

Coal Gasification Technology Investment (IC 6-3.1-29)The coal gasification technology investment credit was established to encourage the use of Indiana coal to produce synthesis gas to generate electricity and for the production of synthesis gas to be used as a substitute for natural gas. The tax credit was intended to create jobs with higher wages, reduce air pollution caused by the generation of electricity through fossil fuels, and promote investment in integrated coal gasification power plants and fluidized bed combustion technology. Qualified investment is defined as a taxpayer’s expenditures for all real and tangible personal property incorporated in and used as part of an integrated coal gasification power plant, or a fluidized bed combustion technology and transmission equipment located at the site to serve the plant. To be eligible for this credit, the facility must meet several statutory requirements, including being placed in service.

The credit equals 10% of the first $500 million in qualified investments in an integrated coal gasification power plant and 5% of the qualified investment that exceeds $500 million. The credit for fluidized bed combustion technology equals 7% of the first $500 million invested and 3% of the investment that exceeds $500 million. The tax credit may be claimed against a taxpayer’s individual adjusted gross Income (AGI), corporate AGI, financial institutions, insurance premiums, and utility receipts tax liability. The credit is refundable if the taxpayer making the investment sells substitute natural gas to the Indiana Finance Authority; otherwise the credit is nonrefundable.

The legislation establishing the credit for integrated coal gasification facilities was passed by the 2005 Indiana General Assembly. The credit applies to taxable years beginning after December 31, 2005. In 2006, the credit was expanded to include fluidized combustion technology. A taxpayer planning to make a qualified investment must apply to the Indiana Economic Development Corporation (IEDC) and receive approval through a written agreement before they make the investment. If approved, the credit may be claimed once the facility is operational. The taxpayer must enclose the certificate of compliance from the IEDC along with their return.



The credit must be taken in 10 annual installments. The annual amount of the credit equals the lesser of the total amount of credit awarded divided by 10 or the greater of: (1) the utility’s total state tax liability for the taxable year multiplied by 25%; or (2) the utility’s total utility receipts tax liability for the taxable year.

Taxpayers may assign part or all of the credit to one or more utilities that enter into a contract to purchase electricity or substitute natural gas from the taxpayer. The contract must be approved by the Indiana Utility Regulatory Commission. A tax credit assigned to a taxpayer must be taken in 20 annual installments. The total amount of the taxpayer’s credit that may be assigned in any taxable year may not exceed: (1) the total approved credit amount divided by 20 and multiplied by (2) the percentage of Indiana coal used in the taxpayer’s integrated coal gasification power plant or fluidized bed combustion technology in the taxable year for which the annual installment of the credit is allowed. The part of the amount that may be assigned to any one utility with respect to the taxable year may not exceed the greater of: (1) the utility’s total state tax liability for the taxable year multiplied by 25% or (2) the utility’s total utility receipts tax liability for the taxable year.

A taxpayer who makes a qualified investment in an integrated coal gasification power plant and enters into a contract to sell substitute natural gas to the Indiana Finance Authority may choose to claim the credit as a refundable tax credit for a period of 20 years. The amount of refundable credit for one taxable year is equal to: (1) the total approved credit amount divided by 20 and multiplied by (2) the ratio of Indiana coal to total coal used in the taxpayer’s integrated coal gasification power plant in the taxable year.

Approval of Tax CreditA tax credit of up to $150 million was approved for the power project in Edwardsport, Indiana. No other projects have been approved for the tax credit. A tax credit agreement was entered into by Duke Energy Indiana, Inc., the IEDC, and the State Budget Agency with an effective date of March 31, 2010. The contract specified that the maximum approved credit amount would be $142.5 million, but the credit would increase to $150 million if the approved project cost was higher than $2.35 billion (IEDC Transparency Portal).

The agreement estimated that the construction phase of the project would create 900 to 2,000 construction jobs and $26.9 million in state tax revenue. It further estimated that, after beginning operations, the project would create 300 mining jobs that would pay $18 million annually in wages. The agreement projected the use of 1.5 million tons of Indiana coal per year. It also estimated that about 79 to 99 full-time jobs would be created at the plant and pay above 125% of the average wage in Knox County, Indiana. Further, the agreement estimated that the project would result in $13 million annually in state tax revenues after it was placed in service (IEDC Transparency Portal).

In June 2013, Duke Energy Indiana, Inc., put into service the coal gasification plant in Edwardsport in Knox County. The Edwardsport IGCC project includes: (1) an activated carbon bed for the absorption of mercury; (2) two heat recovery steam generators, each of which is equipped with selective catalytic reduction for nitrogen oxide control; and (3) a multiple-cell cooling tower. The plant has a capacity of 618 MW. According to Duke Energy, the plant uses 1.7 to 1.9 million tons of Indiana and Midwestern coal per year. They claim that the coal used each year supports an estimated 170 mining jobs, and the plant employs an estimated 110 to 120 people.

Since the final cost of the project was above $3.5 billion, it is estimated that the maximum approved credit amount would be $150 million. The credit will be claimed over 10 years from tax years 2014 to tax year 2023. The credit is estimated to reduce state General Fund revenues by up to $15 million annually between FY 2014 and FY 2023. Duke Energy Indiana also reports that it has executed contracts in excess of $950 million with utility companies to sell electricity. This would allow Duke Energy to assign the tax credit to those utility companies.

No other tax credits have been approved. Indiana Gasification LLC, a subsidiary of Leucadia National Corporation, had planned an investment of $2.8 billion in Rockport, Indiana to build a coal gasification plant. The project was suspended due to feasibility issues according to available information.



Coal Gasification TechnologyThe U.S. Department of Energy explains that gasification is a technological process that uses heat, pressure, and steam to convert any carbon-based raw material into synthesis gas, or syngas. The resulting syngas is comprised primarily of carbon monoxide, hydrogen, and occasionally other gaseous compounds. This product resembles natural gas. Coal constitutes 80% of the feedstock for gasification. Petcoke and petroleum are some of the other fuels used for gasification. The primary products from the coal gasification projects are electricity, substitute natural gas, gasoline, and chemicals. Chemicals and gaseous and liquid fuels are the bulk of end use applications from the gasification process. Electricity accounts for only about 5% of the end product (NETL, USDOE).

The 2010 Worldwide Gasification Database revealed that the worldwide gasification capacity has continued to grow in the past several decades and was at 70,817 megawatts thermal (MWth) of syngas output from 144 operating plants with a total of 412 gasifiers. Industry reports estimate that by 2020, about 650 plants with more than 2,000 gasifiers will have a capacity of over 250,000 MWth of syngas. This technology is more prevalent in the Asia-Pacific region. North America accounts for less than 5% of the production estimates (Higman Consulting, GSTC). The coal to electricity generation model similar to the Edwardsport plant is a very small share of the overall gasification market. This is primarily because, despite advances in gasification technologies over the past several decades, the costs of gasification systems remain high. The larger capital investment required for bigger plants and the accompanying financial risk have become significant barriers to market penetration.

Indiana’s first coal gasification plant was the Wabash Valley Power plant which began operations in Vigo County in November 1995. The project was one of the first demonstrations of coal gasification used to produce electricity. Since this project predated the enactment of the coal gasification tax credit, it did not receive the tax credit. In 2000, the Wabash Valley Power plant in Indiana and the Polk Power Station in Tampa Florida were the only two coal gasification plants producing electricity in the United States. When compared to Duke’s Edwardsport plant, Polk and Wabash were smaller facilities with less than 300 MW in capacity. In 2016, the Wabash Valley Power Plant terminated operation after 20 years of operations. In the same year, the Polk Power Plant moved to substantially use natural gas instead of gasified syngas as its fuel. This was a result of the lower price of natural gas as compared to the cost of syngas (USDOE).

Even with a higher cost, the coal gasification technology is considered an option because of the potential to reduce air pollution emissions caused by coal. The U.S. Department of Energy lists the status of 59 proposed gasification plants. This database includes all gasification plants classified as active or canceled in the last decade. About 15 of these projects planned to produce electricity. However, 10 of those projects that were considering using coal as fuel have been delayed, canceled, or changed the fuel source to natural gas. The database does not include facilities that are currently operating. Since 2000, there were only two major coal gasification plants in the United States using coal as a feedstock to generate electricity: the Duke Energy plant at Edwardsport, Indiana and the Kemper Power plant, in Kemper County, Mississippi. Due to operational costs and efficiency issues, the Kemper Power plant stopped using the coal gasification process to generate electricity.

Cost of ProjectThe construction cost for Duke Energy’s Edwardsport plant increased from an estimated $1.9 billion to more than $3.5 billion. Assuming that the taxpayer will receive $150 million in tax credits, this is about 4% of the total cost of construction. The project is largely funded by utility consumers through charges built into their electricity rates. Indiana Utility Regulatory Commission approved an agreement that allowed Duke Energy to pass up to a maximum of $2.6 billion of the construction costs to the consumers. Electric rates in Indiana include a number of components including a base rate, costs for fuel, environmental compliance, regional transmission, purchase of power, and other factors. The base rate covers the basic infrastructure costs including operation and maintenance of power plants and distribution infrastructure. It also covers the interest on the funds borrowed to build the plant.

The Edwardsport facility uses coal as fuel and turns it into syngas which was estimated to be a better alternative due to high natural gas prices during the project’s development phase in 2006. Natural gas prices were at their highest in decades. However, by the time the operations began, natural gas prices decreased and continue to remain relatively low. Figure 3.1 shows the change in natural gas prices over the last decade along with certain project milestones.



Figure 3.1. Cost of U.S. Natural Gas for Electricity Generation and Edwardsport Gasification Power Plant Timeline

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In 2017, coal provided the largest generation share of electricity in 18 states, down from 28 states in 2007. Coal accounts for approximately 95% of electric generation in Indiana. Natural gas had long been the second-most prevalent fuel for electricity generation behind coal, but in April 2015, it became the primary fuel source for generating electricity in the United States. For the United States as a whole, natural gas provided 32% of the total electricity generated in 2017, slightly higher than coal’s 30% share. The price of natural gas has provided impetus to the decision to shift away from using coal as a fuel source. While the electricity generation cost of natural gas has been above and below coal in the last five years, the direct use of natural gas has proved to be cheaper than gasified syngas.

The Edwardsport plant’s operating and maintenance cost has been reported to be higher than the initial estimates. This would result in higher electricity costs for Indiana consumers. Duke Energy contends that the plant’s performance has improved in 2017 and 2018. They argue that the initial focus on safety and reliability led to increased cost, which will lead to lower long-term costs. However, as long as the total cost of generating electricity using gasified syngas remains substantially higher than the cost of generating electricity using natural gas, the tax credit is unlikely to incentivize the construction of another coal gasification plant.

ConclusionThree property tax deductions and one AGI tax credit exist or have existed to encourage conversion of coal to gas or encourage use of coal combustion products. The coal combustion product property tax deduction was created to incentivize conversion of coal into a gaseous or liquid fuel or char, but has not been available for 30 years. Two property tax deductions were established to encourage recycling of burned coal residuals. The coal combustion property tax deduction is equal to 5% of the assessed value of a building that is constructed with burned coal byproduct. The recycled coal combustion byproduct personal property tax deduction allows a manufacturer to deduct 15% of the assessed value of equipment used to produce recycled products from coal combustion residuals. According to the LSA’s 2018 Property Tax Survey, no counties granted a coal combustion product property tax deduction in the past five years.

The coal gasification technology investment tax credit was established to promote investment in integrated coal gasification power plants and fluidized bed combustion technology. In the last 13 years, only one project was approved to receive this tax credit. The tax credit represents a small portion of the capital, operational, and maintenance expenditures of that project. This along with the rate based funding mechanism discussed in the prior section, indicate that the tax credit, by itself, did not solely influence whether the firm built a coal gasification plant. Whereas the project created construction, mining, and power plant jobs, it also resulted in higher than estimated building and operational costs. Due to the relatively low cost of generating power using natural gas and other fuel sources, an integrated coal gasification technology has to produce power at low prices in order to compete with wholesale market power prices. The low utilization of the tax credit indicates that coal gasification technology may not be competitive in the current energy market conditions. Currently, there are no active plans for any integrated coal gasification plant to be built in the state of Indiana. It can be concluded that the tax credit, by itself, will unlikely incentivize any project in the near future.

Source: U.S. Department of Energy, analysis by Office of Fiscal and Management Analysis.

Renewable Energy Property Tax Deductions


Renewable Energy Property Tax DeductionsIndiana has five property tax deductions that are intended to encourage the use of renewable energy devices to provide electricity, heating, or cooling. To determine if the deductions could influence a taxpayer’s decision to purchase a qualifying system, hypothetical scenarios were developed to determine a system’s total cost. In the analysis, total cost consisted of the cost of the equipment and installation, and property taxes. Then, the percentage of the total cost savings from each deduction was calculated. Our analysis shows that the deductions reduce the total cost of the systems by a small percentage in the first year, but the property taxes become a larger proportion of the system’s total cost over longer time horizons. Taxpayers who do not understand the property tax implications of installing a renewable energy system would not be influenced by a deduction. Additionally, taxpayers who base their decision to install a system on other factors such as generating electricity, heating, or cooling from a renewable resource and lower utility bills might not be influenced by a property tax deduction. Taxpayers who are most likely to be influenced by a deduction are undecided on installing a renewable energy system, understand the property tax implications of the new system, and plan on living or operating in a taxing district with a property tax rate that maximizes the deduction’s value.

To receive any of the renewable energy deductions, a taxpayer must submit State Form 18865. The form lists all five renewable energy property tax deductions. To claim a deduction, a taxpayer checks a box to indicate which deduction they are claiming. Responses from the LSA’s 2018 Property Tax Incentive Survey and interviews with county auditors revealed that most counties do not track each renewable energy deduction separately. For instance, several counties record all renewable energy deductions as geothermal. As a result, there is no way to examine each deduction separately.

Claims DataBecause the five different deductions are commingled in LSA’s property tax database, the information regarding the number of claims, deduction amounts, and tax value represents all the renewable energy property tax deductions. For taxes payable in 2018, county auditors reported that 21,263 taxpayers received $477.3 million in renewable energy property tax deductions, about 0.1% of the gross assessed value of all the property in the state. Figures 4.1 and 4.2 show the distribution of the number of deductions and deduction amounts across property types.

Figure 4.1. Total Renewable Deduction Amount by Property Type in 2018

Figure 4.2. Count of Renewable Deduction by Property Type in 2018

18%

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Agriculture PersonalSingle Family Homesteads Everything Else

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Agriculture Single Family Homesteads Everything Else

Source: The LSA property tax database, analysis by Office of Fiscal and Management Analysis. Source: The LSA property tax database, analysis by Office of Fiscal and Management Analysis.



Despite accounting for less than 0.25% of the total number of deductions claimed, personal property claims were 30% of the total deduction amount. The average personal property renewable energy deduction amount claimed was $2.6 million. In comparison, the average deduction amount for both homeowners and agricultural landowners was between $15,000 and $16,000.

From 2014 through 2018, both the number of deductions and the average deduction amount increased every year. Much of the increase in the average deduction amount was due to a small increase in large personal property solar installations. Figure 4.3 illustrates the total deduction amount every year.

Figure 4.3. Renewable Deduction Amount ($ in Millions)

The total tax savings attributable to the deduction are shown in Table 4.1. The tax savings generated by each deduction is dependent upon the amount of the deduction, the local property tax rates and credit rates, and whether taxpayers were at their tax cap. Taxpayers who were at their tax cap after the deduction reduced their net assessed value and saved no additional dollars. Of the 22,448 taxpayers who claimed the deduction in 2018, 2,263 (10%) experienced no benefit from a deduction due to the tax cap.

Table 4.1. Tax Value of Renewable Energy Property Tax Deductions ($ in Millions)2014 2015 2016 2017 2018$3.7 $5.7 $7.8 $8.8 $9.0

Figure 4.4 shows the distribution of tax savings across property types over the past five years. The overall average tax benefit in 2018 was $425. The average homeowner benefit was $213.

Figure 4.4. 2014 to 2018 Tax Savings by Property Type ($ in Millions)

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2014 2015 2016 2017 2018Source: The LSA property tax database, analysis by Office of Fiscal and Management Analysis

Source: The LSA property tax database, analysis by Office of Fiscal and Management Analysis.



Total Cost Savings AnalysisThe sections that follow use hypothetical scenarios to illustrate the savings each deduction provides for a qualifying project. All renewable energy property tax deductions work in a similar way. With the exception of the solar energy heating or cooling system deduction, the deduction value is equal to the assessed value of the system or device. The solar energy heating or cooling system deduction amount is equal to the cost of the components and installation. All of the deductions last indefinitely. The discount provided by the deductions vary based on two conditions:

1. The depreciation schedule for property tax assessment purposes; and2. The installation cost of each system.

The average installation cost of each system type for this analysis is based on industry averages. However, prices vary considerably by the size, quality, and system type. Rather than simply calculating the total savings generated by the deductions, which is largely dependent upon the initial cost of the system, we calculated the percentage of the total cost saved by the deduction. For each example, the total cost is equal to the sum of the system price, installation costs, and property taxes paid without a deduction. The potential decreases in utility bills, net metering compensation, maintenance costs, or any other factor that may affect a taxpayer’s decision to purchase a renewable energy system are not included in this analysis. Variation in those factors is dependent on the quality, size, and the environment in which the system or device is located.

To illustrate the potential impact, each deduction is applied to both a single family homestead and a commercial or industrial facility. The homestead average net property tax rate from 2017 (approximately 2.17%) is used for the homestead scenarios. This rate takes into account local income tax credits that homestead properties receive. For industrial and commercial properties, the 2017 average net property tax rate of all nonhomestead properties (2.39%) is used.

Finally, the effect of property tax caps is not included in this analysis. It is assumed in the scenarios that the taxpayer will be able to receive the full benefit from the incentive and will not be affected by the tax caps. The rates used in this analysis would not result in tax assessments above 1% of gross assessed value for the typical home in Indiana. At the 2.17% homestead net tax rate, a homestead would first hit the tax cap at $154,700 of gross assessed value. The median gross assessed value for homesteads in 2018 was $124,200. Commercial and industrial properties have a property tax cap of 3%, so they would not hit their tax cap with a property tax rate of 2.39% used in the scenarios. Also, the installation of renewable devices could result in an increase in gross assessed value of the property which in turn raises the measure used to determine the property tax cap threshold. If a taxpayer’s net assessed value is at their tax cap after the deduction, then they received no benefit.

Solar Energy Heating or Cooling System Property Tax Deduction (IC 6-1.1-12-26)Enacted in 1974, the solar energy heating or cooling system property tax deduction reduces the property tax on property equipped with a solar energy heating or cooling system. Solar energy heating or cooling systems use the energy from the sun to heat air, water, or another liquid to generate hot water or for heating or cooling a property. Systems used for domestic hot water, space heat, or preheating for industrial processes qualify for the deduction. The deduction’s value is equal to the cost of the system’s installation and component parts. There is no limitation on the number of years an owner can receive the deduction, and the deduction is transferable. Data from the 2013 American Housing Survey found that less than 0.05% of owner-occupied homes in the Midwest used a solar thermal energy system as a heat source (U.S. Census Bureau, 2015).

Since the deduction amount equals the cost of the system’s installation and component parts, as opposed to the assessed value of the system, the calculation of the cost savings is slightly different than the other renewable energy deductions. The deduction remains the same over time, rather than declining as the system ages and depreciates. All of the renewable energy system deductions eliminate the property taxes on the system. However, the solar energy heating and cooling deduction also reduces the net assessed value of the real property by the difference between the deduction amount and the depreciated value of the device. This slightly increases the relative value of the deduction compared to the other renewable energy device deductions.



Residential Scenario: Installation of a Solar Energy Water Heater

As shown in this scenario, the deduction would reduce the total cost of the system over time. This is the effect of the deduction being larger than the assessed value of the system, which then reduces the net assessed value of the real property upon which the system is installed. The deduction provides an 18% discount after 10 years, and the discount increases to 31% after 20 years.

Commercial Scenario: An Industrial Facility with a Solar Energy Heating Device The solar energy heating and cooling deduction provides a greater discount for equipment installed in a commercial or industrial facility. Figure 4.6 shows the potential impact on the cost of installing a qualifying solar unit that costs $100,000 and would last for around 40 years. (Marron, Todd, 2015). The deduction provides a 20% discount after 10 years, and the discount increases to 61% after 40 years.

The percentage of the total cost saved by the deduction would be larger for a commercial property for two reasons. First, a slightly higher property tax rate is used in this example to reflect that commercial properties do not receive as many local property tax credits as homesteads receive. This difference is reflected in the analyses of the other renewable energy device property tax deductions as well. Secondly, a different depreciation schedule is used for solar energy systems installed on commercial/industrial properties than residential properties. The depreciation schedule used for industrial facilities depreciates property at a much faster rate. This increases the property tax savings for the taxpayer.

Figure 4.6. Total Cost of a Commercial Solar Heating Unit Over 40 Years

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$0$20,000$40,000$60,000$80,000

$100,000$120,000$140,000$160,000$180,000

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Years

Source: Analysis by Office of Fiscal and Management Analysis.


Solar energy water heaters use the sun’s energy to heat water or another liquid solution in glass panels or tubes. Then, the liquid typically runs through a coil in a water tank. The heated coils are used to heat the water in the tank while cooling the liquid solution. A small electric pump moves the liquid solution back to the solar collector, and the process repeats. Typical systems last approximately 20 years (Energy Star, n.d.). While costs vary depending on size, build quality, and other factors, a typical solar water heater costs $9,000 (Fuscaldo, 2018). Figure 4.5 shows the cost savings generated over 20 years.

Figure 4.5. Total Cost of a Homestead Solar Water Heater for Over 20 Years



Solar Power Device Property Tax Deduction (IC 6-1.1-12-26.1) Enacted in 2012, the solar power device property tax deduction reduces the property tax on property equipped with solar panels or another device used to convert sunlight to energy. The deduction is equal to the device’s assessed value and is transferable. Owners of solar power devices that provide electricity at wholesale or retail price may not receive the deduction unless they meet the following criteria:

1. They participate in a net metering or feed-in-tariff program offered by an electric utility with respect to the solar powerdevice; or

2. They are the owner or host of the solar power system site and a person consumes on the site the equivalent amountof electricity that is generated by the solar energy system on an annual basis even if the electricity is sold to a publicutility, including a solar energy system directly serving a public utility’s business operations site.

The cost of a solar power system can vary greatly depending on the size of the solar panels, where and how they are mounted, and the quality of the solar panel. There is no published guidance for how to assess solar panels or how they should be depreciated over time.

The way solar panels are assessed varies across Indiana counties. Some county officials stated that they do not assess solar panels, therefore no deductions on the property are required. Other county officials noted that they use sound value to assess solar panels, which is an assessor’s way of finding the value of a piece of property using the best available information.

While the use of solar thermal energy systems has not grown over the past several years in Indiana, the use of photovoltaic systems has grown substantially. As of July 2017, there were more than 210 Megawatts (MW) of installed photovoltaic capacity in Indiana. Almost all of the capacity started in early 2013 (State Utility Forecasting Group, 2017). Despite the surge in installations, solar power still accounts for just 0.2% of the state’s electricity generation. Furthermore, the vast majority of the solar generated electricity was produced by large utility-scale solar installations that would not qualify for the solar power device deduction. Only the installed devices subject to net metering (which was 15 MW in 2017) and perhaps a very small portion of the properties with feed-in-tariff capacity (111 MW) would qualify for the deduction. If it was assumed that the 15 MW of installed capacity was fully powering homes that had 7.5 kilowatts (kW) solar photovoltaic systems, approximately 2,000 homes could be powered by rooftop solar.

This analysis of the solar panel deduction includes two hypothetical scenarios. One will investigate how the deduction could impact a homestead’s total project cost, while the other examines the impact on a business. Since the real property assessment manual does not provide guidance on how to depreciate the items, the commercial and industrial structures depreciation table is used in both examples. The U.S. Department of Energy estimates that the life span of solar panels is 25 to 40 years. The examples will assume a lifespan of 35 years (National Renewable Energy Laboratory, n.d.).

Figure 4.7. Total Cost of a Residential Solar Panel Installation Over 35 Years

Residential Solar Panels Scenario The initial cost to install solar panels in a homestead is assumed to be $19,000. That is approximately the national average for residential solar installations (Matasci, 2018). As shown in Figure 4.7, the deduction could lead to a cost savings of 25% to 31% between 20 and 35 years.

Commercial Solar Panels Scenario Commercial solar panel installations can be substantially larger than typical residential installations. The analysis found that commercial and homestead installations achieve similar tax savings. The commercial solar panels achieve a slightly higher savings due to the higher property tax rate used in the scenario. The deduction is estimated to provide a 27% to 33% discount between 20 and 35 years.

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Geothermal Energy Device Property Tax Deduction (IC 6-1.1-12-34)Enacted in 1981, the geothermal energy device property tax deduction reduces the property tax bill for owners of real property or a mobile home equipped with a device that uses the natural heat from the Earth to provide hot water, produce electricity, or heat or cool the property. The deduction lasts indefinitely, can be transferred from one owner to the next and is equal to the device’s assessed value. In order to qualify for the deduction, the device must have been installed after 1981. The number of geothermal systems in Indiana is not readily available. However, geothermal systems account for 1% of the heating market in the United States (Ivanova, 2018). Since geothermal systems tend to be more prevalent in the south, the market share in Indiana could be even lower.

The analysis for this deduction examines a hypothetical homestead and a commercial property that utilizes a qualifying system. The Department of Local Government Finance provides clear guidelines for assessing and depreciating both residential and nonresidential systems, and those guidelines are followed in these examples. Determining an average lifespan for a geothermal system is challenging because parts of the system vary considerably (National Renewable Energy Laboratory, n.d.).

Residential ScenarioIn the scenario for the geothermal property tax deduction, it is assumed that the qualifying geothermal system is assessed at $22,000. Figure 4.8 shows the total cost savings, which could be between 10% and 42% in 5 to 40 years for the hypothetical home.

Commercial Scenario For this example, it is assumed that the geothermal system for a commercial property costs to $40,000. Figure 4.9 shows the total cost savings, which could be between 10% and 37% in 5 to 40 years for the hypothetical commercial property. The geothermal deduction for the hypothetical homestead yielded a better savings on a percentage basis after 40 years than the commercial property’s deduction as the result of using different depreciation schedules.

Figure 4.8. Total Cost of a Homestead Geothermal System Over 40 Years

Figure 4.9. Total Cost of a Commercial Geothermal System Over 40 Years

- $5,000

$10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000

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Source: Analysis by Office of Fiscal and Management Analysis. Source: Analysis by Office of Fiscal and Management Analysis.



Wind-Power Device Property Tax Deduction (IC 6-1.1-12-29)The wind-power device property tax deduction was enacted in 1979. This deduction reduces the property tax bill for owners of property equipped with a wind-power device such as a wind mill or wind turbine. The deduction is equal to the device’s assessed value, and the deduction lasts indefinitely. Public utilities are not allowed to receive the deduction. Other entities that provide electricity at wholesale or retail price, other than those participating in a net metering program offered by a public utility, are also prohibited from receiving the deduction.

Wind turbines in Indiana have a total capacity of over 2,000 MW and produce about 4.8% of the electricity generated in the state. The majority of wind turbine energy is generated by utility-scale turbines that are not eligible for the wind-power device property tax deduction (State Utility Forecasting Group, 2017). The Indiana Office of Energy Development (2017) reports that as of 2014, there were 4,492 kW of small wind installations in the state. The energy capacity of these small wind installations was about 0.25% of the energy capacity of the utility-scale turbines. Most homes need about 2 kW to 10 kW of wind energy to meet typical electricity needs (Wind Energy Foundation, 2016). The small wind projects in 2014 could generate enough electricity to power between 450 to 2,250 homes.

Prices on wind turbines vary considerably and depend upon factors such as where and how they are mounted, height, blade size, and blade design. Published guidance is not available on how to assess or depreciate wind turbines, so in these hypothetical scenarios the depreciation table for commercial and industrial structures is used. A life expectancy of the device is assumed to be 20 years (National Renewable Energy Laboratory, n.d.). One scenario is a homestead with a wind turbine while the other is an industrial facility.

Homestead Wind TurbineIn this scenario, it is assumed that the cost of a small off-grid wind turbine is $9,000 (Wind Energy Foundation, 2016). Figure 4.10 shows the savings generated by the deduction over the assumed lifespan of the system. The hypothetical homeowner in this example could have a cost savings of between 9% and 19% of the total cost from 5 to 20 years.

Industrial Wind TurbineIn this scenario, it is assumed that a wind turbine costs $40,000 for an industrial installation. A wind turbine this large, in the right environment, could power a home (Wind Energy Foundation, 2016). Figure 4.11 illustrates the total cost savings produced by the deduction. The deduction provides a 21% discount after 10 years, and the discount increases to 28% after 20 years.

Figure 4.10. Total Cost of a Homestead Wind Turbine Over 20 Years

Figure 4.11. Total Cost of an Industrial Wind Turbine Over 20 Years

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Without Deduction With DeductionSource: Analysis by Office of Fiscal and Management Analysis. Source: Analysis by Office of Fiscal and Management Analysis.

Years Years



Hydroelectric Power Device Property Tax Deduction (IC 6-1.1-12-33)The hydroelectric power device property tax deduction was enacted in 1981. This deduction reduces property taxes on real property or mobile homes equipped with a device that uses moving water to provide mechanical energy or produce electricity. The deduction is equal to the device’s assessed value, and the deduction lasts indefinitely. The device must have been installed after 1981 to qualify for the deduction. Property owned by a utility (also known as state distributable property) is not eligible for the deduction. Responses from the LSA’s 2018 Property Tax Incentive Survey indicates that no facilities received the hydroelectric power device property tax deduction from 2014 to 2018. With limited potential for hydroelectric power in Indiana, few hydroelectric power devices operate in the state (Indiana Office of Energy Development, n.d.). None of those devices are eligible for the deduction. In the event that a home or farm is using a small hydroelectric device, its savings relative to the cost of the device would be similar to the other renewable energy deductions.

Federal Income Tax CreditsIn addition to Indiana’s property tax deductions for renewable energy systems, there are federal tax credits available for some systems. The business energy investment tax credit is available for businesses that install qualifying renewable energy systems (U.S. Department of Energy, 2018a), while the residential renewable energy tax credit is available for residential property (U.S. Department of Energy, 2018b). Both credits are nonrefundable, but can be carried forward for up to five years for businesses or at least one year for homeowners. Both credits have been revised numerous times. Federal legislation has altered the definition of eligible systems, credit amounts, and qualifying years. Table 4.2 shows the federal tax credits available for each renewable energy system that has a corresponding property tax deduction.

Table 4.2. Federal Tax Credits for Renewable Energy Systems (% of Installation Cost) for Units Placed in Service by the End of 2018

Solar Heating or Cooling

Solar Water Heating

Solar Power Device Geothermal Small Wind Hydroelectric

Business 30% 30% 30% 10% 30% N/AResidential N/A 30% 30% 30% 30% N/ASource: U.S. Department of Energy.

Because of the timing of the discounts, the federal income tax credit is likely more effective in influencing a consumer’s decision to purchase a renewable energy device. The federal tax credits can immediately reduce the total cost of a renewable energy system by up to 30%. In many cases, the property tax deductions will eventually result in property tax savings sufficient to produce the same discount. However, it will take over 10 years for that to occur.

ConclusionAll Indiana renewable energy device deductions are intended to encourage the installation and use of renewable energy technology. The deductions are expected to encourage renewable energy usage by reducing the total cost including: the cost of the device or system, installation, and property taxes. The cost savings from these deductions would have to be an amount that makes a potential project feasible.

The deductions might not influence taxpayers who base their decision to install a renewable energy device system on factors such as the desire to get electricity, heating, or cooling from a renewable resource, and lowering their utility bills. They may not consider property taxes in their decision-making process, as not all taxpayers would know that their gross assessed value would increase from the installation of a renewable system.

The deductions are most likely to influence taxpayers who are ambivalent about installing a renewable energy device system, understand how the new system will affect their property taxes, and plan on living or operating in a taxing district with a property tax rate that maximizes the deduction’s value. While all of the deductions offer savings, the solar energy system property tax deduction for a commercial or industrial property offers a particularly high value relative to the other deductions.

Brownfield Revitalization


Brownfield RevitalizationBrownfields are parcels of real estate that are abandoned, inactive, or may not be operating at their appropriate use as a result of the presence or potential presence of contamination. The U.S. Environmental Protection Agency (EPA) estimates that there are more than 450,000 brownfields in the United States. The Indiana Department Environmental Management (IDEM) reported 789 brownfields located in Indiana in 2015 (Indiana Map 2018). The majority of the known brownfields are clustered in heavily populated urban areas.

Brownfields can range in size from a large manufacturing facility to a small dry cleaning facility. The most common types of brownfields include former transportation facilities, manufacturing plants, shopping malls, and gas stations. Remediation of contaminants, hazardous substances, or pollutants on brownfield sites can be cost prohibitive for developers and discourage private investment. As a result, brownfields can become liabilities that have negative health and economic consequences for surrounding communities (Haninger, Ma, and Timmins 2017).

Studies have shown that brownfields can negatively impact local government revenue, ecosystems, and community conditions (Ihlandfeldt and Taylor 2004: Berman, L. and Foresster 2013; Sullivan 2017). The upfront cost, potential future liability, and “contamination stigma” associated with brownfields discourage private developers to clean up and reuse. However, studies have shown that there are significant positive effects on communities surrounding brownfields following remediation (Mihaescu and vom Hofe 2012; Haninger, Ma, and Timmins 2017). The general conclusion from most studies is that the net public value of cleaning up a brownfield far exceeds the costs.1

Brownfield Revitalization Zone Property Tax Abatement (IC 6-1.1-42)Since 1997, statute has allowed counties, cities, and towns to designate an area that meets certain criteria as a brownfield revitalization zone. The brownfield revitalization zone property tax abatement is intended to encourage the redevelopment and rehabilitation of brownfields by reducing the property taxes on the designated property.

The Brownfield Revitalization Zone Designation ProcessTo receive the abatement, the property must be designated a brownfield revitalization zone. An applicant must submit a statement of public benefits to the designating body. The statement of public benefits must include three primary components:

1. A description of the proposed remediation and redevelopment.2. An estimate of the number of individuals who will be employed or whose employment will be retained by the person as a

result of the remediation and redevelopment and an estimate of the annual salaries of these individuals.3. An estimate of the value of the remediation and redevelopment.

Once the designating body receives the statement of public benefits, it may designate a brownfield revitalization zone only if it finds that the applicant never had an ownership interest in an entity that contributed to the contamination. Also, applicants may not have contributed to the contamination that is the subject of voluntary remediation. Brownfield designation is determined based on IDEM standards and must be substantially under-utilized or nonproductive without remediation. Once a property is determined to be a brownfield, the applicant must submit a voluntary remediation agreement. The remediation agreement must be submitted to the IDEM to receive a certificate of completion and covenant not to sue.

Brownfield Revitalization Zone Property Tax AbatementThe designating body may grant the property owner the brownfield revitalization zone tax abatement, which is a 3 , 6 , or 10-year property tax deduction on all real and personal property located in the brownfield revitalization zone. The deduction amount is equal to the increase in the property’s assessed value multiplied by a percentage outlined in the Indiana Code, as illustrated in Table 5.1. The abatement is transferable as long as the new owner did not contribute to the contamination and continues to use the property as outlined in the resolution creating the brownfield revitalization zone.

1Two separate studies estimate the positive impact on surrounding communities at approximately $4 million. The North Midwest Institute estimates the average cost of brownfield remediation to be $602,000.



Table 5.1. Brownfield Revitalization Zone Abatement ScheduleAbatement

LengthYears of Deduction

1 2 3 4 5 6 7 8 9 103 Years 100% 66% 33% - - - - - - -6 Years 100% 85% 66% 50% 34% 17% - - - -10 Years 100% 95% 80% 65% 50% 40% 30% 20% 10% 5%

Usage of the AbatementNone of the LSA 2018 Property Tax Incentive Survey respondents indicated that their county has granted a brownfield revitalization zone abatement within the past five years. There are several reasons that there may not be any reported brownfield revitalization abatements. First, there is not a separate “adjustment code” for auditors to report this abatement. It is possible that the amount of the abatements are reported under a different adjustment code, and auditors are unable to discern whether or not it was used in their data.

Another potential explanation is that counties or municipalities might be granting other property tax abatements on brownfield properties. The process to receive a property tax abatement is similar to the process for the brownfield revitalization zone abatement. Both the property tax abatement and the brownfield revitalization zone abatement are transferable and require:1. the designating body to find that the area is undesirable to occupy or develop;2. the applicant to provide a statement of public benefits with similar information; and3. the designating body to make a number of findings, many of which revolve around the likelihood that the claims of jobs,

salaries, and costs of rehabilitation made in the statement of public benefits will actually come to fruition.

The biggest difference between the two abatements is that the abatement schedule for the brownfield revitalization zone is dictated by Indiana Code, while real property tax abatements granted after June 30, 2013, allow for an abatement schedule that lasts no more than 10 years and a deduction percentage that is determined by the designating body. This greater flexibility may appeal to both the designating body and the applicant filing for the abatement, making the use of brownfield revitalization zone abatements less common.

Other Brownfield Programs Available in Indiana There are several other sources of financial assistance available to reduce the costs of brownfield remediation for local political subdivisions and certain private entities in Indiana. Those sources for brownfield remediation, include loans, grants, and a mechanism to reduce property tax liability.

The Indiana Brownfields Program is an initiative administered by the Indiana Finance Authority in partnership with the IDEM. Multiple financial resources are available including: • Revolving loan fund – this fund provides low-cost loans with flexible terms for eligible public and private borrowers. The

funds for this program are received by the state from the U.S. EPA.• Supplemental environmental projects (SEP) - in partnership with the IDEM, the Indiana Finance Authority provides

supplemental environmental project funds for brownfield redevelopment activities. Entities do not apply for SEP funds.The projects are funded by a negotiated amount from cases settled by the IDEM’s Office of Enforcement. The respondentin those cases pays a portion of the amount owed to IDEM directly to the Indiana Finance Authority for use on brownfieldprojects.

• Tax waiver for delinquent taxes – Applicants must submit a form to the Indiana Brownfields Program in order for theIDEM to determine if the applicant’s property is a brownfield. After the IDEM determines that property is a brownfield, theapplicant may petition the DLGF to waive delinquent property taxes on the property.

The program offers financial assistance to political subdivisions and some incentives for eligible private entities. Finally, the Petroleum Orphan Sites Initiative administered by the IDEM and tax waivers for delinquent property taxes by the DLGF can also reduce the costs associated with brownfields.



ConclusionBrownfields can pose significant consequences for the communities in which they are located. Research has generally shown that the public benefits of remediation outweigh the costs. However, cost remediation can be cost-prohibitive for private investment. The brownfield investment revitalization zone tax abatement was established in 1997 to encourage private investment in brownfield remediation and reuse. To receive the abatement, a property owner must apply and have a designating body designate the property as a brownfield revitalization zone. A taxpayer whose property is located in a brownfield revitalization zone may receive a 3, 6, or 10-year property tax deduction on all real and personal property located in the brownfield revitalization zone. According to the respondents of the LSA 2018 Property Tax Survey, no county has granted a brownfield revitalization zone abatement within the past five years. There are several public programs that may also be used to subsidize brownfield remediation.

Resource Recovery System Property Tax Deduction (IC 6-1.1-12-28.5)


Resource Recovery System Property Tax Deduction (IC 6-1.1-12-28.5)Enacted in 1979, the resource recovery system property tax deduction reduces property taxes on tangible property that is used to convert solid or hazardous waste into energy or other useful products. Owners of resource recovery systems can receive the deduction if each of the following are true: 1. The system was certified by the Indiana Department of Environmental Management for the 1993 assessment year or a

prior assessment year.2. The owner filed a timely application for the deduction for the 1993 assessment year.3. The owner has not been convicted of an environmental crime.4. The owner is not subject to an order or a consent decree with respect to property located in Indiana due to a violation of

rule, regulation, or statute regarding hazardous wastes that had a major or moderate potential for harm.5. A political subdivision is liable for any property taxes on the system.

In 1994, an estimated 400 deductions reduced the assessed value of eligible properties by approximately $320 million. The deduction was phased out over several years for all eligible properties except the Indianapolis Resource Recovery Facility, going from 95% of the assessed value of qualifying properties in 1994 to 60% in 1997. Beginning in 1998, the Indianapolis Resource Recovery Facility was the only property eligible for the deduction. This facility still qualifies for a deduction of 95% of gross assessed value.

Local Option Hiring Incentive (IC 6-3.5-9)


Local Option Hiring Incentive (IC 6-3.5-9)The local option hiring incentive is a program that counties and cities can use to encourage local job creation. Under the program, the county unit and cities may use local income tax revenue to provide qualifying businesses with payments related to the creation of new jobs. The program was established in 2011.

Cities and counties that receive a certified distribution of local income tax may enter into a hiring incentive agreement with a business that proposes a project that will create jobs within the local unit. The local unit must determine the following before entering into an agreement:• The project will create new jobs that were not previously performed by the employees in the qualified unit.• The project is economically sound and will benefit the people of the local unit by increasing opportunities for employment

in the qualified unit and will strengthen Indiana’s economy.• The business receiving the incentive is a major factor in their decision to go forward with the project, and without the

incentive, the business will not create new jobs.• The project is not relocating any jobs from one site in Indiana to another site in Indiana.

The terms of the incentive are stated in the hiring incentive agreement. The amount of the hiring incentive can either be a fixed dollar amount or stated as a percentage of the aggregate annual local income tax withheld and remitted on behalf of new employees who live in the local unit. The business must supply the local unit with the data necessary to verify employment with the appropriate state agencies and compute the award. The incentive is paid to the business in installments as stated in the hiring incentive agreement, and it can be provided for up to 10 years.

Statute requires the hiring incentive agreement to contain other conditions beyond the duration and payment amounts. The agreement must have a detailed description of the project, and the business must maintain operations for at least two years after they receive an incentive payment. The hiring incentive agreement also defines the consequences of noncompliance. If a firm is found to be noncompliant with the agreement or statute, the local unit is authorized to pursue remedies under law to recoup the amount of incentives provided.

Local units who use the local option hiring incentive must submit an annual report to the IEDC. The annual report must contain the number of jobs created, average wages of new employees, the location of the jobs, and a summary of the incentives provided to each taxpayer. The IEDC compiles the information and includes it in their annual compliance report. As of August 21, 2018, no qualified civil units have reported using the local option hiring incentive to the IEDC.

AnalysisThe local option hiring incentive is similar to Indiana’s Economic Development for a Growing Economy (EDGE) tax credit. EDGE is a refundable job creation tax credit program administered by the IEDC. Like the local option hiring incentive, EDGE credits are based on a percentage of the incremental withholding attributable to the new Indiana jobs created or retained by a project. The credit percentage, credit terms, and conditions of EDGE credits are specified in the incentive agreement between the IEDC and the taxpayer.

The local option hiring incentive also differs from EDGE in how firms receive the incentive and the potential award amount. The local option hiring incentive is directly paid to the business while EDGE tax credits must be claimed on an annual tax return. This provides the local units with flexibility to determine the timing of the incentive. Also, the local option hiring incentive would likely be less for each qualifying new employee than an EDGE credit because the hiring incentive is based on the local income tax withheld. Generally, local income tax rates are lower than the 3.23% state individual income tax rate. For example, if a qualifying new employee earns $40,000 annually, the maximum annual EDGE credit could be $1,292. The maximum local option hiring incentive could be $692 in a county with the median 1.73% local income tax rate.

Academic research on the impact of government job creation tax incentives is ambiguous. Hicks and LaFaive (2011) found that Michigan’s MEGA program failed to have a discernible impact on employment in the targeted sectors of manufacturing and wholesale. Faulk (2002) analyzed Georgia’s jobs tax credit and concluded that participating firms created between 23% and 28% more jobs than nonparticipating firms. Gabe and Kraybill (2002) researched incentives in Ohio. They found that tax incentives failed to have a positive impact on employment.

Local Option Hiring Incentive (IC 6-3.5-9)


A study of employment tax incentives in North Carolina suggests that businesses receiving a recruitment incentive on average added about 11.5 more jobs over the time period of the incentive relative to similar firms not receiving incentives (Lester, Lowe, & Freyer, 2014). Finally, a recent study by Jensen (2017) suggests that the Promoting Employment Across Kansas (PEAK) had no discernible impact on business expansion and employment.

The effectiveness of the Indiana local income hiring incentive is indeterminable because it appears to not have been used. The IEDC reported that no local unit has submitted an annual report or provided them with a hiring incentive agreement.

The availability of other economic development programs that provide a greater discount, specifically EDGE credits and property tax abatements, could be contributing to the program’s lack of use. In FY 2018, the IEDC entered into 238 EDGE credit agreements for a potential $262 million in EDGE credits over the duration of the agreements. Property tax abatements provided by local units reduced an estimated $229 million in net tax for both real and personal property in CY 2018.

Local units may also be hesitant to offer the local option hiring incentive because it would reduce the amount of local income tax revenue they receive. The local income tax distributed to the county is allocated among the appropriate civil units based on a combination of property tax levies, the prior year’s revenue distribution, and post 2005 debt resulting in each $1 of local income tax paid by county residents being shared by multiple units. On average, the county unit retains $0.40 and all municipalities within a county will receive a portion of $0.46 of each $1 distributed to the county.1 If the local unit wanted to offer a firm an incentive that would be revenue neutral from the local unit’s perspective, assuming all jobs would not be created but for the incentive, the award would likely have to be less than 1% of the qualifying new employee’s incremental wages.

1 This estimate is based on the statewide CY 2018 allocations to local units of school corporation and civil unit distribution, economic development revenue, and certified shares. The analysis excludes Marion County.

Aviation-Related Incentives


Aviation-Related IncentivesIndiana provides various aviation-related tax incentives through sales and use tax exemptions and property tax deductions. State sales and use tax exemptions are provided for the purchase of certain aircraft, aircraft parts, and aviation fuel. Property taxes may be deducted for certain aircraft and for aircraft used to provide commercial intrastate airline service. This section reviews each aviation-related Indiana tax incentive.

Sales and Use Tax ExemptionsSeveral states provide multiple sales and use tax exemptions that may benefit the aircraft manufacturing and aviation industries. Like Indiana, it is common for states to provide a “fly away” exemption (i.e., sales tax exemptions for aircraft that will be based out of state). Exemptions on aircraft purchases vary across states by rate, type of aircraft, use of aircraft, and registration period. It is common for states to exempt taxes on the purchase of aircraft repair parts and aviation fuel. Combined, these exemptions are generally intended to encourage aviation activity in Indiana. The expectation is that increased aviation activity will lead to sellers and buyers using manufacturing, maintenance, and refurbishment facilities (Wieand, 2014, Dorner, 2017). At least 42 of these facilities are located in Indiana. In 2017, they employed over 6,100 people and paid a total of $568.3 million in annual wages (Bureau of Labor Statistics, 2017). In addition, they contributed $1,154.3 million in employee compensation, taxes, and profit to the state’s economy in 2015 (MIG, Inc., 2015).

Sales Tax Exemptions for Certain Aircraft (IC 6-2.5-5-8; IC 6-2.5-5-42)Indiana law provides two sales and use tax exemptions for the purchase of an aircraft. Aircraft purchased for rental or leasing are exempt if certain criteria are met. Also, aircraft sold to nonresidents are exempt.

Aircraft Acquired for Rental or Leasing (IC 6-2.5-5-8)Indiana has a sales and use tax exemption for certain aircraft acquired to be rented or leased to another person. The purchaser must satisfy one of two conditions to qualify for the exemption. The first condition involves the amount of revenue the lessor earns from renting or leasing the aircraft. The second condition is determined by how the lessee predominantly uses the aircraft they leased from the person who purchased the aircraft.

The first condition involves whether the person acquiring the aircraft will rent or lease the aircraft in the ordinary course of their business (IC 6-2.5-5-8(e)). The person must prove to the Department of State Revenue (DOR) that a certain amount of revenue is earned from the renting or leasing of the aircraft. The DOR may not approve the exemption unless the person has established that the annual gross lease revenue is at least 7.5% of the book value of the aircraft (as published in the VREF Aircraft Value Reference guide) or the net acquisition price for the aircraft. If an aircraft is acquired below the book value, the taxpayer may appeal to the DOR for a lower lease or rental threshold equal to the actual price paid. The purchaser must demonstrate that the transaction was completed in a commercially reasonable manner based on the aircraft’s age, condition, and equipment. A purchaser is required to meet the 7.5% revenue requirement until the earlier of the date the aircraft has generated sales tax on leases or rental income that equals the amount of the exemption, or for 13 years. In addition, this exemption only applies to aircraft purchased after June 30, 2008. If the purchaser sells the aircraft before meeting all requirements, the sale will not result in the assessment of sales tax from the date of acquisition to the date of the sale. A purchaser is required to remit the sales tax on taxable lease and rental transactions no matter how long the aircraft is used for lease and rental.

A person can also be granted an exemption for aircraft acquired after December 31, 2007, for rental or leasing if the lessee of the aircraft predominantly uses it for public transportation (IC 6-2.5-5-8(h)). The DOR may not require a purchaser to meet the 7.5% revenue requirement to maintain this exemption. However, the DOR requires annual reports showing that the aircraft is predominantly used to provide public transportation.1

1 Public transportation is defined as the movement, transportation, or carrying of persons and/or property for consideration by a common carrier, contract carrier, a household goods carrier, carriers of exempt commodities, and other specialized carriers performing public transportation service for compensation.



Purchases by Nonresidents (IC 6-2.5-5-42)Indiana law exempts sales tax on transactions involving aircraft, including completion work, if the purchaser is not a resident of Indiana. In addition, the following conditions must be met:(1) The purchaser transports the aircraft outside Indiana within 30 days of accepting delivery of the aircraft or within 30 days

of when a repair, refurbishment, or remanufacture of the aircraft is completed.(2) The aircraft will be titled, registered, or based in another state or country.(3) The aircraft will not be titled or registered in Indiana.

A purchaser may claim the exemption by submitting an affidavit to the seller affirming all requirements have been met and identifying the state or country in which the aircraft will be titled, registered, or based. In addition, within 60 days of delivery, repair, refurbishment, or remanufacture of the aircraft, the purchaser is required to provide the seller with a copy of the purchaser’s title or registration outside Indiana.

Similarly, Indiana provides a use tax exemption to taxpayers for the keeping, retaining, or exercising of any right or power over an aircraft if the following criteria are met:(1) The aircraft is or will be titled, registered, or based in another state or country.(2) The aircraft is delivered to Indiana by or for a nonresident owner or purchaser of the aircraft.(3) The aircraft is delivered to Indiana for the sole purpose of being repaired, refurbished, remanufactured, or subjected to

completion work or a prepurchase evaluation.(4) After completion of the repair, refurbishment, remanufacture, completion work, or prepurchase evaluation, the aircraft is

transported to a destination outside Indiana.

Utilization of ExemptionsThe sales tax exemptions for aircraft acquired for rental or leasing and aircraft purchased by nonresidents have not been used by a large number of taxpayers recently, but the value of the exemptions has been significant. In CY 2016, CY 2017, and part of CY 2018, around 70 aircraft purchases qualified for these exemptions. The total estimated amount of sales tax revenue foregone during this time period was about $9.5 million. The value of the exemption is also substantial from the perspective of the purchaser due to the large purchase price associated with an aircraft. For example, the average purchase price of exempt aircraft that were purchased to be rented or leased was $2.26 million. The average estimated tax savings per aircraft that qualified for this exemption was about $147,000.

Table 8.1 shows the number of exempt aircraft as reported on the DOR’s Form ST-108AIR. The DOR requires aircraft purchasers to complete this form in order to claim a sales tax exemption for the purchase of an aircraft. The table also shows the estimated amount of exemptions claimed based on purchase price and trade-in value data reported on this form. An additional 11 aircraft, with a total estimated net purchase value of $6.3 million, were exempt under other statutes.

Table 8.1. Sales Tax Exemptions for Certain Aircraft, 2016-2018*Exemption Number of Purchases Estimated Value of Exemption

Aircraft purchased by a nonresident and based out of state within 30 days N/R N/R

Aircraft purchased to be rented or leased in the ordinary course of business 55 $8,000,575

Aircraft purchased to be rented or leased predominantly for public transportation 10 $1,538,077*Totals provided for CY 2016 through a portion of CY 2018.N/R = Five or fewer filers, count not reportable.Source: Aggregate data provided by the Department of State Revenue, data analysis by the Office of Fiscal and Management Analysis.



Sales Tax Exemption for Aircraft Parts (IC 6-2.5-5-46)Tangible personal property (including materials, parts, equipment and engines) used, consumed, or installed in the repair, maintenance, refurbishment, remodeling, or remanufacturing of an aircraft or avionics system of an aircraft is exempt from sales and use tax. The exemption applies to a transaction if either following requirement is met:(1) The retail merchant possesses a valid repair station certificate issued by the Federal Aviation Administration (FAA); or(2) For transactions after June 30, 2014, the retail merchant has leased a facility at a public use airport, which meets the

airport’s minimum standards for an aircraft maintenance facility, and the work is performed by a mechanic who is certifiedby the FAA.

Taxpayers may claim this exemption by presenting Form ST-105, the General Sales Tax Exemption Certificate, at the time of purchase. In addition, the owner of a public use airport is required to provide to the DOR a list of the retail merchants that have a lease with the airport and perform aircraft maintenance at that airport.

When the exemption was enacted in 2012, exempt transactions were more narrowly defined. The exemption only applied if an aircraft was registered in a country other than the United States and was either certified by the FAA as having a minimum landing weight of at least 5,000 lbs. or equipped with a turboprop or turbojet power plant. In addition, the exemption only applied to a transaction if the retail merchant had a valid repair station certificate issued by the FAA. In the following two years, the exemption was expanded to allow more transactions to potentially qualify. The General Assembly removed the requirements regarding the country of registration and type of aircraft in 2013. In 2014, the eligibility requirements were expanded to include retail merchants that have leased facilities at public use airports where work is performed by a mechanic certified by the FAA.

No data are available to determine the number of taxpayers claiming the exemption or the dollar amount of exemptions claimed. However, it is possible to estimate the number of taxpayers that could potentially claim the exemption and the total amount for purchases that could potentially be exempt. According to the FAA, there are 55 certified repair stations and over 4,800 certified mechanics located in Indiana as of August 1, 2018. Based on Indiana trade flow and business use data, the LSA estimates that businesses performing aircraft maintenance, repair, and remanufacturing purchased approximately $107.5 million in materials, parts, equipment, and engines in CY 2015. If all of these items that were purchased were exempt from sales tax, the impact on state revenue would have been about $7.5 million.

Sales Tax Exemption for Aviation Fuel (IC 6-2.5-5-49)Aviation fuel is exempt from Indiana sales and use tax. For purposes of the exemption, aviation fuel refers to the following:(1) Gasoline used to power an aircraft (aviation gasoline);(2) Jet fuel; or(3) A synthetic fuel or fuel derived from any organic matter used as a substitute for aviation gasoline or jet fuel.

The exemption was enacted in FY 2013. At the same time the exemption was enacted, the General Assembly also created a $0.10 per gallon aviation fuel tax. The rate was later increased to $0.20 per gallon starting in FY 2018. Fuel used by the following entities is exempt from the aviation fuel tax: federal government agencies, the state of Indiana, the Air National Guard, and common carriers of passengers or freight. Sales tax for aviation fuel purchased by those entities was already exempt under other provisions of the law before this sales tax exemption went into effect.

The U.S. Energy Information Administration (EIA) publishes data on the consumption, prices, and expenditures of aviation gasoline and jet fuel in Indiana. As shown in Table 8.2, it is estimated that between 360.5 million and 379.9 million gallons of aviation fuel were purchased in Indiana in FY 2016. Jet fuel is the most commonly used type of aviation fuel, comprising over 99% of total aviation fuel consumption. Jet fuel is primarily used in large commercial aircraft, while aviation gasoline powers various types of smaller planes.



Table 8.2. Consumption of Aviation Fuel in Indiana (in millions of gallons)FY 2014 FY 2015 FY 2016

Aviation Gasoline 2.9 – 3.2 2.8 – 3.0 2.8 – 3.0Jet Fuel 345.8 – 364.5 344.6 – 363.1 357.7 – 377.0

Total 348.7 – 367.7 347.4 – 366.1 360.5 – 380.0Source: Raw data provided by U.S. Energy Information Administration, data analysis by the Office of Fiscal and Management Analysis.

Table 8.3 shows estimated taxable gallons and actual revenue collections. The overall consumption of aviation fuel is in the hundreds of millions of gallons. However, the actual number of gallons that would have been subject to sales tax without the exemption is likely much smaller. Because the aviation fuel tax applies to fuel that was subject to sales tax before IC 6-2.5-5-49 went into effect, it is likely that the number of gallons subject to the aviation fuel tax is approximately the same as the number of gallons that are exempt from sales tax under this provision. Based on aviation fuel tax collections, the exemption provides tax relief for an estimated 4% to 5% of all aviation fuel purchases in Indiana.

Table 8.3. Aviation Fuel Taxes (amounts in millions)FY 2014 FY 2015 FY 2016 FY 2017

Revenue $1.50 $1.72 $1.71 $1.84Taxable Gallons 15.02 17.20 17.05 18.43

Source: Raw data provided by U.S. Energy Information Administration and Department of State Revenue, data analysis by the Office of Fiscal and Management Analysis.

Table 8.4 shows estimated expenditures on all aviation fuel, the amount of expenditures subject to the Indiana aviation fuel tax, and the estimated value of the sales tax exemption. Total expenditures are reported by the EIA. Taxable expenditures are estimated using EIA consumption and price data, combined with aviation fuel tax revenue collections. The decline in expenditures is primarily due to a decrease in the prices of jet fuel and aviation gasoline between FY 2014 and FY 2016. The estimated value of the sales tax exemption for aviation fuel excludes purchases by already exempt users, such as governmental agencies and common carriers. Data regarding the actual value of the exemption is not available.

Table 8.4. Aviation Fuel Expenditures and Estimated Value of Sales Tax Exemption (in millions)FY 2014 FY 2015 FY 2016

Total Aviation Fuel Expenditures $1,004.3 $766.2 $522.3Estimated Expenditures Subject

to Aviation Fuel Tax $45.3 $40.5 $27.8

Estimated Value of Sales TaxExemption $3.2 $2.8 $1.9

Source: Raw data provided by U.S. Energy Information Administration, data analysis by the Office of Fiscal and Management Analysis.

The same entities that are exempt from the aviation fuel tax were already exempt from paying sales tax on aviation fuel before this sales tax exemption was established. Because sales tax on aviation fuel was replaced by another tax, the sales tax exemption may not have been enacted as an incentive to encourage increased fuel purchases. However, the exemption did likely provide tax savings to aviation fuel purchasers. The EIA price data were used to estimate average prices of aviation gasoline and jet fuel in FY 2014 through FY 2016. As illustrated in Table 8.5, the 7% sales tax likely would have been higher than the $0.10 per gallon tax.



Table 8.5. Estimated Prices and Estimated Revenue Impact of P.L. 288-2013FY 2014 FY 2015 FY 2016

Price per GallonAviation Gasoline $3.82 $3.37 $2.70Jet Fuel $2.80 $2.14 $1.41Sales Tax per GallonAviation Gasoline $0.26 $0.23 $0.18Jet Fuel $0.19 $0.15 $0.10Impact of Sales Tax Exemption ($3.17 M) ($2.84 M) ($1.95 M)Net Impact on State Revenue ($1.67 M) ($1.12 M) ($0.24 M)Source: Raw data provided by U.S. Energy Information Administration and Department of State Revenue, data analysis by the Office of Fiscal and Management Analysis.

Using the estimated prices in Table 8.5, it is possible to estimate the revenue loss in FY 2014 through FY 2016 due to the simultaneous repeal of the sales tax on aviation fuel and implementation of the aviation fuel tax. The net impact on state revenue was an estimated reduction of $1.67 million in FY 2014, $1.12 million in FY 2015, and $0.24 million in FY 2016. The smaller impact in FY 2016 is mostly due to a reduction in fuel prices. The aviation fuel tax increase to $0.20 per gallon in FY 2018 will likely result in a net increase in future revenue. Any change in net revenue will depend on future aviation fuel prices.

Property Tax DeductionsIndiana has two aircraft property tax deductions. Both deductions were established in 2003. The aircraft property tax deduction was established to encourage the location of corporate airline headquarters in Indiana. The intrastate aircraft property tax deduction was established to encourage air service between certain Indiana airports.

Aircraft Property Tax Deduction (IC 6-1.1-12.2)The aircraft property tax deduction reduces a business’ property taxes by deducting the assessed value of eligible aircraft. The following conditions must be met to receive the deduction: (1) The business must have its corporate headquarters located in Indiana or be a subsidiary of a business with its corporate

headquarters in Indiana.(2) The aircraft must hold no more than 90 passengers or be used solely to transport property.(3) The aircraft must be owned or operated by a person who is certified as an air carrier or air taxi operator.

Taxpayers must claim the deduction on their personal property tax return. The deduction is available every year the taxpayer meets the required qualifications. Responses from the LSA’s 2018 Property Tax Incentive Survey indicate that no taxpayers have received the aircraft property tax deduction in the past five years.



Intrastate Aircraft Property Tax Deduction (IC 6-1.1-12.3)The intrastate aircraft property tax deduction reduces property taxes by deducting a portion of an aircraft’s assessed value. The aircraft must be used for commercial intrastate service between certain airports. Specifically, taxpayers must meet the following conditions to receive the deduction:(1) The aircraft must hold at least nine passengers or be used solely to transport property.(2) The aircraft must be owned or operated by a person who is certified as an air carrier or air taxi operator.(3) The aircraft must be used to offer intrastate airline service directly between either:

a. A qualifying medium hub airport and at least two qualifying underserved airports;1

b. Two qualifying commercial airports, one of which is not an underserved airport; orc. A qualifying medium hub airport and a qualifying commercial service airport other than a qualifying underserved airport

(A business can only receive a deduction for b or c if the same or another taxpayer is offering a service described in a).(4) The intrastate airline service described above must have been flown at least five times per week in the previous year.

An airport must have 2,500 or more passenger boardings annually and receive scheduled passenger service of aircraft to qualify as a commercial service airport under 14 CFR 158.3. In 2017, four airports located in Indiana had 2,500 or more passenger boardings: Indianapolis International (4.3 million), Fort Wayne International (0.35 million), South Bend International (0.31 million), and Evansville Regional (0.21 million) (Federal Aviation Administration). When the deduction was enacted, Purdue University’s airport was also a commercial service airport, but it lost that designation in 2004. From 2004 to 2013, there were six years in which Gary/Chicago International qualified as a commercial service airport. Both Purdue and Gary/Chicago International are currently designated as general aviation airports. Indianapolis International is the only qualifying medium hub airport in Indiana. South Bend International and Evansville International are the qualifying underserved airports.

Based on the qualifying criteria for the intrastate aircraft property tax deduction, all flights must offer connections through Indianapolis International to Evansville International and South Bend International. Other qualifying connections include Fort Wayne to Evansville International or South Bend International, but must include the Indianapolis International connections. Taxpayers may claim the deduction on their personal property tax return each year the qualifying criteria are met. The amount of assessed value that may be deducted is based on the proportion of ground time immediately preceding a qualifying connection.

In late 2004 and early 2005, American Trans Air (ATA) Airlines offered intrastate service between Indianapolis and three cities: Fort Wayne, South Bend, and Evansville (O’Malley, 2005). ATA Airlines planned to offer intrastate air service between Gary and Indianapolis (Grimm, 2005). The intrastate service ended as ATA moved flights from Indianapolis to Chicago Midway Airport. Northwest Airlines considered intrastate air service in 2005, but ultimately concluded that the service was not economically viable (O’Malley, 2005).

Responses to the LSA’s 2018 Property Tax Incentive Survey indicate that no taxpayers have received the intrastate aircraft property tax deduction within the past five years. Currently, there are no intrastate airline services that qualify for the deduction.

1 To be classified as a medium hub airport, the activity at the airport must account for at least 0.25% but less than 1% of the total enplanements in the United States. Indiana Code 6-1.1-12.3-9 defines a qualifying underserved airport as a qualifying commercial service airport that serves a municipality that is not directly connected by an interstate highway with a municipality served by a medium hub airport.



ConclusionThere is not enough data available to determine the full extent of the impact of the aviation-related sales tax exemptions. However, it is likely that they encourage aviation activity in the state and the use of Indiana-based manufacturing, maintenance, and refurbishment facilities to some extent. Because most other states offer similar sales tax exemptions and because of the mobile nature of the aviation industry, these exemptions may be necessary for Indiana facilities to remain competitive. The exemption for certain aircraft provides substantial savings to aircraft purchasers, and a potentially large number of certified repair stations and mechanics may benefit from the exemption for repair parts. The aviation fuel exemption likely does not affect a large portion of fuel purchases since most aviation fuel is purchased by exempt entities (e.g. public transportation providers). However, this incentive may still be important because an additional tax is imposed on sales tax exempt fuel purchases.

There have been no known claims for the aircraft property tax deduction or intrastate aircraft property tax deduction in the past five years. Currently, there is no intrastate air service that meets the criteria for the intrastate deduction.

Sales Tax Exemption for Recreational Vehicles and Cargo Trailers(IC 6-2.5-5-39; IC 6-2.5-2-4)


Sales Tax Exemption for Recreational Vehicles and Cargo Trailers (IC 6-2.5-5-39; IC 6-2.5-2-4)Indiana provides a “drive-out” exemption for recreational vehicles (RVs) and cargo trailers. Purchases of RVs and cargo trailers are exempt from Indiana sales tax if the purchaser’s state of registration provides a reciprocal exemption for Indiana residents purchasing RVs and cargo trailers. For a transaction to be exempt, the following requirements must be met:

(1) The purchaser must not be a resident of Indiana.(2) The purchaser must transport the RV or cargo trailer to a destination outside Indiana within 30 days of delivery.(3) The RV or cargo trailer must be titled or registered in another state.(4) The RV or cargo trailer must not be titled or registered in Indiana.(5) The state in which the RV or cargo trailer is registered must provide a sales tax exemption for a cargo trailer or

RV that is purchased in that state by an Indiana resident and will be titled or registered in Indiana.

Indiana code defines “cargo trailer” as a vehicle without motive power, designed for carrying property, designed for being drawn by a motor vehicle, and having a gross vehicle weight rating of at least 2,200 lbs. “Recreational vehicle” is defined as a vehicle with or without motive power equipped exclusively for living quarters for persons traveling upon the highways. The following are considered to be RVs for the purposes of this exemption: a travel trailer, a motor home, a truck camper with a floor and facilities enabling it to be used as a dwelling, and a fifth wheel trailer.

Purchasers may claim the exemption by submitting an affidavit to the retail merchant stating their intent to transport the RV or cargo trailer outside Indiana within 30 days. Purchasers must also title or register the RV or cargo trailer in a qualifying reciprocal state. Effective July 1, 2017, cargo trailers and RVs purchased and transported to nonreciprocal states pay the sales tax rate of the destination in which they are titled and registered. Locally imposed sales tax rates are not included in that rate. To receive the special rate, the purchaser must certify in an affidavit the name of the state or country in which the cargo trailer or RV will be titled or registered.

Currently, all foreign countries and the following nine states do not provide an exemption for vehicles to be registered in Indiana: Arizona, California, Florida, Hawaii, Massachusetts, Michigan, Mississippi, North Carolina, and South Carolina. All other states either provide a drive-out exemption or do not impose a sales tax. Kentucky, Maine, and Rhode Island provide reciprocal exemptions for RVs but not cargo trailers.

Comparison to Other StatesTable 9.1 compares sales tax rates, exemptions, and credits allowed for cargo trailers and RVs by state. It also shows whether or not dealers are required to collect sales tax on purchases in Indiana based on the state in which a cargo trailer or RV is titled or registered. If a state provides an exemption to Indiana residents or does not impose a sales tax, then RVs and cargo trailers purchased in Indiana and registered in that state are exempt from Indiana sales tax. Otherwise, Indiana dealers are required to collect sales tax equal to the rate of the destination state at the time of the purchase.

Most states, including Indiana, offer a credit for sales tax paid to another state to avoid double taxation. Therefore, if an individual purchases a vehicle in Indiana and pays the 7% sales tax to Indiana, the purchaser would generally not be required to pay state sales tax in his or her home state if that state’s rate is equal to or less than 7%. If the home state’s rate is greater than 7%, the purchaser would only be required to pay to his or her home state the amount that exceeds 7%. The purchaser would also be responsible for paying locally imposed taxes in the home state. However, a few states do not allow a sales tax credit for tax paid to another state.



StateSales Tax Rate on

RVs and Cargo Trailers

Exemption for RVs and Cargo Trailers

Registered Out of StateIndiana Dealers

Required to Collect Sales Tax

Allows Sales Tax Credit for Tax Paid to

Another StateAlabama 2% Yes No YesAlaska None N/A No YesArizona 5.6% No Yes YesArkansas 6.5% Yes No NoCalifornia 6% No Yes YesColorado 2.9% Yes No Yes

Connecticut 6.35%, 7.75% if vehicle is over $50,000 Yes No Yes

Delaware None N/A No NoDistrict of Columbia 5.75% Yes No YesFlorida 6% No Yes YesGeorgia None N/A No YesHawaii 4% No Yes YesIdaho 6% Yes No YesIllinois 6.25% Yes No YesIndiana 7% Yes Yes YesIowa 5% Yes No YesKansas 6.5% Yes No Yes

Kentucky 6% Exemption for RVs only Trailers only – RVs are exempt Yes

Louisiana 5% Yes No Yes

Maine 5.5% Exemption for RVs only Trailers only – RVs are exempt Yes

Maryland None N/A No NoMassachusetts 6.25% No Yes YesMichigan 6% No Yes YesMinnesota 6.875% Yes No Yes

Mississippi 3% for RVs, 7% for trailers No Yes No

Missouri 4.225% Yes No YesMontana None Yes No YesNebraska 5.5% Yes No YesNevada 6.85% Yes No YesNew Hampshire None Yes No YesNew Jersey 6.625% Yes No YesNew Mexico 3% Yes No YesNew York 4% Yes No Yes

Table 9.1 Comparison of Sales Tax Rates, Exemptions, and Credits for RVs and Cargo Trailers by State



StateSales Tax Rate on

RVs and Cargo Trailers

Exemption for RVs and Cargo Trailers

Registered Out of StateIndiana Dealers

Required to Collect Sales Tax

Allows Sales Tax Credit for Tax Paid to

Another StateNorth Carolina 3% No Yes YesNorth Dakota 5% Yes No YesOhio 5.75% Yes No YesOklahoma None N/A No NoOregon None N/A No YesPennsylvania 6% Yes No Yes

Rhode Island 7% Exemption for RVs only Trailers only – RVs are exempt Yes

South Carolina 5% No Yes YesSouth Dakota 3% Yes No YesTennessee 7% Yes No YesTexas 6.25% Yes No YesUtah 4.7% Yes No YesVermont 6% Yes No YesVirginia 4.15% Yes No YesWashington 6.5% Yes No YesWest Virginia 5% Yes No NoWisconsin 5% Yes No YesWyoming 4% Yes No Yes

Source: State Department of Revenue, Tax Comparison Chart, https://www.in.gov/dor/3785.htm.

ExamplesThe following are simplified examples of hypothetical RV purchases that illustrate how Indiana’s exemption and special rates can affect the amount of tax paid by purchasers who are residents of other states. The examples address only state sales taxes. Local sales taxes, excise taxes, and fees imposed in the state in which the RV will be registered are not included.

Purchase of RV by Resident of a State with Similar Exemption1. A person purchases an RV for $100,000 in Indiana and plans to register and title it in Ohio within 30 days of the purchase.

The transaction is exempt from Indiana’s 7% sales tax because Ohio provides a sales tax exemption to Indiana residents who purchase an RV or cargo trailer in that state. Ohio’s sales tax rate is 5.75%. The purchaser would pay $5,750 in state sales tax to Ohio upon registering or titling the vehicle. Indiana’s exemption saves the purchaser from paying an additional 1.25%, or $1,250, in sales tax.

2. A person purchases an RV for $100,000 in Indiana and plans to register and title it in Tennessee within 30 days of the purchase. The transaction is exempt from Indiana sales tax because Tennessee provides a similar sales tax exemption. Tennessee’s sales tax rate is 7%, so the purchaser would pay $7,000 in sales tax to Tennessee upon titling or registering the RV. In this case, Indiana’s sales tax exemption does not provide any tax savings to the purchaser.

Purchase of RV by Resident of a State that Does Not Provide Similar Exemption3. A person purchases an RV for $100,000 in Indiana and plans to register and title it in Arizona within 30 days of the purchase.

The transaction is not exempt from Indiana sales tax because Arizona does not provide a sales tax exemption for RVs purchased by nonresidents. The purchaser would pay $5,600 in sales tax to Indiana because Arizona’s state sales tax rate is 5.6%. The purchaser would receive a credit for that amount against Arizona sales tax when titling or registering the vehicle in Arizona. In this example, the taxpayer receives a tax savings of $1,400 because the full 7% rate is not applied.

https://www.in.gov/dor/3785.htm.



Estimated Revenue ImpactInformation regarding the actual usage of this tax incentive is not available. However, we can estimate the incentive’s potential impact on sales tax revenue using data from the federal government and other relevant sources. The RV Industry Association estimates that in 2017, the total retail value of RVs in the United States was about $20.02 billion. Using data from the 2012 Economic Census regarding sales of recreational vehicles, parts, and accessories by state, the LSA estimates that 2.38%, or $476.52 million, of all RV sales in the United States occur in Indiana. No data are available that indicate the share of RVs sold in Indiana that are transported out of state, so we assume that 20%, or $95.30 million, of Indiana RV sales are not made to Indiana residents. Using Personal Consumption Expenditure data from the Bureau of Economic Analysis and assigning a heavier weight to neighboring states, we are able to estimate the share of sales made to reciprocal and nonreciprocal states. Based on these sales estimates, the estimated state revenue foregone due to the exemption and reduced rates for RVs and cargo trailers is approximately $4.97 million annually. This estimate is subject to change depending on factors such as changes in the economy and trends in RV sales.

Motorsports-Related Incentives


Motorsports-Related IncentivesIndiana is considered to be one of the three main hubs of the motorsports industry. The other two are located in North Carolina and England. While the Indianapolis Motor Speedway is the most widely known motorsport facility in Indiana, the state hosts several major motorsports events and has a broad range of racing leagues, racing teams, and racetracks. In addition, various race car design and assembly, parts manufacturing, engineering, and marketing firms directly related to the motorsports industry are located in Indiana. A Purdue University study identified 2,130 motorsports related businesses with 23,000 total employees throughout the state in 2011 (Hutcheson, et. al., 2011). These businesses provided approximately 1% of all jobs in Indiana in 2011. The study also found that over 22,000 additional firms with an estimated 421,000 employees were connected to the motorsports industry in some way.

Based on business-level employment and wage data, the LSA estimates that around 70 racing teams, drivers, or race vehicle owners were based in Indiana in 2017 (U.S. Bureau of Labor Statistics, 2017). These businesses employed about 700 people and paid a total of $56.4 million in annual wages. In addition, the 24 racetracks and promoters throughout the state employed over 1,000 temporary and full time employees and paid $21.3 million in total annual wages.

This section covers two motorsports tax incentives: (1) the sales tax exemption for racing parts and (2) the motorsports investment district (MID). Both incentives are intended to bolster the competitive advantage of the motorsports industry cluster in Indiana.

Sales Tax Exemption for Certain Racing Equipment (IC 6-2.5-5-37)Tangible personal property that comprises any part of a professional motor racing vehicle that is leased, owned, or operated by a professional racing team is exempt from sales and use tax. This exemption includes replacement and rebuilding, and component parts of a racing vehicle, including chassis and engines. However, it excludes tires and accessories. In addition, a company that is engaged in offering a competitive racing experience during a competitive racing event is entitled to the same exemption for the purchase of tangible personal property that comprises any part of a two-seater Indianapolis 500 style race car.

Professional racing teams must qualify as a trade or business under IRS regulations as a for-profit business in order to claim the sales tax exemption (Department of State Revenue, 2012). Therefore, the purchase of a vehicle for a sporadic activity, a hobby, or an amusement diversion does not qualify for the exemption. The DOR has defined other terms to clarify whether certain items may qualify for this exemption.

• A chassis is exempt and includes paint and decals, but not tires or accessories. • Instrumentation and telemetry equipment permanently affixed to the vehicle are not considered accessories, and therefore

may qualify for the exemption.• Tires are not exempt and include tubes, but exclude wheels.• Accessories include any and all instrumentation and telemetry equipment that is not permanently attached to the vehicle,

as well as consumables and the driver’s protective clothing and headgear. Accessories are not exempt.

A professional racing team or owner, operator, or lessee of a two-seater Indianapolis 500 style car may claim the exemption on the General Sales Tax Exemption Certificate (Form ST-105). The exemption for professional motor racing vehicles was enacted in 1994, and the exemption for two-seater Indianapolis 500 style cars was added in 2012, effective retroactively on January 1, 2011.



The sales tax exemption for motor racing vehicles directly benefits racing teams, as well as the race vehicle and parts manufacturing firms located in Indiana. Racing teams may purchase all vehicle parts (except tires and accessories) exempt from Indiana sales tax, and manufacturers of exempt parts are not required to collect tax on sales of parts, regardless of where the customer is based. However, the actual usage of this tax incentive is not known because taxpayer data regarding the number or amount of claims are not available. In addition, the cost of racing vehicles may vary significantly depending on the type of vehicle, and the quantity of racing vehicles and parts sold in the state is unknown. As a result, a precise estimate of the cost of the exemption is not available. To illustrate the potential benefit taxpayers receive, consider a race car that costs $200,000. Assuming this cost does not include tires or accessories, the sales tax exemption would provide $14,000 in tax savings to the purchaser. The total annual benefit to a racing team may be higher, depending on the number of vehicles and any exempt replacement parts it purchases throughout the year.

Comparison to North CarolinaWhile Indiana is considered to be a major hub for motorsports teams and related businesses, another significant motorsports cluster is located in North Carolina. North Carolina has a similar sales tax provision to Indiana’s exemption for racing equipment. The state allows professional motorsports racing teams to claim a 50% refund of sales and use tax paid on tangible personal property, other than tires or accessories, which comprises any part of a professional motorsports vehicle. For purposes of North Carolina’s law, the term “accessories” includes instrumentation, telemetry, consumables, and paint.

Table 10.1 shows the number and amount of refunds claimed since 2011, as reported by the North Carolina Department of Revenue. In CY 2017, 14 professional motorsports teams claimed $1.44 million in refunds. Based on these data, it is estimated that professional motorsports teams claiming the refund spent around $60.8 million on vehicle parts, excluding tires and accessories.

Table 10.1. North Carolina Sales Tax Refund for Professional Motorsports TeamsCalendar Year Number of Taxpayers Refunds Claimed

2011 19 $1,705,3322012 16 $1,208,8422013 13 $1,376,5072014 12 $1,359,9662015 18 $2,109,0392016 12 $1,320,9532017 14 $1,443,607

Source: North Carolina Department of Revenue, Economic Incentives Reports, https://www.ncdor.gov/reports-and-statistics/economic-incentives-reports.

Although this information may be useful in estimating the scope of Indiana’s sales tax exemption, we should use caution in directly comparing the two incentives due to several differences. First, Indiana’s sales tax rate is 7%, while North Carolina’s state rate is currently 4.75%. In addition, each state may define certain terms differently, which could result in an item qualifying for an exemption in one state but not the other. Another key difference is the types of racing teams in each state. The number of teams may vary slightly across states and over time, and the costs associated with different types of racing vehicles may differ significantly.



Motorsports Investment District (IC 5-1-17.5)A motorsports investment district (MID) is a special district where certain state and local tax revenues generated by activity at, and around, a motorsports facility are dedicated to obligations for capital improvement projects and lease payments. The ultimate goal is to encourage economic development by generating economic activity that will attract new businesses and encourage existing businesses to expand near an established district. The only existing Indiana MID encompasses the Indianapolis Motor Speedway (IMS) in Marion County.

Indiana Motorsports CommissionIn 2013, the Indiana Motorsports Commission was created with the authority to create a MID and oversee the capital projects within the district. The Commission may establish a MID provided it contains a qualified motorsports facility. To qualify, a motorsports facility must be greater than two miles in length and have at least two professional motorsports racing events with a combined total of at least 200,000 annual admissions. Professional racing events include practices that are open to the general public. The IMS is the only facility that currently qualifies for a MID designation. The district may also include:• adjacent properties owned by the facility owner or subsidiaries;• properties on which activities related to the qualified facility occur; and• other public property specified by the Commission.

To establish a MID, the Commission must determine that improvements will have a positive effect on the activities of a qualified motorsports facility, improve public health and welfare, provide public utility and benefit, and protect or increase state and local tax bases and revenues. The Commission must have a public hearing and adopt a resolution establishing a MID. The Commission determines the geographic area of the MID in a resolution. The resolution designating a MID must be reviewed by the State Budget Committee and be approved by the State Budget Agency. The MID may not exist for more than 30 years or beyond the date the facility owners fulfill their obligations to the Commission. The MID was first established by resolution in December 2013. The district was expanded in 2015 and 2017 to include additional businesses surrounding the IMS. Map 10.1 shows the current boundaries of the MID.

Map 10.1. Indianapolis Motorsports Investment District

Source: Indiana Motorsports Commission, Resolution G-2-2017, https://www.in.gov/IMC/2339.htm. Map was created by Office of Fiscal and Management Analysis.



Indianapolis Motor SpeedwayThe IMS is one of the world’s largest spectator sports facilities. While several other professional events occur at the facility, the most widely known race is the Indianapolis 500. The first Indianapolis 500-mile race took place in May, 1911. The race has run every year except for six years during World War I and World War II. The 100th running of the Indy 500 occurred on May 29, 2016. The current facility encompasses 560 acres and a 2.5 mile track in Speedway, Indiana just west of Indianapolis in Marion County.

Improvements and BondsThe Commission is authorized as an instrumentality of the state to finance and lease real and personal property improvements for the benefit of the owner of a qualified facility. The MID program provides a unique funding mechanism for Indiana to partner with the facility owner to make improvements. The goal of establishing a MID is to reduce the burden of facility improvements on surrounding communities. Also, the intent is to allow those communities to potentially take advantage of the economic activity that spills over from the improvements within the district.

The Indiana Finance Authority (IFA) issued about $92.76 million in bonds to pay for the cost of improving, constructing, reconstructing, renovating, acquiring, or equipping improvements at the IMS. The IFA entered into a lease with the Commission for structures and capital improvements located in the district. The Commission then entered into a sublease with the IMS for the same property. The IMS is required to pay at least $2 million in lease payments for 20 years. The Commission may request an appropriation up to $7 million per fiscal year until the bonds issued by the IFA are no longer outstanding or up to 22 years after the first appropriation. The IMS has agreed to pay the difference if the aggregate amount of credit allocated is less than the total amount of funds appropriated. As of June 30, 2017, there is approximately $89.4 million in outstanding debt.

The $92.76 million investment made at the IMS was to improve facilities in order to continue to compete as a major hub within the racing industry. The authorizing resolution and bond offering provide an outline for the Commission’s improvement plan. The improvement plan intends to improve and enhance the fan experience, seating, and parts of the track facility. The following projects are included in the plan:• Renovation of the penthouse setting in stand A including restrooms and concession facilities• Upgrades to seating options in Stand E• Adding a fan entertainment deck, technology, and seating to the Hulman Terrace• Implementation of high definition video boards and improving wireless access throughout the facility• New gateways to increase access to the facility• Track safety improvements• Expansion of Pagoda Plaza inside the track• Updating all existing concession stand and several restroom facilities

Unlike other economic development programs with an incremental tax capture, the MID is structured more like a loan than a grant or tax credit agreement. The bond payments are financed through annual appropriations by the General Assembly. The $2 million annual cash payments provided by the IMS and certain credits are applied towards the repayment of the appropriations. The credits are provided through three main sources: incremental sales tax, incremental income tax, and an admissions fee. Specifically, the credits are collected from: (1) incremental sales tax revenue remitted by taxpayers in the MID; (2) incremental income tax revenue from income taxes paid with respect to income earned or attributable to the taxpayer’s activities within the MID; (3) and an admissions fee imposed on race day admissions at IMS. The sum of the tax credits are allocated toward the debt service incurred for MID improvements. The IMS has agreed to pay the difference between the total credits and appropriations at the end of 30 years.

The amount of the increments are determined by the DOR. Retail merchants must report all income and sales that occur in the MID. Professional racing teams and out-of-state professional race car drivers must also report income earned while participating in activities at the IMS. Professional racing team members include any person who rendered services on behalf of the team, including independent contractors. All professional out-of-state racers must pay Indiana income taxes resulting from a race event. Like professional sports teams, the tax is equal to the amount of duty days in Indiana divided by total duty days.



The admissions fee is imposed on each person charged for admission on race day. The admissions fee equals the price of admission multiplied by the applicable percentage on the following scale: • 6% on admissions on an admissions charge of at least $150;• 3% on admissions charge of at least $100 but less than $150; and• 2% on an admissions charge of less than $100.

The admissions fee revenue is deposited in the state General Fund and credited toward the lease agreement. The admission fee will expire once all bonds issued by the IFA for improvements in the MID are no longer outstanding and the aggregate amount of credits allocated to the IMS equals or exceeds the total appropriations.

Table 10.2 shows the gross retail and income tax increment. It also shows the admission fees collected from 2014 through 2016. The tax credits from merchant incremental retail sales tax and incremental individual income taxes paid within the MID between CY 2013 and CY 2016 totaled nearly $6.4 million. The increase in gross retail is, in part, due to an expansion of the MID in 2015 (see Map 10.1). Over $3.7 million was collected in admissions fees between CY 2014 and CY 2016. The total amount of credits toward the repayment of the appropriation was over $10 million over the first four years.Table 10.2. Gross Retail, Incremental Income Tax, and Admissions Fee

Year Gross RetailAmount

Incremental Income Tax Amount

MotorsportsAdmission Fee

TotalAmount

CY 2013 ($3,756) ($37,013) $0 ($40,769)CY 2014 $302,144 $635,395 $966,075 $1,903,614CY 2015 $989,281 $1,064,509 $1,234,471 $3,288,261CY 2016 $2,231,770 $1,210,614 $1,564,803 $5,007,187

Total Increment 2013-2016 $3,519,439 $2,873,505 $3,765,349 $10,158,293

Source: Data by Indiana Department of State Revenue, analysis by Office of Fiscal and Management Analysis.

Literature ReviewThe improvement plan lists a number of specific projects designed to improve the fan experience. Research suggests that the quality of the spectator experience is an important component of drawing visits to an event at a given facility (Lee et.al. 2012). Fan experience at a sporting event has a direct impact on visits, revisits, and reputation. Increased visits leads to increased economic activity that can have direct and indirect impacts on employment, income, and government revenue. Findings on the actual economic impact of sporting events, especially mega or mass-sporting events, is mixed for various reasons (Matheson 2006).

Generally, researchers have defined mega or mass sporting events as events that draw attention and visibility to an area from a national or international audience. Typical descriptors of mega events include: the National Football League’s Super Bowl, Soccer World Cup, and the Olympics (Gong 2012). Most mass-sporting events are irregular. A city wins a bid, makes necessary improvements, and hosts an event in an effort to garner widespread attention to the area in which the event is hosted. Most mass events have additional activities that may last over an extended period of time (e.g. multiple weeks). Those one-time events are expected to have an economic impact that justifies major infrastructure improvements. The evidence to justify the type of investment for a one-time major event is mixed because, in some cases, the necessary improvements to host the event are underutilized after the event occurs (Matheson 2006).

The IMS is unique. In addition to smaller events, the IMS hosts reoccurring mass events, including the Indianapolis 500, Red Bull Air Race, Indy Car Grand Prix, and Big Machine Vodka 400 at the Brickyard. Like most mass events, the events at IMS have multiple associated activities (e.g. racer practice days, IPL 500 Festival Parade, concerts, parties, etc.).The IMS reports that these events draw hundreds of thousands spectators. A study by the Indiana University Public Policy Institute (2013) references a Turnkey survey reporting that the Indianapolis 500 (IndyCar), Brickyard 400 (NASCAR), and Indianapolis Grand Prix attract more than 200,000 out-of-state visitors annually.



The IMS is also unique because it serves as a hub for the motorsports industry cluster. In addition to events, it is the location of multiple IndyCar teams and Dallara’s IndyCar assembly facility. Through operations and events, the IMS is responsible for 1,570 employees (full-time equivalents) and nearly $171 million of direct economic activity, annually (Klacik 2013).

The full return on the investments made through the MID program will be unknown for several years. The impact of not making the investments also is unknown. However, the uniqueness of the IMS as a motorsports spectator and industry hub suggests that maintaining and updating the facility may increase its utilization, both through drawing more spectators and ensuring that it remains the location for IndyCar teams and assembly.

ConclusionTwo tax incentives are intended to support the competitive advantage of the motorsports industry cluster in Indiana. The sales tax exemption for certain racing parts exempts sales and use tax for parts (with the exception of tires and accessories) of professional motor racing vehicles that are leased, owned, or operated by a professional racing team. The MID is a special district in which certain tax revenues within the district are dedicated to repaying obligations for capital improvements and lease payments at IMS.

The sales tax exemption directly benefits the motorsports industry in Indiana and likely encourages motorsports firms, including race teams, to make business transactions in Indiana. However, there is not enough information available to determine the extent of the impact of this tax incentive. While it provides a financial benefit to motorsports-related businesses in Indiana, there are several other benefits to businesses that locate in the state. For example, the Purdue (2012) study notes the proximity of a skilled workforce as one advantage. Indiana higher educational institutions offer various academic programs specifically designed to educate workers to enter the motorsports or automotive industry. The study also cites the presence of automotive and transportation equipment manufacturers as a reason the state may appeal to the motorsports industry. In addition, Indiana’s reputation as a motorsports hub encourages teams and other related businesses to locate to the state.

An MID was established that encompasses the IMS and surrounding businesses in 2013. (The Indianapolis MID expanded in 2015 and 2017 to include more businesses.) In addition to direct payments received and admission fees, the incremental sales tax and incremental income tax revenue within the district are credited towards the repayment of the $92.76 million borrowed for IMS improvements. It is difficult to predict or forecast the state’s return on investment from the appropriations. Not enough time has passed since the improvements were completed. Also, data necessary for such an analysis are not publicly accessible. However, the incremental increase in sales and income taxes suggests that there is some direct growth in economic activity that is at least impacting state revenue generation. In addition, the admissions fee revenue indicates that there are either more admissions or that spectators are willing to pay more to attend activities at IMS. Those indicators should be reviewed with caution because it is unknown whether or not income and sales receipts would have grown as much, or if ticket receipts would have increased without the improvements. Also, it is unknown whether the additional spending at the IMS represents new spending, or if it is displaced spending that would have occurred in another location in the state.

Adoption Tax Credit (IC 6-3-3-13)


Adoption Tax Credit (IC 6-3-3-13)Adoption tax credits are intended to help families offset the cost of adoption. The Indiana adoption tax credit was established to provide an additional nonrefundable tax credit for taxpayers who claim the federal adoption tax credit. Understanding the federal adoption tax credit is necessary to analyze the potential impact of Indiana’s adoption tax credit because a taxpayer must claim federal credits to receive Indiana credits. This section also discusses other available subsidies to offset adoption costs.

Federal Tax CreditThe federal adoption credit was enacted in 1996 with the intention of encouraging the adoption of foster children into permanent placement (i.e., public adoptions). However, taxpayers may also claim credits for domestic and international adoptions outside the foster system (Green 2007; Wolters Kluwer 2017). In fiscal year 2015, nearly 64,000 taxpayers claimed approximately $251 million in federal adoption tax credits nationwide.

The federal adoption tax credit is nonrefundable. However, unused credits may be carried forward for up to five years. The federal credit equals the amount of the qualified adoption expenses. However, the amount of the credit is limited by a credit maximum and by the taxpayer’s income. The maximum credit amount and income thresholds are annually adjusted for inflation. In tax year 2018, the maximum credit amount allowed is $13,840 per adoption. The credit is phased out beginning with taxpayers whose modified adjusted gross income (MAGI) is greater than $207,140. Taxpayers with a MAGI over $247,140 may not claim the credit. MAGI is computed by taking a taxpayer’s adjusted gross income and adding back certain deductions such as foreign earned income, student loan interest, and rental loss.

The amount and timing of the federal adoption tax credit differs by adoption type. All unused credits may be carried forward for five years after the first claim for all types of adoption. Table 11.1 summarizes the eligibility requirements for each type of adoption. Generally, taxpayers who adopt domestically may claim a credit for qualified adoption expenses in the tax year following the year the expenses occurred. Taxpayers who adopt a special needs child may claim the maximum allowable credits in the final year of the adoption, regardless of the actual amount of qualified expenses incurred. Taxpayers who adopt children without special needs may claim credits only for qualified expenses incurred, up to the maximum credits allowed. Credits for foreign adoptions may only be claimed by taxpayers after adoptions are finalized.

Table 11.1. Federal Adoption Eligibility by Adoption DefinitionsAdoption Type Definitions Eligibility

Domestic Adoption – Adopted individual under 18 years of age at the time of the adoption, who is physically or mentally incapable of taking care of him or herself (26 U.S. Code § 23 (d)(2)).

A taxpayer may claim the credit for qualified expenses before the year an adoption becomes final. The credit may be claimed for the tax year following the year of qualified payments. Credits for expenses of domestic adoptions may be claimed even if the adoption is never finalized. (26 U.S. Code § 23 (a)(2))

Special Needs Child – For the purposes of the adoption tax credit, a special needs child meets the following criteria (26 U.S. Code § 23 (d)(3)):• The child is a citizen or resident of the United States or

U.S. possession;• A state has determined that a child cannot or should not

be returned to the home of his or her parents; and• The state concludes that a specific factor or condition

of a child such that he or she cannot by placed withadoptive parents without providing adoption assistance.

A taxpayer may claim the credit for qualified expenses before the year an adoption becomes final. The credit may be claimed for the tax year following the year of qualified payments. Credits for qualified expenses may be claimed even if the adoption is never finalized.

The taxpayer may claim the maximum credit in the final year of the adoption, regardless of the amount of actual qualified adoption expenses incurred.

Foreign Adoption – An adoption of a child who is not a citizen or resident of the United States.

Taxpayer may not claim the credit for qualified adoption expenses until adoption becomes final. Any expenses paid or incurred before the taxable year in which the adoption is finalized may be claimed up to the maximum allowed.

Source: U.S. Code.



Indiana Tax CreditThe Indiana adoption tax credit was established in 2014. The Indiana adoption tax credit is equal to the lesser of 10% of the qualifying federal adoption credit the taxpayer claims for the taxable year or $1,000 per eligible child. Taxpayers are not eligible to claim the Indiana adoption tax credit for any federal adoption credits claimed if the first allowable year was before January 1, 2015. The credit must be used in the same year the qualifying federal adoption credit is claimed.

Table 11.2 illustrates the 2018 maximum federal adoption tax credit ($13,810) and the maximum allowable state adoption tax credit ($1,000) at various MAGI levels. As shown, the federal credit begins to phase out at $207,140 and is not allowed at a MAGI greater than $247,140. The additional Indiana credit is capped at $1,000 until the maximum federal credit reaches a level below $10,000. The maximum amount of state credit decreases as the federal statutory maximum credit begins to phase out.

Table 11.2. Maximum Allowable Adoption Credits by Income LevelMAGI Federal Indiana Total

$207,140 $13,810 $1,000 $14,810$210,000 $12,823 $1,000 $13,823$215,000 $11,096 $1,000 $12,096$220,000 $9,370 $937 $10,307$225,000 $7,644 $764 $8,408$230,000 $5,918 $592 $6,509$235,000 $4,191 $419 $4,610$240,000 $2,465 $247 $2,712$245,000 $739 $74 $813$247,140 $0 $0 $0

Source: Analysis by Office of Fiscal Management and Analysis.

Table 11.3 shows a hypothetical example of the adoption credit claimed by a taxpayer who initiates a single adoption in 2015. In the example, the taxpayer has an $8,500 federal tax liability and a $2,200 state tax liability. The taxpayer incurs $25,000 in qualified expenses for a private domestic adoption. As shown, the hypothetical taxpayer initiates the adoption in 2015 with $10,000 in qualified expenses that are claimed in 2016. Since the credit is nonrefundable, the taxpayer cannot claim the entire $10,000 in qualified adoption expenses in 2016, but they can carry forward the remaining $1,500 to the following year.

The hypothetical taxpayer incurs $15,000 adoption expenses in 2016 and may add the $1,500 carryover from the previous year, for a total of $16,500 in qualified expenses that may be claimed before considering tax liability in 2017. Since the taxpayer already claimed $8,500 in the previous year, the maximum amount that can be claimed is $5,070 (the difference between the current year statutory maximum credits claimed the previous year) before the federal tax liability is considered. The maximum amount is below the taxpayer’s $8,500 federal tax liability, so the $5,070 credit may be claimed. The taxpayer may not carry forward the remaining balance because the federal statutory maximum has been met for the adoption of this child.

Since the adoption was initiated in 2015, the taxpayer may claim the Indiana tax credit. The hypothetical taxpayer may claim 10% of the $8,500 and $5,070 in 2016 and 2017, respectively. Over the two-year period, the hypothetical taxpayer received $13,570 in federal adoption tax credits and $1,357 in state adoption tax credits. The $14,927 total adoption tax credits this taxpayer received is 60% of the $25,000 in qualified expenses incurred.



Table 11.3. Hypothetical Taxpayer Claiming Adoption Tax Credits for $25,000 of Qualifying Expenses (Domestic Adoption)

2015 2016 2017 2018Maximum Statutory Credit $13,400 $13,460 $13,570 $13,810Maximum Credit That May Be Claimed Based on Previous Year Claims

$0 $13,460 $5,070 $0

Current Year Qualifying Adoption Expenses $10,000 $15,000 $0 $0Calculation of Expenses Claimed Before Federal Tax Liability

Previous Year Expenses to Claim $0 $10,000 $15,000 $0Unused Credits Carried Forward $0 $0 $1,500 $0Total Expenses $0 $10,000 $16,500 $0Credit Amount Before Tax Liability $0 $10,000 $5,070 $0

Calculation of Credits That May Be Claimed and Carried Forward Based on Federal Tax LiabilityFederal Tax Liability $8,500 $8,500 $8,500 $8,500Amount Claimed $0 $8,500 $5,070 $0Carry Forward Amount $0 $1,500 $0 $0

Calculation of Indiana Credits That May be Claimed (Lesser of 10% Federal Adoption Credit or $1,000)Indiana Tax Liability $2,200 $2,200 $2,200 $2,200Indiana Credit $0 $850 $507 $0Cost Reduction from Credits $0 $9,350 $5,577 $0Source: Adapted from Crandall-Hollick, M.L. (2017). Adoption Tax Benefits: An Overview.

Figure 11.1 compares the distribution of national and state adoption tax credit claims by taxpayers with a federal adjusted gross income (FAGI) above $30,000 in tax year 2015.1

Relative to all national tax returns with federal adoption tax credit claims, a disproportionate share of total Indiana tax credits were claimed by taxpayers with a FAGI between $50,000 and $100,000 (52% of total Indiana adoption credit claims).

Nearly one-third of federal and Indiana adoption tax credits were claimed by taxpayers with an AGI between $100,000 and $200,000.

The average amount of Indiana adoption tax credits claimed per return was $492 in 2015.

Figure 11.1. FAGI Distribution of Number of National and Indiana Taxpayers Claiming Adoption Tax Credits (2015)

13%14%

24%

16%

32%

2%

6%

9%

27%25%

30%

3%

$30K UNDER $40K $40K UNDER $50K $50K UNDER $75K $75K UNDER $100K $100K UNDER $200K $200K AND OVER

Federal Indiana

1 Claims with less than $30,000 are undisclosed in the federal data. The federal data includes all taxpayers who claimed the federal adoption tax credit.

Sources: Data by Internal Revenue Service and Department of State Revenue, analysis by Office of Fiscal and Management Analysis



Figure 11.2 shows that nearly 38% of taxpayers who claimed the credits received less than $250. Nearly 60% of those taxpayers claimed less than $500. The maximum Indiana adoption tax credit allowed for each child is $1,000 per tax year. Almost 20% of the taxpayers who claimed the credit received $1,000 or greater in 2015.2

Figure 11.3 shows the percentage of total and weighted average amounts of Indiana adoption credit claims by FAGI in 2015. The percentage of the tax credits claimed increased as FAGI increased, up to $200,000. Nearly 45% of the total amount of Indiana adoption credits were claimed by taxpayers with a FAGI between $100,000 and $200,000. The proportion and averages reported for higher income categories is likely because adoption tax credits are nonrefundable.

Taxpayers with higher FAGI generally have a greater tax liability. The steep decline in the average credits claimed for taxpayers with a FAGI greater than $200,000 is the result of the federal adoption tax credit phase out beginning at a MAGI of $201,010 in 2015.

Other Adoption Resources Indiana provides adoption assistance in addition to the adoption tax credit for some adoptive families. The Indiana Department of Child Services (DCS) provides assistance to adoptive parents through two primary programs: Title IV-E Adoption Assistance Program and State Adoption Subsidy program. Families who qualify for either of those programs may also receive Medicaid and/or nonrecurring adoption expenses (NRAE). The following details each type of adoption assistance under the DCS Adoption Assistance Program:

2 Taxpayers may claim credits for expenses related to each adopted child. The total credits claimed may be over $1,000 if a taxpayer adopts more than one child.

Figure 11.2. Distribution of Indiana Adoption Tax Credit Amounts

Figure 11.3. Distribution of Number of Federal and Indiana Taxpayers Claiming Adoption Tax Credits by FAGI (2015)

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

UNDER $30k $30k UNDER$40k

$40K UNDER$50K

$50K UNDER$75K

$75K UNDER$100K

$100K UNDER$200K

$200K AND OVER

Percentage of Total Credits Average Credits Claimed

• Title IV-E Adoption Assistance Program – If eligible for this program, adoptive parents will receive periodic negotiatedadoption assistance. The negotiated payment amount cannot exceed the foster care per diem amount. Adoptive parentsalso will receive NRAE and Medicaid.

• State Adoption Subsidy – This program is for certain families if the child is not eligible for the Adoption Assistance Program.Among other eligibility criteria, the child must be a ward of DCS before placement and at least two years old. If parents areadopting a sibling group, then only one of the children must be two years old or older. An eligible child or adoptive parentsmay receive a negotiated periodic payment, NRAE, and Medicaid.

38%

21%

13%

9%

19%

<$250 $250 UNDER $500 $500 UNDER $750 $750 UNDER $1,000 $1,000 OR OVER

Source: Data by Department of State Revenue, analysis by Office of Fiscal and Management Analysis



• Medicaid – A child who is eligible for Title IV-E adoption assistance is automatically eligible for Medicaid. Children who are not eligible for Title IV-E adoption assistance may also be eligible for Medicaid if the child currently has or is genetically predisposed to have a medical, physical, mental, or emotional condition.

• Nonrecurring Adoption Expenses (NRAE) – An adoptive family may receive a one-time payment in an effort to reduce adoption costs. The DCS determines eligibility and completes an agreement for the appropriate amount of the payment. The maximum amount available is $1,500.

Beginning in 2010, the state provides a maximum per diem of $16.88 and a $22.50 per diem for providing standard foster care. This is a 33% difference between fostering a child and adopting a child under the adoption assistance program (not including other subsidies and credits).

TITLE IV-E ADOPTION ASSISTANCE PROGRAM

The Title IV-E Adoption Assistance Program is contained within Title IV of the Social Security Act. The federal Adoption Assistance and Child Welfare Act of 1980 was amended, creating Title IV to reimburse states for entitlements that fund foster care maintenance and adoption assistance.

The program went into effect in Indiana on October 1, 1982. As part of the Indiana Adoption Assistance program, the state uses the federal entitlement program to provide post-adoption payments and/or Medicaid for eligible children.

Parents of an adopted child who meets defined special needs and categorical needs may apply for the assistance. For the purposes of this program, special need is defined by a child’s age, membership in a sibling group, membership in a minority group, or a medical condition. The special needs definition also includes children who are physically, mentally, or emotionally handicapped. Categorical eligibility for the program is based on whether a child meets one of four criteria: (1) eligibility requirements for Aid to Families with Dependent Children (AFDC),1 (2) eligible for supplemental social security income benefits, (3) previously was a recipient of IV-E assistance, or (4) the child is placed with a minor parent.

1 Although the Temporary Assistance for Needy Families (TANF) program replaced AFDC, AFDC program requirements that were in effect on July 16, 1996 still apply to the Title IV-E program. A child who is eligible for TANF is not automatically eligible for Title IV-E.

Literature ReviewFindings from studies examining whether or not tax credits or subsidies that offset adoption expenses increase the number of adoptions are mixed. Some research has shown that reduction in adoption costs does increase the probability for families who are already inclined to adopt, while others have found no relationship (Green R. 2007, Argys & Duncan 2012, Crandall-Hollick 2018). Some studies have shown that reducing the cost of adoption, in particular for children in the foster system, may accelerate the time of moving a child from foster status to permanent placement. In part, the timing is accelerated because reducing the cost of adoption mitigates the financial disincentive of incurring adoption costs while payments for fostering the child are eliminated (Crandall-Hollick 2018).

Research has generally shown that the financial tradeoff of fostering or adopting a child decreases and the permanent placement of a child is accelerated when the cost of adoption is reduced. For instance, Argys and Duncan (2012) examined the economic (dis)incentives associated with adopting a child out of foster care from the perspective fostering parents. Using data from the Adoption and Foster Care Analysis and Reporting System, the authors found that reducing the difference between foster care payments and adoption costs encourages fostering families to adopt.

ConclusionFederal adoption tax credit was initially intended to encourage permanent placement of foster children, but the eligibility was expanded to include other domestic and foreign adoptions. The Indiana adoption tax credit is an additional credit that may be claimed, based on the amount of the federal adoption tax credit claimed for qualified adoption expenses. Research is mixed on whether or not a tax credit encourages adoption. However, combined with other sources of assistance, there is some empirical evidence that suggests lowering the costs of adoption may reduce the amount of time a child in the foster system is placed with a family permanently.

Promotional Free-play Deduction (IC 4-33-13-7; IC 4-35-8-5)


Promotional Free-play Deduction (IC 4-33-13-7; IC 4-35-8-5)In 2013, a wagering tax deduction for the amount of promotional free-play investment was provided to increase the competitiveness of Indiana gaming facilities. Indiana gaming facilities were allowed to deduct a fixed amount attributable to the amount of free-play promotions offered during the taxable year from their adjusted gross revenue (AGR). The total amount deducted by each gaming facility was limited to $2.5 million in FY 2013 and $5 million annually in FY 2014 through FY 2016. In 2015, the expiration on the tax deduction was removed, and the annual cap was increased to $7 million for each gaming facility. The legislation also permitted taxpayers to transfer the tax deduction to other casinos to maximize the benefit from the deduction.

The promotional free-play tax deduction reduces the effective tax rate for the gaming facilities. Table 12.1 provides the deduction claims and the state wagering tax impact. Some of the state revenue loss attributable to the promotional free-play deduction was expected to be offset by additional promotional spending by Indiana casinos and racinos, which would increase the aggregate amount of taxable spending by gamblers in the state.

Table 12.1. Promotional Free-play Deduction and Wagering Tax Revenue Impact ($ in Millions) Year Annual Promotional

Free-play AGR CapActual PromotionalFree-play Deduction

State Wagering Tax Impact

FY 2013 $32.5 $32.5 ($10.6)FY 2014 $65.0 $64.3 ($20.4)FY 2015 $65.0 $65.0 ($20.4)FY 2016 $91.0 $89.8 ($28.3)FY 2017 $91.0 $91.0 ($29.1)FY 2018 $91.0 $91.0 ($28.9)

NOTE: The promotional free-play deduction also reduces county slot machine wagering tax and racino revenues set-aside for the horse racing industry. Starting in FY 2019, it will impact the state riverboat supplemental wagering tax.Source: Data by Indiana Gaming Commission, analysis by Office of Fiscal and Management Analysis.

Gaming IndustryThere are an estimated 460 commercial gaming facilities and about 500 Native American gaming facilities in the United States. Depending on the type of establishment, gaming facilities are classified as a riverboat, a casino, or a racino. In this analysis, the term casino refers to all types of gaming facilities. Casinos are establishments licensed by the regulating jurisdiction to allow various forms of gambling. A casino generates its gaming revenue by retaining a portion of the wagers through the statistical advantage that the games provide the casino. A typical casino also receives revenue from restaurants, entertainment, and lodging facilities.

There are 13 casinos, 11 riverboats and 2 racinos, in Indiana. Indiana casinos are required to pay state wagering taxes and fees. The taxes are applied to the AGR, which is generally calculated as the difference between the (1) amount of wagers won by the casino; and (2) the amount of payouts on wagers lost by the casino. Depending upon the type and size of the establishment, the effective wagering tax rate for Indiana casinos varies from 25% to 32%.

Free-play PromotionFree-play is a type of marketing promotion designed as a monetary inducement provided to gaming patrons with the objective of increasing attendance and overall spending per trip. Generally, promotional free-play is provided in the form of coupons, vouchers, or other electronic currency loaded on loyalty program cards that must be wagered before patrons can redeem any face value of the original instrument of the free-play. These incentives are offered to attract new customers who may not be accustomed with casino games and to encourage people to join casino loyalty programs. When provided to existing patrons, casino operators consider free-play as an investment to generate additional casino trips and spending.



Free-play is offered by casino operators throughout the industry. The level of spending on free-play is proprietary information, and it is likely that all Indiana casinos have been using promotional free-play credits as part of their marketing campaign from their inception. The tax deductibility of free-play provides partial data to confirm that at least $91 million in free-play promotions were offered to Indiana casino patrons in the last three years. Complete free-play data is available from states like Ohio and Pennsylvania because they provide a tax deduction for all free-play promotions. These data show that as a share of gross gaming revenue (GGR) Ohio and Pennsylvania casinos provide about 16.5% and 20% respectively in promotional free-play. Other studies have shown casinos in other states use about 10% to 15% of GGR to offer free-play promotions.

Free-play Tax DeductionSince free-play promotions are wagers by patrons that are effectively financed by the casino, most casino operators argue that it is unfair to include the amount of free-play in the calculation of taxable AGR. Most casino operators are proponents of completely deducting all free-play amounts when calculating their AGR.

In addition to the parity argument, the advocates of the tax deduction also claim that the tax benefits of the free-play deduction would be reinvested in additional promotions that would expand the tax base. This claim cannot be independently verified by publicly available information. It must be noted that wagers are not tax base. Casinos only pay taxes on the portion of their win, and casino win is calculated as wagers minus the payout. So, even when $1 in free-play results in more than $1 in wagers, it does not result in expansion of the tax base. It is only when $1 in free-play promotions results in at least $1 in casino win that the tax deduction is offset by the gain in gaming revenues.

Industry reports have estimated a net return on investment ranging from 2:1 to 3:1 (Spectrum Gaming, 2014). This means that a $100 free-play investment could result in $200 to $300 additional AGR for the casino. The additional AGR occurs through increased attendance and incremental spending per trip. If these deductibility arguments are correct, then a casino in a jurisdiction providing a free-play deduction would gain competitive business advantage over a casino in neighboring jurisdiction with no free-play deduction. Casino operators have argued that the additional business also results in jobs and local economic development.

Any positive return on investment would require that, on average, patrons continue to wager even after all promotional credits are exhausted. However, it is possible that free-play promotions could result in a lower return on investment if a patron cashes out a free-play coupon after satisfying a small compulsory play requirement. In these cases, the free-play coupon would result in a loss for the casino, thus reducing the actual gaming tax revenues. For example, a patron receiving $100 in free-play could lose $40 and cash out the remaining $60. This free-play promotion would result in a loss for the casino and reduce the taxable revenue by $60. Unlike any other coupon programs, free-play coupons have the potential to reduce the existing tax base. In absence of a positive rate of return, a free-play marketing campaign would be financed by the existing tax collections.

Casino operators close to Chicago or Cincinnati argue that it is essential to match the free-play promotions offered by casinos in neighboring jurisdictions. Researchers have commonly pointed to situations where the dynamics of offering free-play promotions is mostly driven by the need to remain at par with competition, and this results in a lower return from the promotion (Lucas et. al. 2002, Lucas and Kilby, 2008).

States have adopted different policies regarding the deductibility of free-play. Currently nine states provide no tax deduction for promotional free-play, nine states provide partial deductions based on percentage of win or flat dollar amounts, and six states provide a full tax deduction. Table 12.2 contains information on each state’s policy regarding free-play.



Table 12.2. Promotional Free-play Tax Policy by State (2017)

State Number of Casinos(1) Total GGR(2) Effective Tax

Rate

Effective Tax Rate: Ranking

(1 = Highest Tax Rate)

Promotional Free-play Tax

Policy

Colorado 33 828 14.6% 20 No DeductionIllinois 10 1,407 33.8% 10 No DeductionLousiana 20 2,561 23.5% 17 No DeductionMaine 2 137 40.1% 5 No DeductionMichigan 3 1,401 24.3% 16 No DeductionMissouri 13 1,738 25.7% 15 No DeductionNew Mexico 5 227 26.4% 14 No DeductionOklahoma 2 125 19.2% 19 No DeductionSouth Dakota 26 105 14.3% 21 No DeductionDelaware 3 415 39.5% 6 Partial DeductionIndiana 13 2,240 26.9% 13 Partial DeductionIowa 19 1,463 23.0% 18 Partial DeductionMaryland 6 1,614 36.1% 8 Partial DeductionMississippi 28 2,080 12.1% 22 Partial DeductionNew Jersey 7 2,659 9.3% 23 Partial DeductionNew York 12 2,348 43.6% 4 Partial DeductionRhode Island 2 624 50.3% 1 Partial DeductionWest Virginia 5 625 46.9% 3 Partial DeductionFlorida 8 547 35.0% 9 Full DeductionKansas 4 390 26.9% 12 Full DeductionMassachusetts 1 165 49.1% 2 Full DeductionNevada 215 11,571 7.5% 24 Full DeductionOhio(3) 11 2,065 28.8% 11 Full DeductionPennsylvania(3) 12 3,787 37.8% 7 Full DeductionNote: (1) The table shows 2017 data for commercial casinos as reported by the American Gaming Association.

(2) GGR = Gross Gaming Revenues(3) GGR for Ohio and Pennsylvania were adjusted to calculate the effective rate. Remaining states were unchanged from AGA report.

Source: Data by American Gaming Association, analysis by Office of Fiscal and Management Analysis.



Indiana Gaming TrendsThe efficiency of free-play coupons in Indiana is difficult to determine using empirical data due to the changing landscape of gaming in Indiana and all the neighboring states. In the last ten years, new casinos have opened up in Indiana, Ohio, Michigan, and Illinois. Some of these have been casinos operated by tribes that have substantially lower effective tax rates. All the new facilities have minimized the market opportunity and increased competitiveness. Indiana has adopted several policies to support the in-state gaming facilities. Figure 12.1 shows how various gaming measures have changed in recent years. Whereas some policies like the replacement of the admissions tax with a supplemental wagering tax were implemented with the goal of removing regulatory obstacles, others like the promotional free-play deduction were intended to be used as a reinvestment tool by the casinos. However, the promotional free-play deduction is a small change in relation to the substantial shift in the regional market due to out-of-state competition. Due to this pluridimensional environment, an attempt to measure the impact of the promotional free-play deduction on Indiana gaming revenues using an econometric analysis produced ambiguous results.

Figure 12.1. Indiana Gaming Variables Trend --> Indexed 2009=100

Source: Indiana Gaming Commission.

Revenue forecasters use state personal income as an anchoring variable to estimate gaming revenues. The long term relationship between Indiana personal income and Indiana AGR and taxable AGR (AGR minus the free-play deduction) is shown in Figure 12.2. The free-play deduction represents a small portion of the drop in AGR. Tax deductions lower the effective tax rate for taxpayers. Computing Indiana’s effective tax rate for this deduction provides a measure to compare how the policy impacted the competitiveness of Indiana’s tax structure to the neighboring states. Considering all other regional business climate factors as equal, a tax rate cut would be most effective in terms of regional competitiveness if it lowered the level of effective tax rate below neighboring jurisdictions. Figure 12.3 shows that Indiana’s free-play deduction did not change the regional tax rate dynamics. Regardless of the free-play deduction, the effective tax rate imposed by Ohio and Illinois is higher than Indiana’s, and Michigan imposes a lower effective tax rate.

However, since all other factors are not equal, a tax rate cut does not have to change the regional sorting order of the tax rates to be effective. A tax rate change executed by means of the free-play deduction when stacked with other positive factors in a jurisdiction could still provide a competitive advantage if it increases the total bankrolled (out-of-pocket) wagers in a casino.

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Figure 12.2. Indiana Personal Income (IPI) & Indiana Adjusted Gross Receipts (AGR)

Figure 12.3. Effective Casino Tax Rate - Indiana & Neighboring States

20.0%22.0%24.0%26.0%28.0%30.0%32.0%34.0%36.0%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Indiana Tax Rate Indiana Effective Tax Rate Ohio Tax RateOhio Effective Tax Rate Michigan Tax Rate Illinois Tax Rate

$500

$550

$600

$650

$700

$750

$800

$850

$170,000

$190,000

$210,000

$230,000

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$290,000

$310,000

$330,000

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Indiana Nominal IPI AGR AGR net of Deductible Free-play

Millio

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IPI AGR

Source: Bureau of Economic Analysis, IHS, Indiana Gaming Commission.

Source: American Gaming Association, State Gaming Agencies.



Literature ReviewThere are a limited number of scientific studies that have attempted to measure the impact of free-play promotions on wagers. Most literature is generated from the industry point of view and most of the industry free-play decisions are centered on assumptions about the mechanism of the promotion (Salmon J. et. al., 2005). Most reporting is based on perceived positive outcomes. Others derive conclusions based on techniques that do not control for factors easily identified as the source of the revenue trends (Spectrum 2016). Ignoring those factors and appropriating a certain trend to loyalty programs could result in biased estimates.

Researchers using econometric methods have focused on the impact of free-play on total wagering in casinos (Suh 2012, Rudisser et. al., 2015) or individual trip volume (Lucas et. al., 2005). Others have used scientific surveys to measure the general impact of loyalty programs on customer loyalty (Barsky, 2010).

Rudisser et. al. (2015) conducted an experiment comparing patrons that received free-play offers to those who did not receive the offer. Randomness in the selection process was introduced by providing free-play coupons based on the outcome of spinning a wheel. The authors concluded that patrons who received free-play promotions contributed less to the casino AGR than those who did not receive free-play promotions. They suggested that casino operators should not issue free-play promotions because it could produce less revenue for the casino. They noted that the results could reflect a tendency of loss aversion where a player with a free-play coupon was content with the free-wagers and did not continue to wager.

Lucas and Spilde (2017) gathered actual slot machine performance data from two tribal resorts to study the impact of free-play on wagers. They concluded that one casino’s free-play campaign showed signs of success while the other’s indicated a shrinking of the casino win. Yet, their study was one of the few that showed a growing tax base.

Since free-play promotions can be part of loyalty programs, research conducted to determine the effectiveness of loyalty programs can provide insight on the effectiveness of free-play. The bulk of research appears to be inconclusive as to the impact of loyalty programs on a patron’s loyalty. Barsky (2010) used data on hotel customer satisfaction to analyze casino hotel customer loyalty. Customer responses to survey questions were used to conduct a cluster analysis to separate the data into customer segments. The study suggests that loyalty programs are effective for selected elite groups and ineffective for a large group of customers it calls unmoved members. Barsky suggests that enhanced promotion and perks may impact the behavior of these unmoved customers.

Suh (2010) tested the hypothesis that enhanced promotions with higher free-play values will produce a greater net cash flow per player. Data from a Las Vegas strip hotel casino were used to conduct a multiple regression analysis. The sample included redeemers of $50 free-play offers (control) and $100 free-play offers (experimental). The amount of per player net cash flow produced by $100 incentive players was less than that produced by $50 incentive players. The study suggested that high-value free-play coupons failed to produce a positive and statistically significant effect on a player’s slot gaming volume. This is similar to a study conducted by Lucas et. al. (2005) that suggested the possibility of excess free-play coupons leading to cannibalizing a player’s original gaming budget. They also considered the idea that players start to perceive promotional incentives as an entitlement.

A substantial number of reviewed academic literature (Lucas et. al., 2005; Rüdisser et. al., 2015; Suh et. al., 2014), not discussed here in detail, could not establish a strong relationship between free-play promotions and the gaming tax base. Using a Nevada casino’s data, Lucas (2004) established that a one dollar increase in match-play redemption resulted in a decrease in blackjack cash drops. The author of this study and others (Suh 2012) have used these results to suggest that bankroll cannibalization is occurring. This means that the free-play promotion is reducing the player’s cash wagers because much of the trip is funded by the free-play promotions. They have argued that the time taken for the casino to create a net gain encourages a casual gaming patron to redeem some of the free-play coupons that survive a compulsory play requirement (Lucas et. al., 2017). This results in a loss for the casino. Even though Lucas and Spilde (2017) found the wagering gain from incentivized free-play customers to be large enough to have a net positive impact on the gaming tax base in one casino, they did not find a similar impact from the other casino used in the study.



ConclusionThe immediate purpose of the promotional free-play tax deduction is to increase the amount of free-play promotions offered by Indiana gaming facilities through the reinvestment of the tax benefits derived from the deductions. Whereas data related to the use of the tax benefits from the deduction are unavailable, this analysis examines whether free-play promotions increase the casino wagers and gaming tax base in Indiana.

The analysis is limited by certain factors. First, Indiana data on the amount of free-play promotions are only available for the past five years, after the adoption of the tax deduction. The tax deduction is capped and only partial data is available for Indiana casinos. Second, there have been changes in several dimensions of the regional gaming industry market, thus multiple factors are responsible for the market trends in gaming. In this environment, the impact of Indiana’s free-play deduction on gaming revenues was not separable with an acceptable level of confidence. The Indiana data could only be used to make descriptive statements. Specifically, it illustrated that even though the tax deduction reduced the effective tax rate paid by Indiana casinos from what they would otherwise pay in absence of the free-play deduction, it did not change the ranking of Indiana’s gaming tax rate in the region.

A majority of the studies suggest that a free-play tax deduction benefit of $1 reinvested as a free-play coupon will likely result in more than $1 in wagers by the patron. Other studies suggest that free-play coupons result in a phenomenon called bankroll cannibalization where a patron wagers less than they would otherwise wager in absence of the free-play incentive. In this scenario, free-play coupons reduce the amount of the patron’s cash wagers.

A broader purpose of the policy is to increase the competitiveness of in-state gaming facilities, thus stabilizing the gaming tax base and related casino jobs in Indiana. Most studies agree that the level of the effect on wagers is not large enough to recoup the tax base lost through a free-play deduction. Broadly speaking, the tax base is wagers minus payouts. The tax base is only about 7% to 10% of the wagers. Most studies that found a positive net impact on wagers failed to demonstrate a net gain in tax base. In essence, when the payouts were subtracted from the incentivized wagers, the remainder was not enough to offset the loss to the tax base associated with the deduction. However, a small number of studies suggest that certain casinos reaped considerable benefits from their free-play campaign.

In summary, casino operators argue that free-play is a marketing promotion that should not be included in the calculation of the taxable AGR. They claim that the tax deduction is essential to create parity with other jurisdictions. However, data are not available to measure the amount of the tax benefits from the free-play deductions that are reinvested into providing additional promotions. Gaming tax and revenue data show that the deduction overall did not change Indiana’s tax competitiveness compared to surrounding states. A majority of the literature reviewed did not provide evidence that free-play promotions increase casino wagers and tax base. Some studies found the impact to vary by gaming facility. While no overall conclusion can be drawn, the tax deduction allowed some casinos to offer additional free-play promotions that may have produced net gains that resulted in expansion of their wagering tax base. However, this would not be true for all Indiana casinos, especially casinos that already provide free-play promotions at an optimal level.

Appendix A. 2018 Property Tax Incentive Survey Methodology

Office of Fiscal and Management Analysis A

Appendix A. 2018 Property Tax Incentive Survey MethodologyThe Department of Local Government Finance (DLGF) codes property tax deductions and credits as “adjustments.” County auditors submit adjustment amounts, by parcel, to the LSA and DLGF each tax year. Adjustments are broadly coded. As a result, there can be discrepancy in the way specific property tax adjustments are entered and submitted. Many of the property tax incentives reviewed in this report do not have specific adjustment codes. Without specific coding for certain adjustments, auditors enter deduction and credit amounts disparately into broad categories. Four renewable energy-related deductions are aggregated into two different adjustment codes: hydroelectric power or geothermal heating or cooling, and solar energy systems or wind power devices. The resource recovery system deduction is the only energy-related property tax incentive with a disaggregated adjustment code. The brownfield revitalization area property tax abatement also does not have its own adjustment code.

County auditors were surveyed by the LSA to disaggregate adjustment amounts that currently do not have separate adjustment codes. Specifically, the LSA requested that county auditors provide the amount for each of the adjustments over the past five years. Responses were received from 87 out of 92 county auditors, resulting in a 95% response rate.

Appendix B. Tax Incentive Review Statute (IC 2-5-3.2-1)

Office of Fiscal and Management Analysis B

Appendix B. Tax Incentive Review Statute (IC 2-5-3.2-1)Chapter 3.2. Review, Analysis, and Evaluation of Tax Incentives

2-5-3.2-1Year Enacted 2014; Year Amended 2015

Sec. 1. (a) As used in this section, “tax incentive” means a benefit provided through a state or local tax that is intended to alter, reward, or subsidize a particular action or behavior by the tax incentive recipient, including a benefit intended to encourage economic development. The term includes the following:

(1) An exemption, deduction, credit, preferential rate, or other tax benefit that:(A) reduces the amount of a tax that would otherwise be due to the state;(B) results in a tax refund in excess of any tax due; or(C) reduces the amount of property taxes that would otherwise be due to a political subdivision of the state.

(2) The dedication of revenue by a political subdivision to provide improvements or to retire bonds issued to pay for improvements in an economic or sports development area, a community revitalization area, an enterprise zone, a tax increment financing district, or any other similar area or district.(b) The general assembly intends that each tax incentive effectuate the purposes for which it was enacted and that the

cost of tax incentives should be included more readily in the biennial budgeting process. To provide the general assembly with the information it needs to make informed policy choices about the efficacy of each tax incentive, the legislative services agency shall conduct a regular review, analysis, and evaluation of all tax incentives according to a schedule developed by the legislative services agency.

(c) The legislative services agency shall conduct a systematic and comprehensive review, analysis, and evaluation of each tax incentive scheduled for review. The review, analysis, and evaluation must include information about each tax incentive that is necessary to achieve the goals described in subsection (b), which may include any of the following:

(1) The basic attributes and policy goals of the tax incentive, including the statutory and programmatic goals of the tax incentive, the economic parameters of the tax incentive, the original scope and purpose of the tax incentive, and how the scope or purpose has changed over time.(2) The tax incentive’s equity, simplicity, competitiveness, public purpose, adequacy, and extent of conformance with the original purposes of the legislation enacting the tax incentive.(3) The types of activities on which the tax incentive is based and how effective the tax incentive has been in promoting these targeted activities and in assisting recipients of the tax incentive. (4) The count of the following:

(A) Applicants for the tax incentive.(B) Applicants that qualify for the tax incentive.(C) Qualified applicants that, if applicable, are approved to receive the tax incentive.(D) Taxpayers that actually claim the tax incentive.(E) Taxpayers that actually receive the tax incentive.

(5) The dollar amount of the tax incentive benefits that has been actually claimed by all taxpayers over time, including the following:

(A) The dollar amount of the tax incentive, listed by the North American Industrial Classification System (NAICS) Code associated with the tax incentive recipients, if an NAICS Code is available.(B) The dollar amount of income tax credits that can be carried forward for the next five (5) state fiscal years.

(6) An estimate of the economic impact of the tax incentive, including the following:(A) A return on investment calculation for the tax incentive. For purposes of this clause, “return on investment calculation” means analyzing the cost to the state or political subdivision of providing the tax incentive, analyzing the benefits realized by the state or political subdivision from providing the tax incentive.(B) A cost-benefit comparison of the state and local revenue foregone and property taxes shifted to other taxpayers as a result of allowing the tax incentive, compared to tax revenue generated by the taxpayer receiving the incentive, including direct taxes applied to the taxpayer and taxes applied to the taxpayer’s employees.(C) An estimate of the number of jobs that were the direct result of the tax incentive.(D) For any tax incentive that is reviewed or approved by the Indiana economic development corporation, a statement by the chief executive officer of the Indiana economic development corporation as to whether the statutory and programmatic goals of the tax incentive are being met, with obstacles to these goals identified, if possible.

Appendix B. Tax Incentive Review Statute (IC 2-5-3.2-1)

Office of Fiscal and Management Analysis C

(7) The methodology and assumptions used in carrying out the reviews, analyses, and evaluations required under this subsection.(8) The estimated cost to the state to administer the tax incentive.(9) An estimate of the extent to which benefits of the tax incentive remained in Indiana or flowed outside Indiana.(10) Whether the effectiveness of the tax incentive could be determined more definitively if the general assembly were to clarify or modify the tax incentive’s goals and intended purpose.(11) Whether measuring the economic impact is significantly limited due to data constraints and whether any changes in statute would facilitate data collection in a way that would allow for better review, analysis, or evaluation.(12) An estimate of the indirect economic benefit or activity stimulated by the tax incentive.(13) Any additional review, analysis, or evaluation that the legislative services agency considers advisable, including comparisons with tax incentives offered by other states if those comparisons would add value to the review, analysis, and evaluation.

The legislative services agency may request a state or local official or a state agency, a political subdivision, a body corporate and politic, or a county or municipal redevelopment commission to furnish information necessary to complete the tax incentive review, analysis, and evaluation required by this section. An official or entity presented with a request from the legislative services agency under this subsection shall cooperate with the legislative services agency in providing the requested information. An official or entity may require that the legislative services agency adhere to the provider’s rules, if any that concern the confidential nature of the information.

(d) The legislative services agency shall, before October 1 of each year, submit a report to the legislative council, in an electronic format under IC 5-14-6, and to the interim study committee on fiscal policy established by IC 2-5-1.3-4 containing the results of the legislative services agency’s review, analysis, and evaluation. The report must include at least the following:

(1) A detailed description of the review, analysis, and evaluation for each tax incentive reviewed.(2) Information to be used by the general assembly to determine whether a reviewed tax incentive should be continued, modified, or terminated, the basis for the recommendation, and the expected impact of the recommendation on the state’s economy.(3) Information to be used by the general assembly to better align a reviewed tax incentive with the original intent of the legislation that enacted the tax incentive.

The report required by this subsection must not disclose any proprietary or otherwise confidential taxpayer information.(e) The interim study committee on fiscal policy shall do the following:(1) Hold at least one (1) public hearing after September 30 and before November 1 of each year at which:

(A) the legislative services agency presents the review, analysis, and evaluation of tax incentives; and(B) the interim study committee receives information concerning tax incentives.

(2) Submit to the legislative council, in an electronic format under IC 5-14-6, any recommendations made by the interim study committee that are related to the legislative services agency’s review, analysis, and evaluation of tax incentives prepared under this section.(f) The general assembly shall use the legislative services agency’s report under this section and the interim study

committee on fiscal policy’s recommendations under this section to determine whether a particular tax incentive:(1) is successful;(2) is provided at a cost that can be accommodated by the state’s biennial budget; and(3) should be continued, amended, or repealed.(g) The legislative services agency shall establish and maintain a system for making available to the public information

about the amount and effectiveness of tax incentives.(h) The legislative services agency shall develop and publish on the general assembly’s Internet web site a multi-year

schedule that lists all tax incentives and indicates the year when the report will be published for each tax incentive reviewed. The legislative services agency may revise the schedule as long as the legislative services agency provides for a systematic review, analysis, and evaluation of all tax incentives and that each tax incentive is reviewed at least once every five (5) years.

(i) This section expires December 31, 2023.

Appendix C. Tax Incentive and Incentive Program Descriptions

Office of Fiscal and Management Analysis D


Corporate Income Tax/Individual Income TaxTax Provision Description

Adoption Tax Credit(Reviewed in 2018)

10% of the federal adoption tax credit claimed for the year. The maximum credit equals $1,000 per eligible child. The credit was effective beginning January 1, 2015.

Alternative Fuel Vehicle Manufacturing Investment Credit (Reviewed in 2018)

15% of qualified investments made between 2007 and 2016 to manufacture and assemble alternative fuel vehicles. Credits are approved by the IEDC. New credits not awarded after December 31, 2016.

Coal Gasification Technology Investment Credit(Reviewed in 2018)

10% of the first $500 million in qualified investment in an integrated coal gasification power plant (7% if the investment is in a fluidized-bed combustion unit) and 5% of the qualified investment exceeding $500 million (3% if the investment is in a fluidized-bed combustion unit). Credits are approved by the IEDC Board.

Community Revitalization Enhancement District Credit (Reviewed in 2016)

Percent of qualified investments made in these areas as approved by the IEDC Board.

Community Revitalization Enhancement District Credit (Local) (Reviewed in 2016)

Percent of qualified investments made in these areas as approved by the IEDC Board.

Earned Income Tax Credit (Reviewed in 2015)

A refundable tax credit for certain families that have a modified adjusted gross income less than $45,000. The credit amount depends on the number of qualifying children and family income. The maximum credit for 2017 was $505.

Economic Development for a Growing Economy (EDGE) Credit (Reviewed in 2017)

Incremental income tax withholdings of new or retained employees as approved by the IEDC Board.

Enterprise Zone Employee Income Deduction (Reviewed in 2016)

The lesser of 50% of earnings or $7,500 if the individual lives and works within an enterprise zone.

Enterprise Zone Employment Expense Credit (Reviewed in 2016)

Allowed for increased employment expenditures, equal to the lesser of 10% multiplied by the increased wages, or $1,500 multiplied by the number of qualified employees.

Enterprise Zone Investment Cost Credit (Reviewed in 2016)

Percent of qualified investment approved by the IEDC in a business located in an enterprise zone. New credits may not be awarded after January 1, 2018.

Enterprise Zone Loan Interest Credit (Reviewed in 2016)

Allowed for interest received from qualified loans. New credits may not be awarded after January 1, 2018.

Headquarters Relocation Credit (Reviewed in 2017)

Up to 50% of the costs incurred by an eligible business to relocate its headquarters, division or subdivision principal office, or research center to Indiana.

Historic Rehabilitation Credit (Reviewed in 2015)

20% of qualified expenditures as approved by the Department of Natural Resources. The maximum statewide credit may not exceed $450,000 annually. New credits may not be awarded after June 30, 2016.

Home Insulation Deduction (Reviewed in 2014)

Up to $1,000 for the purchase and installation of home insulation, weather stripping, storm doors, storm windows, and double-pane windows. Repealed effective January 1, 2016.


Office of Fiscal and Management Analysis E

Tax Provision DescriptionHoosier Business Investment Credit (Reviewed in 2017)

Up to 10% of qualified nonlogistics business investments directly related to expanding the workforce in Indiana, not to exceed the taxpayer’s state tax liability. For logistics investments, the credit equals 25% of the additional qualified investment made during the taxable year. The total nonlogistics credit for all taxpayers is capped at $10 million per year, while the total logistics credit for all taxpayers is capped at $50 million per year. Credits are approved by the IEDC Board.

Indiana 529 College Savings Account Contribution Credit (Reviewed in 2015)

20% of annual contributions to an Indiana College Choice 529 investment plan savings account. The maximum credit per taxpayer is $1,000.

Indiana Colleges and Universities Contribution Credit (Reviewed in 2015)

50% of contributions to institutions of higher education, up to $100 ($200 if filing a joint return).

Indiana Partnership Long-Term Care Insurance Premiums Deduction (Reviewed in 2014)

Amount of premiums paid during the year on a qualified long-term care policy.

Individual Development Accounts Credit (Reviewed in 2015)

50% of the amount contributed to a fund if the contribution is not less than $100 and not more than $50,000.

Industrial Recovery Credit (Reviewed in 2016)

Percent of qualified investments as approved by the IEDC Board.

Local Option Hiring Incentive (Reviewed in 2018)

Cities and counties may use to local income tax revenue to provide hiring incentives to businesses that create local jobs.

Natural Gas-Powered Vehicles (Reviewed in 2018)

50% of the difference between the price of the qualified vehicle and a similar vehicle that is powered by a gasoline or diesel engine, up to $15,000. The maximum credit per taxpayer is $150,000 per taxable year. The total amount of credits per year may not exceed the lesser of $3 million or the sales tax revenue attributable to natural gas fuel used in providing public transportation. No new credits awarded after December 31, 2016.

Neighborhood Assistance Credit (Reviewed in 2015)

50% of contributions to approve projects that assist economically disadvantaged areas or to employ, train, or provide technical assistance to people who reside in these areas. The maximum credit is $25,000. Total tax credits statewide may not exceed $2.5 million in a fiscal year.

Patent-Derived Income Deduction (Reviewed in 2017)

Up to $5 million in income from plant or utility patents issued beginning in 2008 to businesses or organizations domiciled in Indiana.

Research Expense Credit (Reviewed in 2017)

For certain qualified research expenses incurred.

Residential Historic Rehabilitation Credit (Reviewed in 2015)

20% of qualified expenditures as approved by DNR for the preservation or rehabilitation of the taxpayer’s principal residence. The maximum statewide credit may not exceed $250,000 annually.

School Scholarship Contribution Credit (Reviewed in 2015)

50% of contributions to nonprofit K-12 school scholarship-granting organizations. Total tax credits may not exceed $9.5 million in FY 2017, $12.5 million in FY 2018, and $14 million each fiscal year thereafter.

Solar-Powered Roof Vent/Fan Installation Deduction (Reviewed in 2014)

Up to $1,000 deduction if a solar-powered roof vent or fan is installed on a building owned or leased by the taxpayer. Repealed effective January 1, 2016.

Special Rate for Income Derived Inside a Military Base (Reviewed in 2017)

Rate is 5% of AGI that is derived from sources within a qualified area if the corporation locates its operations in the qualified area. Special rate applies during the year in which the corporation located in that area and the four succeeding years.

Venture Capital Investment Credit (Reviewed in 2017)

20% of annual qualified venture capital investment up to $1 million. Total new credits awarded may not exceed $12.5 million annually.


Office of Fiscal and Management Analysis F

Sales TaxTax Provision Description

Aircraft Parts Exemption (Reviewed in 2018)

Materials, parts, equipment, and engines used in the repair, maintenance, refurbishment, remodeling, or remanufacturing of an aircraft or avionics system of an aircraft.

Aviation Fuel Exemption (Reviewed in 2018)

Aviation gasoline, jet fuel, and fuel used as a substitute for aviation gasoline or jet fuel.

Cargo Trailers/RVs Sold to Certain Nonresidents Exemption (Reviewed in 2018)

Sales of RVs and trailers to a resident of another state that has a reciprocal exemption.

Certain Aircraft Exemption (Reviewed in 2018)

Aircraft purchased for rental or leasing if the annual amount of gross lease revenue is greater than or equal to 7.5% of the book value or net acquisition price. Any aircraft rented or leased for predominant use in public transportation. Aircraft sold to a person who is not an Indiana resident.

Certain Racing Equipment Exemption (Reviewed in 2018)

Tangible personal property that comprises any part of a professional motor racing vehicle or a two-seater Indianapolis 500-style race car, excluding tires and accessories.

Research and Development Property Exemption (Reviewed in 2017)

Tangible personal property that has not previously been used in Indiana for any purpose and is acquired for the purpose of experimental laboratory R&D for new products, new uses of existing products, or improving or testing existing products.

Property TaxTax Provision Description

Aircraft Deduction(Reviewed in 2018)

Aircraft that seat up to 90 passengers or that are used to transport only property. The aircraft must be owned by a taxpayer with an Indiana corporate headquarters or its subsidiary. The deduction equals 100% of the property's AV.

Brownfield Revitalization Zone Deduction (Reviewed in 2018)

The designating body may grant a 3-, 6-, or 10-year abatement for real and personal property located in a brownfield revitalization zone. The deduction equals the increase in the property's AV multiplied by a percentage based on year and duration.

Certified Technology Park Deduction (Reviewed in 2017)

Personal property located in a certified technology park and used to conduct high-technology activity. The deduction equals 100% of the property’s AV. The term of two to ten years is determined by the county fiscal body.

Coal Combustion Product Deduction (Reviewed in 2018)

Building designed and constructed to use qualified materials throughout the building. Qualified materials must consist of at least 60% coal combustion products by weight. The deduction is available for three years and equals 5% of the building’s AV.

Deduction for Purchases of Investment Property by Manufacturers of Recycled Components (Reviewed in 2018)

Personal property used to manufacture recycled components composed of at least 15% coal combustion waste generated in Indiana. The deduction equals 15% of the investment property's AV only in the first year that the investment property is subject to assessment.

Enterprise Zone and Entrepreneur and Enterprise District Investment Deduction (Reviewed in 2016)

Qualified investments including buildings, manufacturing or production equipment, retooling, and infrastructure within an enterprise zone. The deduction equals the increase in AV of the enterprise zone property as compared to the AV in the base year. The deduction was expanded to include Entrepreneur and Enterprise Districts on July 1, 2017.

Enterprise Zone Obsolescence Deduction (Marion County) (Reviewed in 2016)

Newly purchased real property in an enterprise zone in Marion County if an obsolescence depreciation adjustment was allowed for the property in the year preceding the year in which the owner purchased the property. The deduction equals the amount of the former owner’s obsolescence adjustment multiplied by 100% in year one, 75% in year two, 50% in year three, and 25% in year four.

Entrepreneur and Enterprise District Personal Property Exemption

An exclusion from the 30% valuation floor for depreciable personal property. The incentive went into effect July 1, 2017.


Office of Fiscal and Management Analysis G

Tax Provision DescriptionEntrepreneur and Enterprise District Vacant Building Abatement

Commercial or industrial building that is vacant for a year or longer. The deduction equals 100% of real property taxes for the first year it is occupied and 50% in the second year. The incentive went into effect July 1, 2017.

Geothermal Energy Heating or Cooling Device Deduction (Reviewed in 2018)

Real property or mobile home equipped with geothermal heating, cooling, hot water, or electricity production. The deduction equals the device's AV.

Hydroelectric Power Device Deduction (Reviewed in 2018)

Real property or mobile home equipped with a hydroelectric power device. The deduction equals the device's AV.

Infrastructure Development Zone Deduction (Reviewed in 2017)

Gas storage, transmission, and distribution facilities; broadband and advanced service transmission facilities; and water treatment, storage, and distribution facilities in an infrastructure development zone. Eligible property in the zone is 100% exempt.

Intrastate Aircraft Deduction(Reviewed in 2018)

Aircraft used for service between qualifying Indiana airports that seat at least nine passengers or that are used to transport only property. The deduction equals 100% of the property's AV.

Low-Income Housing Exemption (Reviewed in 2015)

All or part of real property is exempt from property taxation if (1) the improvements on the real property were constructed, rehabilitated, or acquired for the purpose of providing housing to income-eligible persons, (2) the property is subject to an extended use agreement, and (3) the property owner has entered into an agreement to make payments in lieu of taxes.

Maritime Opportunity District Deduction (Reviewed in 2017)

New manufacturing equipment installed in a maritime opportunity district. The deduction equals 100% of AV in years 1 to 6; 95% in year 7, 80% in year 8, 65% in year 9, and 50% in year 10. The deduction may not reduce a taxpayer’s total personal property net assessment in the first year below the previous year’s net assessment. The deduction is subject to approval by Ports of Indiana. Applies to investments made before July 1, 2018.

Personal Property Abatements in an Economic Revitalization Area (Reviewed in 2017)

New manufacturing, R&D, logistical distribution, and information technology equipment located in an economic revitalization area. The local designating body determines the length of the deduction from 1 to 10 years. The designating body must specify an abatement schedule.

Real Property Abatements in an Economic Revitalization Area (Reviewed in 2017)

Improvements made to real property located in an economic revitalization area. The local designating body determines the length of the deduction from 1 to 10 years. The designating body must specify an abatement schedule.

Rehabilitated Property Deduction (Reviewed in 2015)

Buildings and structures at least 50 years old if the owner paid at least $10,000 for the rehabilitation. The deduction is available for five years and equals 50% of the increase in AV (limited to $124,800 for a single-family dwelling or $300,000 for other property).

Rehabilitated Residential Property Deduction (Reviewed in 2015)

Residential real property that has been rehabilitated. The pre-rehabilitation AV may not exceed $37,440 for a single-family dwelling, $49,920 for a two-family dwelling, or $18,720 per unit if more than two dwelling units. The deduction is available for five years and equals the increase in AV (limited to $18,720 per rehabilitated unit).

Resource Recovery Systems Deduction (Reviewed in 2018)

Tangible property directly used to dispose of solid waste or hazardous waste by converting it into energy or other useful products. The deduction equals 95% of the system's AV. This deduction currently applies to only one property, located in Marion County.

Coal Conversion Systems Property Tax Deduction (Reviewed in 2018)

Tangible property used to convert coal into a gaseous liquid fuel or charcoal. The deduction equals 95% of the system’s AV multiplied by the fraction (Indiana coal converted/total coal converted).

Solar-Energy Systems Deduction (Reviewed in 2018)

Real property or mobile home equipped with solar energy heating or cooling system. The deduction equals system's cost.

Wind-Powered Devices Deduction (Reviewed in 2018)

Real property or mobile home equipped with wind-powered equipment designed to provide mechanical energy or produce electricity. The deduction equals the device's AV.


Office of Fiscal and Management Analysis H

OtherTax Provision Description

Certified Technology Park (Reviewed in 2017)

Special zones established by local units that capture state and local tax revenue for high-technology business development in the zones.

Community Revitalization Enhancement Districts (Reviewed in 2016)

Special district established by local units that may capture state and local tax revenue for development purposes in the districts.

Enterprise Zones (Reviewed in 2016)

Special zone established by municipal units where tax incentives are provided for development in the zones.

Entrepreneur and Enterprise District Pilot Program

Special district established by municipal units that may receive a grant for programs that support entrepreneurship, small business development, technology development, and innovation. The program went into effect on July 1, 2017.

Motorsports Investment District (Reviewed in 2018)

Geographic area including the Indianapolis Motor Speedway. Revenue is captured from certain incremental sales tax, individual income tax, and admissions fee revenue.

Professional Sports Development Areas (Reviewed in 2017)

Special areas established by local units that may capture state and local tax revenue for sports and convention development purposes in the areas.

Promotional Free-Play Deduction (Reviewed in 2018)

Wagering tax deduction for wagers made by casino patrons using noncashable vouchers, coupons, electronic credits, or electronic promotions provided by the casino.

Tax Increment Financing (Reviewed in 2015)

Special district established by local units that capture incremental property tax revenue for development purposes in the districts.

References

Office of Fiscal and Management Analysis I

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Gabe, T. M., & Kraybill, D. S. (2002). The effect of state economic development incentives on employment growth of establishments. Journal of Regional Science, 42(4), 703-730.

References

Office of Fiscal and Management Analysis II

Green, R. (2007). The adoption tax credit: is it an effective approach to promote foster care adoption? Child Trends Issue Brief. Retrieved from https://www.childtrends.org/wp-content/uploads/2013/02/Child_Trends-2007_08_07_RB_AdoptionTaxCredit.pdf

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Hicks, M. J., & LaFaive, M. (2011). The influence of targeted economic development tax incentives on county economic growth: evidence from Michigan’s MEGA credits. Economic Development Quarterly, 25(2), 193-205.

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Lester, T. W., Lowe, N. J., & Freyer, A. (2014). Mediating incentive use: a time-series assessment of economic development deals in North Carolina. Economic Development Quarterly, 28(2), 132-146.

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Lucas A. & Spilde K.A. (2017). The free-play tax deduction debate: how academic research can help, UNLV Gaming Research & Review Journal, 21(1), 25-42.

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Mihaescu,, O. and vom Hofe, R. (2012). The impact of brownfields on residential property values in Cincinnati, Ohio: a spatial hedonic approach. Journal of Regional Analysis and Policy, 42(3), 223-236.

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Documents

2018 Indiana Tax Incentive Evaluationiga.in.gov/.../19f338a0/2018-tax-incentive-review-final.pdfreview will be conducted over a five-year cycle during which each state and local tax