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INDIANAPOLIS – Republican legislative leaders are kicking the tires over a possible permanent reduction in Indiana sales or personal income taxes.
The quiet due diligence comes after higher than expected tax revenues will give Hoosiers a one-time refund to taxpayers next year.
“The possibility of a tax cut is very serious. I think it will happen, â€said Representative Dan Leonard, R-Huntington. “State revenues are very good. I think taxpayers deserve to get some of that money back or maybe not pay it in the first place. “
Leonard, a long-time member of the tax-conscious House Ways and Means Committee, said he encouraged House Speaker Todd Huston to put everything on the table.
But some financial experts are warning not to move too fast, noting that much of the recent growth has been boosted by federal stimulus dollars and additional unemployment dollars circulating in the economy.
Chris Watts, president of the Indiana Fiscal Policy Institute, said he’s not surprised Indiana is considering the idea. He said 10 states had already cut personal income taxes by 2021, including Ohio.
“We are currently riding this increase in income, but most observers believe it will level off from the stratospheric levels that we are seeing month to month,” he said. “I think we may not want to further reduce our tax base until we understand what the landscape looks like after this pent-up post-COVID activity.”
The 2020 calendar year was typical when it started, and then revenues plummeted due to pandemic shutdowns nationwide. The state lost about $ 1 billion in expected taxes in just a few months – relying on the state’s surplus to continue running state operations. Since then, however, Indiana’s revenue has grown more than expected.
In April, lawmakers learned that the state would raise $ 2 billion more than expected. And they have it all covered in a new two-year budget that went into effect on July 1.
But then, in July, budget leaders were surprised with an additional $ 1.2 billion in revenue, which triggered automatic taxpayer reimbursement in state law. It will be a tax credit next year – about $ 170 per taxpayer.
Sticking to automatic repayment is an option. But some Republicans want to add a more permanent tax cut to their list of accomplishments. In recent decades, the legislator has lowered corporate income tax as well as inventory and inheritance taxes.
In 2013, then-Gov. Mike Pence has pushed for a 10% cut in state income taxes. Lawmakers eventually agreed to a 5% cut, lowering the personal income tax rate from 3.4% to 3.23%.
Representative Greg Porter, D-Indianapolis, recently suggested a number of tax changes he said would benefit “everyday Hoosiers.”
They include the increase in the state earned income tax credit; increase in the rental deduction; create a higher deduction for student loan interest; the creation of a tax deduction for the care of dependents and children; doubling the personal income tax deduction for low income families; and apply the school supplies tax deduction to public school students.
“It is time to ask why the qualified majority creates a policy that benefits the rich and creates a blatant state surplus. It is cruel to hold this excess funding hostage as working class Hoosiers continue to struggle to meet daily needs, â€Porter said.
He continued, “We must not forget that these huge surplus numbers were built by providing fewer resources for the people of Indiana during a global pandemic and the resulting economic struggle. I plan to remain steadfast to ensure that this one-time influx of additional federal dollars and state surplus ends up in the hands of the Hoosiers who need it most.
Leonard and Ways and Means chairman Tim Brown, R-Crawfordsville, seem to agree that a further corporate tax cut is not likely – focusing instead on sales and income taxes.
Indiana sales tax is 7% – higher than the Michigan and Kentucky rates. The one-cent reduction in sales tax would cost about $ 1.2 billion, according to Cris Johnston, head of the Indiana Office of Management and Budget.
He said if the state lowered its personal income tax rate to 3%, from 3.23%, it would cost around $ 400 million a year. Indiana’s income tax rate is the lowest of any neighboring state.
“In terms of long-term structural reduction, I don’t think there’s anyone who thinks we’re here,†said Michael Hicks, director of the Center for Business and Economic Research at Ball State University. “One of the arguments for cutting taxes is that you think it will grow the economy.
“These promises continue to be made and continue to fail.”
Hicks also noted that Hoosiers are among the lowest taxed Americans – with a low tax burden as a percentage of per capita income.
Brown has long pushed for a tax restructuring that involves extending the sales tax to services rather than just goods. This is because the economy has shifted towards more services as a whole.
But he conceded that it would be a “big boost in a short session” as conversations are usually deadlocked when it comes to determining which departments to grant exemptions to.
Brown said before any decision is made, another revenue forecast will be released in December. Lawmakers could cut taxes without opening the state budget.
Another tax he mentioned is the business property tax, which businesses pay on equipment. Indiana is one of the few Midwestern states to see it. Lawmakers have long wanted to eliminate it, but it is a major source of revenue for cities and counties.
Brown is not sure whether to use state dollars as an alternative income for local funds, and Watts has said he would hate to see lawmakers placing additional strain on local government.
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