For Growth’s Sake, Cut Indiana Income Tax
by Andrea Neal
Popular perception to the contrary, Indiana is not a low-tax state. When you add up all the different taxes – property, sales and income assessed by federal, state or local government – we rank right in the middle.
Twenty-three states have lower overall tax loads than Indiana’s. A few more may join them if they follow through with plans to reform their tax systems.
This is the best argument for Gov. Mike Pence’s tax cut proposal, an idea that has yet to make it into the budget bill and has received lukewarm support from lawmakers. Pence has proposed reducing the state’s income tax from 3.4 percent to 3.06 percent, saving Hoosiers about $380 million a year.
Republicans, who hold supermajorities in both houses, should be jumping at the chance. When a state can afford a tax cut, and Indiana can, it’s smart to pass one.
That’s exactly what other states are trying to do as they continue to struggle their way out of this recession. Since January, Governors Bobby Jindal of Louisiana, Dave Heineman of Nebraska and Sam Brownback of Kansas have called for their states to end the state income tax altogether and replace it with sales taxes. All three share the view that low taxes are key to job creation. The North Carolina legislature is considering repeal of personal and corporate income taxes.
If these states are successful, “they could provide the momentum for a nationwide trend,” said one analyst.
The debate in North Carolina, where the unemployment rate is 9.4 percent, has been especially instructive. A study by the John W. Pope Civitas Institute estimates that state would have at least 217,000 more jobs without the income tax.
The study compared growth rates of states based on corporate and individual income taxes and found “a large and negative impact on economic growth” in the high tax states. The study also found that states without a personal income tax have experienced higher average annual growth since 1992.
The Civitas research echoes a 2008 study of the economic effects of state income taxes, by economists Barry Poulson and Jules Kaplan, confirming “evidence of a negative effect of taxes on various measures of state economic performance.”
Critics argue that the North Carolina plan is regressive because consumption and sales taxes, which would be increased to replace the income tax revenue, disproportionately hurt the poor. The Civitas study suggests that employment and income growth that accompany income tax repeal are of far greater benefit to low-income households than lower sales taxes.
In Indiana, the sales tax is already high at 7 percent so getting rid of the income tax right now is not realistic. But Pence’s plan is a move in the right direction. According to the Tax Foundation, it would make Indiana’s income tax rate “the lowest in the country among those states that levy an individual income tax.”
Senate President David Long says Pence’s idea is still alive and likely to make its way into legislation once updated revenue forecasts come out. House Speaker Brian Bosma appears less receptive. In a recent letter to Republican county chairmen, Bosma indicated a preference for moving up the timetable to phase out the inheritance tax. He noted that Indiana’s income tax rate is already among the lowest.
Bosma’s letter to county chairmen was highly unusual for taking on the governor so early in his administration and appealing directly to the Republican political base. That’s where the debate over tax cuts may play out in the short term. In the March 1 Fort Wayne Journal Gazette, Allen County GOP Chairman Steve Shine said he backed the governor, noting, “Many other states are moving in that direction and we don’t want to be lagging behind.”
That’s what lawmakers should be concerned about. Our unemployment rate is 8.3 percent, which is not much better than North Carolina’s. We don’t want to lose jobs to states that are more aggressive in creating a low-tax atmosphere. Remember: Indiana is not a low-tax state. We’re smack dab in the middle.
Andrea Neal is adjunct scholar with the Indiana Policy Review Foundation. Contact her at firstname.lastname@example.org.
This post was tagged under: Indiana Politics