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 might 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.
That’s exactly what other states are trying to do as they continue to struggle their way out of this recession. Since January, Govs. 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 the state would have at least 217,000 more jobs without the income tax.
Critics argue 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 the 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 Indiana’s income tax rate is already among the lowest.
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 aneal@inpolicy.org. The opinions are the writer's.
