The Journal Gazette
Sunday, November 07, 2021 1:00 am

GOP legislators ponder tax cuts

But some experts warn revenue surge may soon recede

NIKI KELLY | The Journal Gazette

INDIANAPOLIS – Republican legislative leaders are kicking the tires on a possible permanent cut of Indiana's sales or individual income taxes.

The quiet due diligence comes after higher-than-expected tax revenues will give Hoosiers a one-time taxpayer refund next year.

“The possibility of a tax cut is very serious. I think it will happen,” said Rep. Dan Leonard, R-Huntington. “Revenues for the state are very good. I think taxpayers deserve to get some of that back or maybe not pay it in the first place.”

Leonard, a longtime member of the fiscal-minded House Ways and Means Committee, said he has encouraged House Speaker Todd Huston to put everything on the table.

But some financial experts are cautioning not to move too fast, noting that much of the recent growth was spurred by federal stimulus dollars and extra unemployment dollars circulating in the economy.

Chris Watts, president of the Indiana Fiscal Policy Institute, said he isn't surprised Indiana is considering the idea. He said 10 states have already cut individual income taxes in 2021, including Ohio.

“We are riding this revenue surge currently, but most observers feel this is going to settle down from the stratospheric levels we are seeing month-to-month,” he said. “I feel 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 calendar year 2020 was typical when it started, then revenue cratered due to the pandemic shutdowns nationwide. The state lost about $1 billion in expected taxes in just a few months – leaning on the state surplus to continue running state operations. Since then, though, Indiana's revenues have jumped higher than anyone expected.

In April, legislators received news that the state would bring in $2 billion more than expected. And they earmarked it all in a new two-year budget that went into effect July 1. 

But then in July, fiscal leaders were surprised with an additional $1.2 billion in revenue, which triggered the automatic taxpayer refund in state law. It will come as a credit on taxes next year – about $170 per taxpayer.

Sticking with the automatic refund is one option. But some Republicans want to add a more permanent tax cut to their list of accomplishments. In recent decades, the legislature has dropped the corporate income tax for businesses as well as eliminated the inventory and inheritance taxes.

In 2013, then-Gov. Mike Pence pushed for a 10% cut in state income taxes. Legislators ultimately agreed to a 5% cut – dropping the individual income tax rate from 3.4% to 3.23%.

Rep. Greg Porter, D-Indianapolis, recently suggested a number of tax changes he said would benefit “everyday Hoosiers.”

They include increasing the state earned income tax credit; increasing the renter's deduction; creating a higher student loan interest deduction; creating a dependent care and child tax deduction; doubling the individual income tax deduction for lower-income families; and applying the school supply tax deduction to public school students.

“It's time to question why the supermajority creates policy that benefits the wealthy and creates an egregious state surplus. It is cruel to hold this excess funding hostage while working-class Hoosiers continue to struggle to meet everyday needs,” Porter said.

He continued: “We should not forget these huge surplus numbers were built on providing fewer resources for the people of Indiana during a global pandemic and the resulting economic struggle. I plan to remain steadfast to ensure this once-in-a-lifetime influx of additional federal dollars and state surplus make it into the hands of Hoosiers that need it most.”

Leonard and Ways and Means Chairman Tim Brown, R-Crawfordsville, seem to agree a further corporate tax cut isn't likely – instead focusing on sales and income taxes.

Indiana's sales tax is 7% – higher than Michigan's and Kentucky's rates. Cutting a full penny off the 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 dropped its individual income tax rate to a flat 3% from 3.23%, that would cost about $400 million annually. Indiana's income tax rate is the lowest of all neighboring states.

“In terms of a structural long-term cut, I don't think there is anybody who believes we are there,” said Michael Hicks, director of the Center for Business and Economic Research at Ball State University. “One of the arguments for cutting taxes is you think it's going to cause the economy to grow.

“Those promises continue to be made and continue not to work.”

Hicks also noted that Hoosiers are among the least taxed Americans – with a low tax burden as a share of income on a per capita basis.

Brown has long pushed for tax restructuring that involves spreading the sales tax to services instead of just goods. That is because the economy has shifted to more services overall.

But he conceded that would be a “big lift in a short session” as conversations usually stalemate when considering what services to give exemptions to.

Brown said before any decisions are made, another revenue forecast will come in December. Lawmakers could cut taxes without opening up the state budget.

One other tax he mentioned is the business personal property tax, which businesses pay on equipment. Indiana is one of the few states in the Midwest to levy it. Lawmakers have long wanted to eliminate it, but it is a major source of revenue for cities, towns and counties.

Brown isn't sure about using state dollars as replacement revenue for local funds, and Watts said he would hate to see lawmakers put an additional constraint on local government.

At a glance

Summary of state taxes – Fiscal Year 2020

Sales tax: $8,233.4 billion

Individual income tax: $5,271.8 billion

Fuel taxes: $1,449 billion

Corporate income tax: $437.5 million

Total (including gaming and other taxes): $16.958 billion

Source: Indiana Taxes, Revenues and Appropriations Handbook 

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