OPINION: Look past oversimplifying state income tax rate

By making the cut, Pence said, “Indiana will be the lowest taxed state in the Midwest. Companies who are here will have one more reason to expand, and we will give businesses outside Indiana one more reason to move to the Hoosier state.”

Pence’s proposed cut would reduce Indiana’s income tax rate from the current 3.4 percent to 3.06 percent.

But even without the cut, Indiana already might have the region’s lowest income tax rate, according to organizations that keep track.

It all depends how you define “lowest” — which is more complicated than Pence makes it sound.

Indiana has a flat tax rate for everyone. We’re one of only nine states with a single tax rate for all income levels.

Two of our neighbors also have flat tax rates, and we’re already lower than Michigan at 4.35 percent and Illinois at 5 percent.

A total of 34 states have graduated income tax rates like the federal government. Tax rates rise as income increases.

Our neighbors with graduated tax rates are Ohio and Kentucky.

In Ohio, the average tax rate is 3.42 percent, but the rates range from 0.59 to 5.92 percent, depending on income.

Kentucky has an average tax rate of 4.3, with steps that range from 2 to 6 percent.

For people with low incomes, taxes would be cheaper in both Ohio and Kentucky — as well as in many other states with graduated rates.

Seven states have no income tax at all. Of the other 43 states, only two have lower average income tax rates than Indiana.

In Oklahoma, 3 percent is the average rate of a graduated scale that runs from 0.5 to 5.25 percent.

Only Pennsylvania has a lower flat rate than Indiana with its 3.07 percent, and Pence’s plan would put Indiana a hair’s breadth lower than Pennsylvania.

But we’re still oversimplifying. To get the true picture, we have to look at the how many deductions are allowed before applying the tax rates.

Indiana allows a minimal personal deduction of $1,000 per person. Most of our neighbors allow more: Michigan $3,763, Illinois $2,000 and Ohio $1,650.

For most taxpayers, the higher deductions in Illinois and Michigan are not enough to offset their higher tax rates. Between Indiana and Ohio, who has the lowest tax depends on the size of your income.

It takes some serious number-crunching to compare Ohio and Indiana rates. But for a childless couple earning $80,000, Ohio appears to hold a slight advantage under present rates. The advantage would shift to Indiana with Pence’s proposed tax cut. At $60,000 income, Ohio still would have lower taxes. At higher incomes, Indiana taxes already are the best.

Adding children and other types of deductions makes the contest even messier.

If you want to get even more complicated, consider that Indiana is giving an automatic refund of $111 per taxpayer this year because of a state budget surplus. For that fictional childless couple earning $80,000, that’s a 8 percent cut in the tax rate. With lower incomes or some dependent children, it’s even better.

We can say that in the contest to have the Midwest’s lowest tax rate:

1. It’s not as simple as Pence makes it sound.

2. Indiana already may have won, at least at incomes above $80,000.

3. At lower incomes, Indiana would have a hard time beating the tax bills in Ohio and many other states with graduated rates.

Instead of cutting its flat rate, Indiana could help lower-income Hoosiers more effectively by going to graduated rates — which seems to be a non-starter in the Statehouse — or raising the personal deduction.