Gov. Mike Braun signed legislation Wednesday that could continue incremental decreases in Indiana’s income tax rate starting in 2030, but whether those cuts could ever go into effect is uncertain.
In order for the cuts to kick in, the legislation stipulates that the state’s revenue must hit certain growth benchmarks. However, the state hasn’t reached those benchmarks in at least two decades, and lawmakers learned Wednesday that state revenue growth is expected to stall over the next three years.
The income tax rate in 2025 is 3%, and it is already slated to decrease to 2.95% in 2026 and to 2.9% in 2027.
Under Senate Enrolled Act 451, the state tax rate could be lowered by .05% in even-numbered years until 2042. The rate would only continue to be phased down as long as state revenue grows at least 3.5% from the year prior—a benchmark the state hasn’t reached in the last 20 years, according to the bill’s fiscal analysis.
Complicating that revenue benchmark is the loss in revenue that comes with lowering the income tax rate. Each 0.5% reduction would cost the state $150 million to $200 million per year.
Braun’s approval comes as the state’s fiscal future was predicted to collect $2.4 billion less than lawmakers expected over the next three years.
An updated revenue forecast presented to the Budget Committee on Wednesday projected that the state’s revenue will flatline from 2025 to 2027, largely due to lower collections from the state’s largest revenue generators—sales and income taxes. Lawmakers also learned Indiana’s unemployment rate is projected to rise to nearly 5% by mid-2027.
Local governments may also offset a taxpayer’s overall savings by raising their local rates to compensate for property tax cuts. Changes in Senate Enrolled Act 1 could limit local governments to a tax rate of 2.9%, but most counties are not taxing at or higher than that rate, with the average county-level income tax rate sitting at about 1.72%.
A half-point increase in the income tax rate would cost an additional $750 for a person who earns $150,000 after deductions and exemptions.
Officials across the state said they are weighing raising their local income tax rates after Braun signed a property tax reform and relief bill that would cut local government and school tax revenue by $1.5 billion.
Indiana has one of the lowest income tax rates among the 43 states that haven’t eliminated their income taxes. North Dakota and Arizona have two of the lowest rates in the country with 2.5%, while California, New York and New Jersey each have rates over 10%.