Key Indiana Republicans heard tepid support on Friday for their hopes to cut or scrap the state’s individual income tax.
Witnesses instead encouraged greater focus on the property tax system and proactive avoidance of short-term budget shortfalls or structural deficits.
“I wonder when we talk about eliminating that,” former Sen. Luke Kenley — a budget hawk — said of the individual income tax. “(It) is pretty fashionable because everybody’s looking at … Texas and Florida, which have some other forms of revenue. I wonder if that’s really going to hold up.”
He spoke at the Interim State and Local Tax Review Task Force‘s second meeting, before former partners and proteges alike.
“Alaska was the last state to eliminate its income tax. That was back in 1980. I don’t know if it’s really applicable to Indiana,” Josh Goodman — senior officer of the Pew Charitable Trust’s state fiscal health project — told the task force.
“That was because they have all this revenue from oil,” he said, adding that non-income tax states generally have unique and large alternate revenue sources or have high sales taxes.
An inflection point for Indiana
States’ pandemic-era surpluses are dissipating, according to Goodman.
Although Indiana is in a “better position than most states” financially, he cautioned that Hoosiers “aren’t immune to challenges.”
If lawmakers seek impactful, long-term policy changes, they’ll need to avoid both temporary budget shortfalls and extended structural deficits.
Goodman recommended that Indiana experiment with budget stress tests, in which officials identify hypothetical budget-crunching scenarios, analyze their potential impacts and consider which financial tools could help close the theoretical gaps.
Long-term budget assessments, he said, could also guide deeper shifts. Rhode Island has used such an approach to figure out what it could afford in tax cuts, while New Mexico began saving millions to head off expected drops in oil production, for example.
Indiana is one of 30 states that has conducted neither, although it does regularly release two-year projections. Goodman suggested extending those further out in time.
And he lauded the Indiana Legislative Services Agency for being a “leader” in tax incentive evaluation, and a “model for other states.”
“The big question, because you aren’t immune to challenges, is: what comes next?” Goodman asked. “And, what kind of long-term path are you on?
Four state agencies also presented on the basics of Indiana’s tax system and recent legislative history, geographic information systems in tax collection and more.
They were largely informational, leaving the analysis to lawmakers — and Kenley.
Former budget chief pushes for property tax pivot
Kenley, who served in Indiana’s Senate for 25 years and chaired the chamber’s appropriations committee for eight of them, asked lawmakers to “reform the reform” he helped lead in 2008 on property taxes.
“It’s been 15 years now since we really reformed the system, put in the constitutional caps, and we’re starting to leak,” Kenley told the committee.
He held up broad bases, low rates and worthwhile proceeds as essential tenets of good tax systems. For Kenley, income taxes were “easiest” because those making money can hand some over.
“If you eliminate either the state or the local income tax … when you hit the next recession, the first thing that’s going to happen is they’re going to reinstate — even on a temporary basis — an income tax, and it will probably have progressive rates to it,” said Kenley, an ardent supporter of the current flat rate.
Property taxes, in contrast, consider value but not necessarily owners’ ability to pay, Kenley asserted.
And he identified two other complications: local school operating referendum levies aren’t necessarily working as intended, he said, and local units and their legal advisers have found “ways to play the system.”
Until next time
Sen. Travis Holdman (R-Wells), who chairs the interim committee, has repeatedly said that he’s willing to consider every solution when it comes to Indiana’s tax system.
Asked if he’d considered marijuana legalization and associated taxes as a potential backfill, he told reporters to observe a separate interim committee on commerce, but added. “Nothing’s off the table.”
But, he said, lawmakers should leave at least the local income tax alone, because the property tax caps prevent local units of government from using that revenue source to make up losses.
He expected further testimony on school operating referendums and levies.
The two-year task force meets next on October 20, and will feature speakers from several more national think tanks: the conservative-leaning Tax Foundation and the American Legislative Exchange Council, along with the liberal-leaning Institute on Taxation and Economic Policy and the Center on Budget and Policy Priorities.
Policy recommendations are due to the General Assembly ahead of the 2025 budget-writing session.