Revelations from the latest hearing of the Indiana General Assembly’s State and Local Tax Review Task Force showed that ideas floated by legislators to replace the state personal income tax could actually backfire and put a greater burden on the Hoosiers who already pay the largest share of their income in taxes.
But national experts also laid out a framework that would give Indiana’s lawmakers the opportunity to rethink how the state’s tax and budget structure can unlock Indiana’s true economic potential and allow all Hoosiers to thrive.
Some of the testimony presented to the Task Force was truly jaw-dropping. For example, The Tax Foundation testified that at 7%, Indiana’s sales tax rate is tied for second-highest in the nation (behind only California), and that it is “definitely not possible” to properly eliminate or replace the individual income tax.
Furthermore, the Institute on Taxation and Economic Policy (ITEP) demonstrated that not only do lower-income Hoosiers currently pay nearly twice the proportion (12.8%) of their incomes in state and local taxes compared to the wealthiest households (6.8%), but that Indiana already has the 12th-most regressive state tax structure in the country.
ITEP also showed that eliminating the state income tax would provide a windfall of $33,964 for the top 1% of earners, but a mere $203 for the bottom 20% of Hoosier earners. Likewise, replacing half of the income tax with a 9.5% sales tax would still gift $29,507 to the wealthiest while causing a net $62 tax *hike* for 1 in 5 Hoosier families.
While there was broad consensus from the national tax experts across the ideological spectrum about the dangers of eliminating the state income tax, there was a stark contrast in assumptions made and corresponding visions for the state. Both the Tax Foundation and the American Legislative Exchange Council (ALEC) posited that a correlation between taxation and migration should equal causation in legislative decision making. However, the Center on Budget and Policy Priorities provided data that jobs and family considerations are the primary reason for over two-thirds of interstate moves.
And while both the Tax Foundation and ALEC frequently praised Indiana’s “tax competitiveness”, their testimony did not reveal what the competition was over, or who is benefiting. The tax competition certainly can’t be for maternal mortality outcomes, as Indiana has the third-highest rate in the nation. And Indiana’s tax system isn’t making the state competitive even in the Midwest, where Indiana is worse than average in the region for real median wages, unemployment rate, poverty, and low wage jobs throughout the economic recovery of the past three years.
The Tax Task Force has a year before its final report is due to the General Assembly and the Hoosier public. After hearing from the national experts, they should now focus their studies and recommendations on three major areas:
- First, do no harm. It’s clear that eliminating the personal income tax, or partly replacing it with a sales tax hike, will only put more burden on the Hoosiers who already pay the largest portion of their incomes on taxes. The Task Force should cross that off the list of possibilities, along with any recommendations to restrict state or local revenue and force cuts to critical services that would put average working Hoosiers further behind our Midwest peers.
- Next, consult those who work closest with the Hoosiers left out of the national recovery. Let me humbly recommend a few I work with: Prosperity Indiana, the Indiana Assets & Opportunity Network, and the Indiana Coalition for Human Services all have statewide networks with the Hoosiers who drive our economy and the organizations who serve them.
- Finally, let’s leverage this opportunity to re-imagine how Indiana’s tax and budget structure can work together to unlock the potential of all Hoosiers. CBPP provided examples from states like Nebraska and Georgia where advocates have offered alternative proposals for their states to fully fund needed services such as affordable housing, universal child care, and tuition-free technical education, all possible for less than the loss of revenue from lopsided tax cuts.
Let’s not miss this opportunity to protect and expand Indiana’s revenue base and invest in needed shared public commitments. This is Indiana’s chance to regain true competitiveness in the Midwest and the U.S. for state prosperity, built on thriving Hoosiers.