INDIANAPOLIS — As Indiana seems poised to restructure its tax system in the next few years, some policy experts are urging the State and Local Tax Task Force not to make drastic cuts to the state’s individual income tax.
In Indiana, the individual income tax accounts for roughly a third of state revenue (the state’s sales tax accounts for nearly half).
During the task force’s meeting Friday, several experts who gave testimony said Indiana is doing well economically (7th in the nation in terms of 2023’s economic outlook according to the American Legislative Exchange Council), and that improvements must be made to keep Indiana’s tax structure competitive (citing net migration levels among states that have lowered their income tax).
Others, however, emphasized drastic cuts could harm lower-income Hoosiers the most.
From 2021 to 2023, nearly half of all states made cuts to their individual income tax rate. However, Wesley Tharpe, the senior advisor on state tax policy for the Center on State and Budget Policy Priorities, said lowering income taxes doesn’t always equate to a boost for state economies.
”The personal income tax brings in eight billion dollars a year about to [Indiana’s] general fund, and meanwhile, 60 percent of the state’s general fund goes to just K-12 public schools and Medicaid,” Tharpe said.
Indiana is set to lower its state income tax rate to 2.9 percent by 2027—however, several lawmakers said eliminating the tax overall is not feasible.
”If we cut the income tax, you’re going to have to raise the sales tax,” State Rep. Gregory Porter of Indianapolis said.
Indiana has a seven percent sales tax rate: the second highest in the nation behind California.
”Lower and middle-income households are paying an astronomical amount of sales taxes in Indiana, currently upwards of 12 percent of their income,” Neva Butkus, a state policy analyst with the Institute on Taxation and Economic Policy (ITEP) said.
Some experts recommended broadening the sales tax base by making more consumer services (such as services provided by spas, salons, theaters, and other services associated with higher-earning Hoosiers), but State Sen. Fady Qaddoura said he fears rural communities could take a hit.
”Rural communities with limited options to raise sales taxes will be negatively impacted,” Sen. Qaddoura said.
The tax task force will hear more testimony in November.