Legislature and State Government and State Budget and Taxes and Legislation and Government & Economic Development and Government

Indiana lawmakers plan to float corporate tax cuts

December 15, 2010

State lawmakers plan to propose reducing Indiana’s corporate income tax rate next year in a move they say will make the state a more appealing place for businesses to locate.

But such a plan is likely to be controversial during a legislative session in which state legislators must craft a two-year budget already strained by lower-than-expected tax revenues. Some lawmakers are expressing doubts about the idea.

That won’t deter Sen. Brandt Hershman, R-Lafayette, from filing a bill that would lower a rate he says is high compared with that of other Midwestern states.

“As the economy recovers, we want to make Indiana the most attractive place to locate or grow a business in America,” Hershman said.

Indiana only weighs a single factor—a company’s sales—in the formula that determines the income taxes the company pays. But the state’s 8.5-percent rate exceeds that of neighbors such as Illinois, Ohio, Kentucky, Michigan and Wisconsin.

That can be a problem, economic leaders say, because even though other tax rates are competitive, the 8.5-percent figure causes sticker shock for some businesses early in the process of looking for places to locate.

“It’s kind of a resting (point) for people who look at the rest of our tax rates, which are pretty low,” said Indiana Secretary of Commerce Mitch Roob, one of several state officials and business leaders who met this fall to discuss the tax and other issues as part of an interim study committee on economic development. “When they see that number, they balk at it.”

The committee also heard testimony from Scott Hodge, president of the Tax Foundation, a nonpartisan tax research group. He recommended lowering the corporate income tax rate—possibly to the individual income tax rate of 3.4 percent of federal adjusted gross income—so the difference wouldn’t affect businesses’ decisions.

Hershman said he hasn't determined what rate he’ll propose, but it’s unlikely he’ll suggest eliminating the tax altogether, as states such as Texas and South Dakota have done.

Even so, the proposed reduction likely will be accompanied by concerns about how the state will fill the gap. A report released in the fall by the Indiana Fiscal Policy Institute projected a $1.3 billion budget gap as the state enters its next budget, which legislators will craft next session.

Money from corporate income taxes makes up about 5 percent of the state’s revenue, according to the fiscal policy institute.

John Ketzenberger, the group’s president, said bringing in additional jobs will take time, while the revenue loss will be instantaneous. That will leave policymakers to weigh whether it’s worth giving up the money in an effort to attract more investment.

“In the short erm, at least, it will be very difficult because the state already is looking at a deficit, and that’s on a flat-line budget basis,” Ketzenberger said. “Any dollar they give up anywhere else is going to have to be filled in or cuts made to offset that revenue loss. That’ll make it a tough political decision, no question about it.”

Rep. Win Moses, a Fort Wayne Democrat who sits on the Indiana House Ways and Means Committee, worried that any additional cuts in revenue would adversely impact Indiana’s schools.

Republican House Speaker Brian Bosma has said education would be the last item to be looked at in terms of cuts, but Moses said it could be “the only thing left to cut” if more trims are needed. That, he said, could put Indiana further behind in producing the well-educated workforce needed to draw employers in skilled sectors such as life sciences.

Moses said it’s not worth the tradeoff.

“If, in fact, they’re going to give money to businesses, they’re going to take it away from somebody, and the group that’s most exposed is the Indiana public schools,” Moses said. “It could cause far greater future problems than it solves.”

Hershman acknowledged the need to account for the revenue, but he said the income tax is a less valuable target than some other tax sources. That’s because larger multinational companies have the ability to shift profits overseas, allowing them to avoid paying income taxes in the U.S.

The lawmaker isn’t banking on more companies paying income taxes here if rates are lower, but he said it should help smaller companies that don’t have the ability to offshore their income.

“It most likely would be seen as a benefit to smaller corporations in Indiana,” Hershman said, “as well as a way to attract new business growth and job-related growth.” 

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