Legislature and Banking & Finance and State Government and Taxes and Government & Economic Development and Government and Wealth Management

Indiana House votes to phase out inheritance tax

February 28, 2012

The Indiana House on Tuesday approved a 10-year phase-out of the state's inheritance tax that now brings in about $160 million a year.

House members voted 80-17 in favor of the plan that would more than double the current inheritance tax exemption for children and grandchildren to $250,000 and reduce the tax rate each year until 2022.

Republican Rep. Eric Turner of Cicero, the bill's sponsor, said eliminating the tax would help families keep small businesses and farms. He said it the current system is unfair because it taxes assets that a person had accumulated from their taxed income.

"You've already paid taxes on this money," Turner said.

The phase-out period will help the state afford the revenue losses, estimated to be about $60 million the first year and then an additional $10 million each year until the tax is eliminated, Turner said. Inheritance taxes currently account for about 1 percent of state revenue.

Opponents of phasing out the tax argued is the wrong step to take when budget leaders previously have said the state can't afford the estimated $60 million annual cost to eliminate school textbook fees or allow less-expensive moves such as removing the state's 7 percent sales tax on college textbooks.

"Every year it's, 'Sorry, gee we just don't have the money, it'd really be nice to do that,'" said Rep. Matt Pierce, D-Bloomington.

The state now exempts inheritances of less than $100,000 to children and grandchildren and has a top rate of 10 percent for portions of estates topping $1.5 million. More distant family members and non-relatives face higher rates. Spouses pay no state inheritance taxes.

The new exemption level for close relatives under the House plan would be $250,000, with a $25,000 exemption for others. The plan starts phasing out the tax on estates for those who die after July 1.

Senate budget leaders largely support the House's inheritance tax elimination plan but agreement must be reached on a final version by the end of next week, when legislative leaders expect to adjourn this year's session.

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