EYE ON THE PIE: Income tax surcharge to hit only 1 in 20

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Gov. Mitch Daniels in his Jan. 18 State of the State address called for many changes. He sought to put aside partisan differences and private calls for privilege. Immediately he was abandoned by many in his own party.

The idea that drew the most attention was the governor’s request for a one-year, 1-percent surcharge in taxes on those with income above $100,000.

There might be some confusion about what the governor meant. Are we going to tax that part of income over $100,000? That is very appealing to the progressive spirit. Or, does the governor propose taxing all income of those who make more than $100,000? This idea will draw less support, although it will generate more revenue.

Some legislators declared that any tax increase was dead on arrival, a condition that matches their own mental state more than the governor’s proposal.

How many of us would pay this onetime, 1-percent surcharge? The latest data I could find are for tax year 2002. These figures show that 137,500 Indiana tax returns had adjusted gross income of more than $100,000. That is 4.9 percent of all tax filers in Indiana, or 5.2 percent of those who had positive income to report (5.8 percent of those who file have AGI equal to zero).

Our tax bills are computed on our net taxable income, which is AGI, less any deductions and credits we are entitled to receive. Thus, the numbers below overstate how many will be paying the tax surcharge. But since my data are for 2002 and we are talking about 2005, the percentages could be higher. Don’t you love the precision economists offer in our public discourse?

Couples can escape part or all of the 1-percent surtax by filing separate returns, unless the Department of Revenue can match us up to our partners.

Some people tell me it’s hard to get by on “just” $150,000 a year and that an added 1 percent on $50,000 (a sum of $500) would be a true burden. Of course, if the governor proposes to tax all income of people who make more than $100,000, we are talking about an added tax of $1,500 on $150,000.

This surtax, no matter how computed, would be felt most in suburban counties (see chart). This tax will be fairly proportionate to the distribution of the taxpaying public. In 86 counties, the difference between the percentage of the state’s taxpayers filing and those filing with over AGIs over $100,000 was 1 percent or less.

For example, Shelby County has 0.6 percent of the tax filers and 0.6 percent of those with returns over $100,000; the difference is zero. In Montgomery County, the figures are 0.6 percent and 0.4 percent, respectively, with a difference of just 0.2 percent. The greatest negative difference is in Lake County, which had 7.4 percent of tax filers and 6.3 percent of those over $100,000. The biggest positive differences come as no surprise. With just 2 percent of all tax returns, Hamilton County has 11 percent of the state’s filers with more than $100,000, while Marion County has 12.4 percent of all taxpayers and 15.5 percent of those in the highest brackets.

The governor asked those with incomes over $100,000 to dig deeper for one year to help right the state’s fiscal vessel. He is calling on one in 20 of us, those who benefit most from being in Indiana, to accept a tax increase for a limited time. Once it is clear who will bear how much burden, the people of Indiana will probably respond favorably to Daniels’ appeal.

Marcus taught economics at Indiana University more than 30 years and is the former director of IU’s Business Research Center. His column appears weekly. To comment on this column, go to IBJ Forum at www.ibj.comor send email to mmarcus@ibj.com.

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