Eliminating Indiana’s income tax sure sounds like an enticing idea—until you start looking at the potential impacts.
Who doesn’t want to stop paying a tax? Any tax?
But the bigger question is, how would the state replace the $8 billion the tax generates annually?
No Republicans pushing the idea have come up with a satisfactory answer.
Senate Tax & Fiscal Policy Committee Chair Travis Holdman, R-Markle, has been the leading advocate for examining potential abolishment of the tax, and he’s chairing a task force to explore the options.
From the outset of the task force’s work in September, he has said it could result in a transformational reshaping of Indiana’s task structure or a tweaking of the system, depending on what lawmakers and their constituents decide.
But he also has argued that repealing the income tax by 2030 would help Indiana compete with states like Florida, Tennessee and Texas that don’t have a state income tax and have seen economic and population growth in recent years.
He’s noted that repealing the tax would benefit both individuals and pass-through corporations, such as S corporations and LLCs.
Lt. Gov. Suzanne Crouch, one of five Republicans running for governor in 2024, also has taken up the charge, saying she would “ax the tax.”
So far, though, experts testifying before the task force have been tepid or cool to the idea—particularly the highly respected Luke Kenley, a former Indiana state senator who chaired the Senate Appropriations Committee for eight years.
“If you eliminate either the state or the local income tax … when you hit the next recession, the first thing that’s going to happen is, they’re going to reinstate—even on a temporary basis—an income tax, and it will probably have progressive rates to it,” Kenley told the task force, according to reporting from the Indiana Capital Chronicle.
Kenley instead urged the committee to shore up the property tax caps he helped devise in 2008 because the caps are leaking as legal advisers find a way around them.
Indiana State Budget Director Zac Johnson also has said there is no clear replacement for income tax revenue.
We have even stronger doubts.
Indiana doesn’t need a gimmick like the repeal of the income tax to stir economic development. And it certainly doesn’t need to do anything that could imperil its hard-earned AAA bond rating.
Indiana already is considered one of the most tax-friendly states for business, according to the Washington, D.C.-based Tax Foundation.
Holdman has said the loss of the income-tax revenue stream could potentially be offset by increasing the sales tax or imposing a sales tax on services.
But it’s hard to imagine that eliminating a source that generates 35% of the state’s tax revenue could be replaced in a way that would boost the state’s rankings.•
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