With Indiana’s state tax collections surging, a top Republican legislator is looking at possible significant changes to the state sales tax and cutting property taxes for some businesses.
House Ways and Means Committee Chairman Tim Brown hasn’t offered details yet for what he could propose for the new legislative session starting in January, but such changes face concerns over the possibility of an economic slowdown and the impact on funding for local governments and school districts.
Topics in Brown’s sights include expanding Indiana’s 7% sales tax that covers merchandise purchases ranging from clothing to cars so that it also is charged for spending on services, which potentially could be anything from haircuts to hospital stays. Brown said his aim would be to lower the sales tax rate if it was applied to a broader range of spending.
Brown points to a trend of more spending on services, which federal reports show now make up nearly 70% of consumer spending.
“Our sales tax base is changing a lot, so I am interested in looking at sales tax and sales tax affects everybody,” Brown said. “It doesn’t matter how much money you make, you pay sales tax.”
About a dozen states have extended their sales taxes for many services, but such moves have faced debates over which ones are appropriate to tax, said Purdue University economist Larry DeBoer, who has studied Indiana tax policy for more than 30 years.
It would be difficult to collect a significant amount from taxing services without it covering areas such as housing costs, including rent payments, and medical and legal expenses. Those areas account for more than half of services spending, according to federal reports.
“When you start looking at the individual things you’d have to tax, you’re going to come up against some very powerful interest groups and some very powerful ethical arguments,” DeBoer said.
Any tax debate in the Legislature would come as the state is flush with cash.
State government saw overall tax revenue grow 14% during the last budget year as collections bounced back stronger than expected from the COVID-19 pandemic recession, pushing its cash reserves to $3.9 billion as of June 30. Tax revenue has kept growing, with the state collecting about $560 million, or 10%, more than expected during the four-month span through October.
Brown also has his eye on property taxes charged on business equipment. The Legislature has exempted thousands of small businesses from the equipment tax in recent years, but it still makes up about 17% of all property taxes that primarily go to city and county governments and school districts.
Despite Indiana having cut its corporate tax rate from 8.5% to 4.9% over the past decade, Brown said the equipment tax is a “burden” on businesses that many other states don’t have.
Republican Sen. Ryan Mishler, chairman of the Senate Appropriations Committee, raised skepticism on whether more business tax reductions are needed as the top concerns he hears from business leaders are about the education and availability of workers.
Mishler said the state needed to stay prepared for any economic troubles.
“With the national trends of increasing the fuel prices, the supply shortage, the increase in prices, I think we’re in for a downturn in the economy,” Mishler said during a recent Indiana Fiscal Policy Institute program.
Local government leaders worry about a possible loss of tax revenue if major changes are made to the equipment tax. Reductions to that tax could mean higher property taxes for residential homeowners unless the legislators find another revenue source for local governments and schools.
Changes to the minimum depreciation levels set by the state for the equipment tax could make a big difference at factories being considered for upgrades, said Andrew Berger, senior vice president of the Indiana Manufacturers Association.
Elimination of that minimum level could mean about $300 million a year in lower tax bills for businesses, according to a report prepared for the 2021 legislative session. That makes up about one-fifth of the $1.4 billion raised by the equipment tax.
Republican Gov. Eric Holcomb hasn’t weighed in on whether he’ll support any tax changes, with his office saying he’s awaiting updated state tax revenue projections coming out in December.
Democrats are suggesting the state’s revenue growth should go toward steps such as increasing the decade-old $3,000 annual limit on tax deductions for renters, greater tax breaks for student loan interest and allowing tax deductions for dependent and child care expenses.
“Previous policies have given generous tax breaks to the wealthy and large corporations,” said Democratic Rep. Greg Porter of Indianapolis. “New policies should be friendlier to working families who are the backbone of the state’s economy.”