Should Indiana eliminate its individual income tax?
This behavior is colloquially referred to as the behavior of a “one trick pony.” The latest quest is a proposal to study how to eliminate our state income tax. Apparently, the resounding cry for improvements to education, quality of life and our workforce’s health has gone unheard.
The parade of Indiana tax cuts at first focused on taxes on assets. Decades ago, Indiana imposed a tax on the value of stock and other financial holdings. That was repealed in 1989. We had a tax on inventories, which was eliminated in 2007. We taxed inheritances, but not after 2012.
All these changes protected wealth. So our tax system had to rely on taxing income, spending (sales tax) and real property. This is the three-legged stool that basically funds our state and local government services, including education.
We financed the cuts by raising sales tax rates 1% in 2002 and again in 2008. In fiscal year 2022, sales taxes generated some $10.4 billion, and now is one of our largest sources of funds. We raised roughly $8.2 billion in personal income taxes (plus nearly $3 billion in local government revenue) and some $1.2 billion in corporate income taxes. Property taxes produced some $8.5 billion for local government.
We have had modest reductions in the personal income tax rates while cutting corporate income taxes nearly in half. All in all, we have shifted taxes from wealth and business activity onto consumers.
Total state tax revenue in fiscal year 2022 was some $23 billion, including fuel taxes and an array of other taxes—e.g., on cigarettes and gambling. Eliminating the state’s share of personal income taxes would cut state revenue by about one-third.
This is clearly impractical if we want to fund our schools and colleges, health services, courts, prisons, etc. Remember that nearly two-thirds of our state budget supports education.
How could we make up for some $8 billion if income taxes were eliminated? It is suggested we could eliminate debt. But we have little of that, and it is coming down fast. We refused to borrow when rates were low and workers available. Now rates are high, and workers are in short supply. So neither borrowing nor paying off debt will work.
We can hardly raise sales tax rates, which are at the high end nationally. So we would have to revert to our old tactic of excessive reliance on local property taxes to fund K-12 education. When we last went that route, we had the famous property tax revolt that led to a constitutional amendment capping property tax rates. No one wants to repeat that experience.
Tax cuts alone don’t further economic development. We have shown that. We need to lower college costs for our kids and their parents, invest in our public health system, use federal funds to support modern rail and transit, and improve public health.
We have tried “penny wise and pound foolish” for 20 years, and it has left us at the bottom of too many lists. We need to invest in our people and our state.•
DeLaney, an Indianapolis attorney, is a Democrat representing the 86th District in the Indiana House of Representatives. Send comments to email@example.com.
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