Will Indiana’s income tax go away? What would replace it? Answers are being sought by interim legislative task force led by local state senator
By MARK MILLER
While the common perception may have been that the State and Local Tax Review Task Force was created during the 2023 Indiana legislative session to endorse a plan to eliminate Indiana’s personal income taxes, it’s chairman, State Sen. Travis Holdman, says it was more of a question.
He frames that as “Could we get rid of the state income tax in order to be more competitive?” Which led legislative leaders to broaden the scope of the ad-hoc committee.
“It’s been 20 years since there’s been any kind of a holistic review of Indiana’s tax structure,” the Wells County Republican and Majority Caucus Chair said. Hence the series of hearings that began in August and will continue throughout 2024 is putting everything up for review. “It’s all on the table,” he said, “property taxes, corporate, sales, and income taxes.”
Nonetheless, Holdman does not hide his preference that the state at least sets a goal to eliminate the personal income tax.
What is important, he says, is that “we signal to people that we are moving in that direction, and to businesses looking to relocate that we are setting a goal for ourselves to get there. We may not ever reach zero percent but at least we continue to be competitive with other states throughout the country, many of which are targeting a zero-percent income tax.”
The Task Force members include Holdman, Rep. Jeffery Thompson (R), Sen. Ryan Mishler (R), Sen. Eddie Melton (D), Sen. Fady Qaddoura (D), Rep. Jack Jordan (R), Rep. Edward DeLaney (D), and Rep. Gregory Porter (D). The Task Force also has four non-legislature members, Dan Huge, public finance director of the Indiana Finance Authority; Zac Jackson, director of the Budget Agency, Cris Johnston, director of the Office of Management and Budget; and Juston Ross, state educational institution economist. As vice-chair, Rep. Thompson will assume leadership of the Task Force after the group’s January meeting.
Although reluctant to take the credit, the second-term senator who represents all of Wells County as well as Adams, Jay and Blackford counties and a small portion of Allen County, was a leader in creating the joint study committee.
“A fellow legislator asked me why we were doing this,” he explained. Indiana has worked it’s way up to being a leader in “friendly tax climates” in the nation. According to the Tax Foundation, a nonpartisan think tank, Indiana has the 10th-best business tax climate in the nation.
“But we used to be ninth,” Holdman pointed out. The Indiana state income tax rate has been reduced over the past several years and is on track to be set at 2.9 percent in 2026. Meanwhile, other states have voted to further reduce their rates.
“If we stand still, we will get passed by other states,” he continues. “We have to keep moving. But we’re not going to get there overnight,” he continued. “It will be a long process.”
In their testimony to the Task Force in October, Tax Foundation representatives Audrey Yushkov and Katherine Loughead — both of whom have strong Hoosier backgrounds — told the group that “the state and local tax landscape is rapidly changing and becoming increasingly competitive, and states that stand still risk falling behind.” They noted that while Indiana’s tax climate leads the Midwest, several of the neighboring states either have reduced their income tax rates or plan to.
Holdman notes that it is important to have a balanced tax climate that attracts both businesses and individuals. With people having more flexibility in where and how they work, states with no incomes taxes have generally seen significant migration from high-tax-climate states. He discusses a “Make My Move” initiative aimed at attracting higher-paying jobs and offering a $5,000 stipend to attract people to Northeast Indiana.
“But we have to give equal attention to controlling expenditures and costs,” Holdman added.
Since income taxes have accounted for about one-third of Indiana’s general fund revenue since at least 2015, that revenue would have to come from other sources. Holdman sees sales tax as the primary target — “broadening the base,” as he puts it, which means taxing groceries and services, along with a rate increase.
According to the Tax Foundation’s presentation, Indiana’s 7-percent sales tax is tied with Mississippi, Rhode Island and Tennessee as the second-highest state sales tax in the nation. (California leads the nation with a 7.25-percent.) However, since Indiana currently does not authorize its localities to impose local sales taxes, Indiana’s combined state and local average sales tax is more competitive, placing Hoosiers pretty much in the middle of the pack.
Currently, groceries and many personal services are exempt from the sales tax. Holdman, recognizing that taxing groceries is perceived as “regressive” — putting more of a burden on lower income households — says the legislature would “consider ways to alleviate the impact on lower income people” if that proposal would be pursued.
The Tax Foundation study noted that “services have grown considerably as a share of personal consumption expenditures.” It had been less than 40 percent in the early 1950s but is now more than 65 percent. The result is “the (sales) tax base has become narrower in almost every state,” including Indiana.
The Tax Foundation’s presentation also noted that Indiana’s flat 4.9 percent corporate income tax “is already one of the lowest in the nation … (and) is highly competitive with its Midwestern neighbors.”
“I think we need to take hard look at the business personal property tax and set a path to eliminate the 30 percent floor,” Holdman added. Indiana, he continued, has the highest floor for states that have a floor on valuation of the business personal property tax.
Meanwhile, the Indiana Chamber of Commerce is doing “a comprehensive study,” Holdman shared. “They hired a national accounting firm to help with the research.” Holdman called their effort a “deep dive into Indiana tax policies, but they will also look at cost controls and state spending.”
The group’s earlier hearings were dominated by presentations on the state’s financial structures and funding processes while the specific tax discussions in October and November have focused primarily on income tax issues. Holdman expects the next hearing, scheduled for Jan. 10 before the 2024 legislative session begins, will be focused on property taxes.
This is an area in which Holdman is focused on costs controls.
“The property tax structure needs to be cleaned up with an eye to controlling spending at the local level,” he explained, “and being fair to all sectors. Schools should likely expect a referendum on all requests to spend above the tax caps.” He also believes that controlling property taxes for Hoosiers age 65 and over is important.
The options for how property taxes fit into the state’s overall tax climate and how they might be tweaked to improve the goal of a “friendly tax climate” gets into the property tax complexities. The best example of that might be the Maximum Levy Growth Quotient, which is a state-mandated limit on how much local property tax levies can grow each year. That is now capped at four percent.
“We’re trying to come up with a new formula” as to how the MLGQ is determined, Holdman explained.
It is currently based on a six-year rolling average of non-farm income, “which makes no sense to me. That is an ability-to-pay formula when the property tax is not (an ability-to-pay tax). It’s a wealth tax. It’s based on most people’s primary asset. So we have a clash there.”
Generally speaking, Holdman has a “so far so good” opinion of his interim effort.
“One of my goals was to make ‘subject-matter experts’ of the legislative body of (tax policies), which I think we’re doing.” He referenced several legislators not on the task force who have sat in on the hearings and several others who are serving on “break-out” groups that are studying specific areas of the tax structure. He is looking forward to the April meeting when some those break-out study groups are scheduled to come back with some recommendations; the Indiana Chamber study should be finished by then.
“I think, so far, we’ve accomplished a lot of what we set out to do,” mostly by doing research, he continued. “Hopefully, we can set a long-term goal of eliminating the individual income tax which may take 10-12 years to get there.”
miller@news-banner.com
