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By Marilyn Odendahl
The Indiana Citizen
August 9, 2024

In the Indiana Statehouse and on Capitol Hill, taxes will likely be a major issue in 2025 with most of the discussion focused on cuts, but experts caution Hoosiers should not expect to get what they are not willing to pay for.

Wesley Tharpe, senior adviser for state tax policy at the Center on Budget and Policy Priorities, pointed to the link between tax revenues and public services. State and local taxes, he said, are the primary funders for schools, health care, transit systems, and correctional facilities. Cuts to taxes mean less money is available for services that create “opportunity and a high quality of life” in Indiana communities, he said.

“Everybody needs access to some degree of quality education, roads, so on and so forth, so you’re going to have to eat your broccoli,” Tharpe said.

Tharpe and Neva Butkus, state policy analyst at the Institute on Taxation and Economic Policy, discussed Indiana’s state and local taxes on Tuesday, during a webinar entitled, “Indiana’s Tax Inequities: Securing Revenues for Indiana’s Future and Who  Pays.”  Prosperity Indiana hosted the event and Hale Crumley, policy manager at Prosperity, moderated the discussion.

Talk of taxes are part of just about every election year as shown, most recently, by Indiana Republican gubernatorial candidate Mike Braun offering a proposal on property taxes. However, in 2025, Republicans and Democrats could be tangling over taxes even more.

When the Indiana General Assembly returns in January 2025 to hammer out another two-year state budget, the debate over taxes could get some extra fuel from a report by the Indiana State and Local Tax Review Task Force. The committee, created by the legislature in 2023, is scheduled to submit by the end of this year its assessment of the state’s tax code and recommendations for changes. Initially, the task force was focused on possibly eliminating the state’s income tax, Crumley said, but the group has shifted its attention to property taxes.

In Congress, lawmakers are expected to be fighting in what has been dubbed the “Super Bowl of Tax.” They will be grappling with the expiration of many of the tax cuts, breaks and rate drops included in the Tax Cuts and Jobs Act signed into law in 2017 during the Trump administration. If Capitol Hill does not take action next year to prevent or, at least, mitigate the fallout caused by the expiring cuts, 62% of taxpayers would see their taxes increase, according to reporting by The New York Times.

What Hoosiers will be paying in taxes depends, as usual, on whether they are at the low end or the high end of the income scale.

Butkus said Indiana has a regressive tax structure with the lowest-income households shouldering the highest portion of the tax burden. The lowest 20% of income earners in Indiana, which are households making less than $22,600 year, are paying an effective tax rate of 13.3%, while the top 1% of earners in households making more than $574,200 annually are paying 6.2%, she said.

Indiana’s heavily reliance on sales and excise taxes for revenue is a key contributor to the state’s regressive tax structure, Butkus said. All Hoosiers, regardless of their incomes, pay the same 7% sales tax, she said, so those with smaller paychecks lose a bigger chuck of their income when they buy school supplies, clothes or other household necessities.

“Because wages are low, really low-income Hoosiers tend to have to spend almost all of their income in order to get by,” Butkus said. “There’s not a whole lot for savings. There’s not a whole lot to put aside or invest. They are just trying to get by paycheck to paycheck, and they spend a very large percentage of their income, because of that, in sales taxes.”

Temporary growth, permanent cuts

An August issue brief from the Indiana Fiscal Policy Institute identifies a mix of good and bad news in the state’s just-released report for fiscal year 2024.

The brief noted Indiana brought in $21.9 billion in revenues in fiscal year 2024, an increase of 1.49% from fiscal year 2023, but the state spent $21.5 billion, a jump of 19.4% over the previous fiscal year. Moreover, while income tax revenue from individual and corporations rose to $9 billion in fiscal 2024 from the $8.8 billion collected in the last fiscal year, it was still below the $9.7 billion received in fiscal year 2022.

Indiana closed the fiscal year with $2.5 billion in reserve, a decrease from previous years but still representing 11% of revenues.

Tharpe noted that Indiana, like many states with strong revenues and budget surpluses, has cut taxes in recent years. The legislature passed a tax cut in 2023, which is phasing in and will reduce the income tax rate to 2.9% by 2027. This tax cut, he said, will eventually slash state revenues by $800 million a year.

While surpluses and revenue growth are temporary, Tharpe said, tax cuts are permanent. So lawmakers should be asking “a lot of hard questions” when debating tax cuts, he said. They should look at what public services will have to be reduced or discontinued and which income group – working families or top earners – will benefit the most from the cuts.

“I think it’s fair to say that in a lot of states, it’s that policymakers aren’t really thinking very clearly enough about what those trade-offs are in terms of lost revenue for services,” Tharpe said.

‘Broad general impact’

Cutting tax revenues not only endangers current public services but could potentially cripple another service or stifle an investment or initiative in the coming years, Tharpe said. Those cuts, he said, tend to disproportionately harm lower-income households and neighborhoods as well as communities of color.

However, while the impoverished may take the brunt of the hit from tax cuts, residents across the state will get punched.

“On top of that, (you should) also think about the broader impact of cuts to public services that really undergird the state’s economy,” Tharpe said. “So if you cut access to quality public education, (and make) cuts to infrastructure, cuts to quality of life, there really is a broad general impact on residents of the state of all backgrounds, as well as I think the state’s general attractiveness and ability to retain and attract residents and companies.”

Butkus said Indiana has the ability to raise revenue in a “more equitable way.” She suggested closing corporate tax  loopholes; enacting estate and inheritance taxes so wealthy families are not “passing down tons and tons of money” from one generation to the next; and taxing capital gains at a higher rate than wage income.

Already, Butkus said, Indiana is helping to address some of the tax inequity with the earned income tax credit.  The EITC is actually a federal program, but Indiana provides a 10% match to Indiana households that qualify for the tax credit, which can “really tip the scales,” she said, and help working families eliminate some of their higher tax burden.

Even a relatively small amount can help, she said. For example, if an Indiana family gets $6,200 from the federal EITC, the state would add $620.

“That’s nothing to scoff at,” Butkus said. “Six hundred bucks can go a really long way for a low-income family. That is enough to get your tires changed, so you can keep going to work every day, and catch up on some utility bills.”

Dwight Adams, an editor and writer based in Indianapolis, edited this article. He has been a content editor, copy editor and digital producer at The Indianapolis Star and IndyStar.com, and a planner for other papers, including the Louisville Courier Journal.

The Indiana Citizen is a nonpartisan, nonprofit platform dedicated to increasing the number of informed and engaged Hoosier citizens. We are operated by the Indiana Citizen Education Foundation, Inc., a 501(c)(3) public charity. For questions about the story, contact Marilyn Odendahl at marilyn.odendahl@indianacitizen.org.