Corporate income tax plan hinges on budget hurdles

Indiana Commerce Secretary Mitch Roob can't count the number of companies that have refused to look at Indiana as a possible business location because they are put off by the state's 8.5 percent corporate income tax rate.

"In most cases, we never really get to describe, 'Well, it's a single sales factor and it's not as bad as it seems,'" he said.

But lawmakers' efforts to reduce the tax, which is among the top third in the nation, could fall victim to more immediate concerns — the state budget.

A proposal passed by the Indiana Senate and awaiting a hearing in the House Ways and Means Committee would lower the rate to 6.5 percent. Supporters say the state can't afford to keep the rate at 8.5 percent and that it has a chilling effect, especially when added to the top federal corporate tax rate of 35 percent.

"When you add the federal tax on top of it, which is the highest in the world, Indiana becomes one of the most expensive places in the world to locate a corporation. We're higher than Germany or Japan," said Sen. Brandt Hershman, R-Lafayette, the bill's author.

But opponents say cutting the rate is a luxury the state can't afford right now.

"I would prefer that we take this up when we actually have some money," said Sen. John Broden, D-South Bend.

The tax is projected to raise about $688 million — or just over 5 percent — of the state's $13.4 billion in revenue for the coming budget year. The Legislative Service Agency, the General Assembly's nonpartisan research arm, estimates the lower rate would mean the state would collect $76.3 million less in corporate taxes.

Hershman proposes making that up by taxing interest earned on bonds issued by states other than Indiana or counties or cities outside Indiana and eliminating certain tax credits. The Legislative Service Agency says those changes would bring in an additional $69 million, meaning the state would bring in $7.3 million less overall.

Some lawmakers and economists aren't convinced the benefits would outweigh the costs.

Kevin Mumford, a Purdue University economics professor, estimates lowering the tax rate would increase investment in the state by 2 percent to 3 percent.

House Ways and Means Committee Chairman Jeff Espich, R-Uniondale, says he generally supports efforts to cut taxes but isn't sure Hershman's plan will help as much as supporters say.

"The proponents say that we're now the 10th best tax climate for business in the nation and this would make us 9th best. That doesn't seem like a big deal to me to lose $80 million a year," he said.

Espich declined to consider a similar House bill cutting corporate taxes earlier this session and said he didn't know whether the committee would take up the Senate proposal.

Roob said a lower corporate income tax rate would make his job easier, especially since it would drop Indiana's corporate rate below neighboring Illinois, which just raised its rate from 4 percent to 7 percent.

"It would help the job of everyone in Indiana who deals with out-of-state firms — be they national or international companies — that are looking to make site location decisions in Indiana," he said.

Hershman contends the change will help Indiana businesses, especially those that compete with corporations that are big enough to have their headquarters overseas.

"What we're trying to do is not only make it more attractive for new businesses to come here, but we're also trying to lighten the load on existing businesses who don't have the advantages of some of the largest corporate players out there," he said.