Economists wary of Pence income tax proposal

Indiana economic experts say state lawmakers' efforts to cut taxes will spur the economy but that Gov. Mike Pence's proposed cut in the personal income tax isn't the best place for reductions.

Lawmakers have until April 29 to decide what areas they'd like to cut. The proposed House budget does not include Pence's proposal, while the plan passed by the Senate gives Pence only part of the $500 million cut he sought.

The final version will be hashed out in conference committee and largely guided by the revenue forecast that's to be unveiled Tuesday.

Pence has pushed for his tax cut, a signature piece of his campaign, and has circulated a letter from noted economist Larry Lindsey, who served under three Republican presidents, The Journal Gazette reported.

Lindsey urged support for the income tax cut, saying trimming the rate puts more cash in the hands of business owners.

Matt Will, associate professor of finance at the University of Indianapolis, said every dollar cut in taxes tends to increase economic activity, but that doesn't mean lawmakers should start eliminating taxes. Critics of Pence's proposal say the state needs to be wary of cutting more until its revenue picture is clearer.

"Democrats need to realize that every dollar you increase in taxes, you reduce growth in the economy," Will said. "Republicans need to realize you have to have taxes in a civilized society."

The Senate budget proposes eliminating the inheritance tax, and cutting a tax on banks and financial institutions by roughly $150 million.

House Ways and Means Chairman Tim Brown, R-Crawfordsville, says the inheritance tax cut will have a greater effect than Pence's proposal. He notes that the tax often causes people inheriting family farms and small businesses to sell them just to get money to pay the taxes.

While the inheritance tax might affect only a few thousand estates annually, he said three times that many people are beneficiaries of the estates. Some older residents also move their assets to states without an inheritance tax.

Ball State University economics professor Michael Hicks said he would prefer to see Indiana further cut its corporate tax rates.

Legislators have already begun a phased reduction of the tax, which initially stood at 8.5 percent and is set to drop to 7.5 percent in the next fiscal year. That compares with the individual income tax rate of 3.4 percent.

But even at its reduced rate, the imbalance stands out, Hicks said.

"I think it's more an equity issue," he said. "I don't think we should treat two businesses different because of how they are organized."

Will said he, too, would cut the corporate tax over the personal income tax to fuel investment. But he'd prefer no tax cut at all, saying the economy is still fragile.

"If we have a rebound recession, then what are you going to do? Raise taxes? Keep taxes where they are and build a surplus. We have unfunded obligations."