Tax ‘simplification’ bill raises numerous questions

Indiana lawmakers are considering legislation that would eliminate $21 million in annual tax cuts for businesses and individuals, bolster a break for the working poor, and expand a sales tax exemption for businesses.

House Bill 1349 is meant to simplify the state’s tax system while remaining revenue neutral, meaning the changes won’t result in more or less money for the state budget, said its author, Rep. Todd Huston, R-Fishers.

But initial estimates from the nonpartisan Legislative Services Agency show it could mean an annual loss of more than $200 million in revenue for the state by 2018 – a shift that would benefit business the most. That’s despite parts of the bill that would mean higher bills for some taxpayers.

Huston told members of the House Ways & Means Committee on Wednesday that he wants to review the numbers to ensure the estimates are correct. But regardless, Huston said he’s open to changes in the bill, which is backed by Gov. Mike Pence.

“There will be an amendment. There will be changes,” he said. “The goal isn’t to impede or slow down any economic progress.”

The legislation covers a wide range of tax issues that affect individuals, communities, universities and businesses – and they all had lobbyists in the Ways and Means Committee on Wednesday to plead their cases for provisions they want to keep in or strip out of the bill.

Lobbyists for higher education urged lawmakers not to eliminate a tax credit for Hoosiers who give money to universities. The credit subtracts up to $100 from an individual’s state tax bill or up to $200 for a couple. That costs the state about $9 million annually.

“We believe the credit helps to encourage a lifetime giving habit,” said John Grew, a lobbyist for Indiana University.

Manufacturers told lawmakers they support a provision that would do away with what’s called the double-direct test. The law essentially requires companies to pay a sales tax on materials or equipment they purchase unless they are used in the direct creation of a product. For example, a farmer who purchases a drainage tile to keep water in the fields for crops doesn’t pay the tax but a farmer that buys a tile to drain water from a field would.

HB 1349 loosens the qualifications for the tax break, so that more purchases would be tax exempt. “That’s very helpful to manufacturing,” said Andrew Berger, a lobbyist for the Indiana Manufacturers Association.

That provision of the bill also carries the biggest price tag, something Berger acknowledged in his testimony. “It’s a big number,” he said. “I just want to say it’s a key thing for Indiana to keep manufacturing healthy because it’s such a big part of the Indiana economy.”

But Burger said that manufacturers oppose a separate section of the bill that would force them to pay higher taxes. That involves a so-called throwback rule that eliminates a tax break on interest that companies pay on loans to their parent firms. He called that a “problematic provision.”

Advocates for the poor, meanwhile, lauded a provision that would couple the state’s earned income tax credit with the similar federal credit. That would make it easier for families to apply for it and expand the benefit for married couples and those with at least three children.

Jessica Fraser, program manager for the Indiana Institute for Working Families, said Indiana has a record number of Hoosiers in poverty and some of the highest tax rates on the poor.

Indiana’s tax credit had long been coupled with the federal credit, which meant taxpayers could use one calculation to determine the amount they’d save in Indiana. But several years ago, the state changed the system in a way that created a more complex calculation. Since then, fewer families have applied for the benefit.

The earned income tax credit “lifts hundreds of thousands of people out of poverty,” Fraser said. The credit is “our most effective anti-poverty tool.”

The bill contains dozens of other provision as well, some of them controversial. But Huston said he wants to hear all the concerns.

“We want this to be a discussion point,” he said. “We need to listen to he feedback and think about how to proceed.”

The Ways and Means Committee is expected to take up the bill – and proposed amendments – again next week.