Experts carefully optimistic about state’s fiscal footing as lawmakers look to cut taxes

Indiana’s budget chiefs offered a measured sense of optimism on the state’s finances at a potentially transformational task force’s first meeting—as Republican-aligned speakers pushed for big moves on taxes and Democrat lawmakers expressed frustration with the group’s structure.

The Interim State and Local Tax Review Task Force will examine Indiana’s corporate tax, individual income tax, property tax, sales tax, and others. Policy recommendations are due to the General Assembly ahead of the 2025 budget-writing session.

“Perhaps this will be the beginning of the discussion to overhaul, in a major way, the tax structure of the Hoosier State,” Chair Travis Holdman, R-Markle, said Wednesday. “Perhaps we’ll find that it isn’t the will of the Legislature or our constituents to do much more than tweak the work … done over the last couple of decades.”

“Nothing is off the table,” he added—although, he was firm that the task force wouldn’t touch education funding.

Financial outlook

Indiana has consistently stuck to balanced budgets, in which the state spends less than it collects in taxes—something the Office of Management and Budget Director Cris Johnston said was a priority.

Tax collections have outperformed state estimates in recent years, State Budget Director Zac Jackson said.

Indeed, the state’s surpluses triggered automatic taxpayer refunds in 2021 and 2022, and prompted lawmakers to make large one-time payments toward pension liabilities and other causes.

The mismatch is expected to stabilize over the biennium, according to Jackson’s slides. But some developments may endure.

While the state typically has had between $1.8 billion and $2 billion in reserves on hand, Jackson said the “new normal” might be in the $2.7 billion to $2.9 billion range.

But Jackson also noted large increases in funding for K-12 tuition, higher education, Medicaid, the Department of Child Services and the Department of Corrections over the last decade. Payments to a pre-1996 teacher’s pension fund have also swelled, but only through one-off supplemental checks.

Overall, he said the state had been proactive about funding its pension liabilities and tackling deferred maintenance.

Indiana Public Retirement System Executive Director Steve Russo said the state’s pension funding progress demonstrated “how the impossible can become possible,” but suggested maintenance strategies for the pre-96 fund to avoid more big appropriations decades down the line.

And Indiana has maintained highest-possible AAA credit ratings from the three big rating agencies for well over a decade. The designation means Indiana qualifies for the lowest interest rates possible—even if it’s paid for recent projects in cash.

Indiana Finance Authority CEO Jim McGoff said Indiana’s credit strengths include strong reserves, oversight, management, liquidity, flexibility and more—along with low debts and a lower cost of living.

Indiana does have $2.8 billion in outstanding debt, however, according to McGoff’s slides. The state pays more than $100 million in debt service annually, although that’s expected to drop to $20 million in 2030 and even lower in 2033.

Making proposals

Two non-government witnesses also testified — both conservative-leaning, and both with suggestions.

Americans For Prosperity Senior Fiscal Policy Fellow Kurt Couchman, who called taxes “deadweight losses on society,” said Indiana should cut its state income taxes and rely more heavily on its sales taxes.

Couchman suggested “adjusting” the rate and broadening the range of things taxed, asserting that the approach would “strongly support greater opportunity, increased prosperity and more vibrant communities.”

Democrats pushed back, arguing that the sales tax is “regressive,” meaning that lower-income people spend a larger percentage of their salaries than higher-income people on sales taxes.

“A regressive tax system that satisfies Americans for Prosperity, a conservative political advocacy group founded by the Koch brothers, should not be the baseline that informs the policy outcomes of the task force,” said Sen. Fady Qaddoura, D-Indianapolis.

Couchman also recommended reexamining spending programs and tax credits, and cracking down on tax increment financing district—a mechanism commonly used by local governments. And, Couchman said, Indiana should consider ditching its biennial budgeting process in favor of what AFP calls a “structurally balanced” format spread across more years.

Former state Sen. Brandt Hershman, who was deeply involved in fiscal policy during his 18-year tenure, advocated to get rid of the corporate tax.

He said that tax was volatile and easy for better-resourced companies to avoid, and that because the revenue goes to the state, ditching it wouldn’t impact local governments.

Hershman also encouraged lawmakers to keep in mind the basic purpose of taxes, to link spending policy with outcomes, and seek bipartisanship.

“In 2010, we found ways to agree, and I hope you’re able to do so as well,” he said.

Democrat quibbles and what’s next

Four pairs of Senate Republicans will lead research groups focused on each of the broader task force’s policy areas, drawing criticism from Democrats of both chambers.

“I ask you to rethink your position on this and put a minority member in an appropriate place on each of those committees,” Rep. Ed DeLaney, D-Indianapolis, told Holdman.

Qaddoura also asked for greater geographic diversity, noting that—although central Indiana is a significant portion of the state’s population and tax base—just one of the Republican research group leaders represents the region.

Holdman said that to participate, lawmakers need only contact their colleagues leading the research groups.

Democrats additionally advocated for greater ideological diversity in non-government witnesses, with some pushing Americans for Prosperity’s Couchman on a range of policy differences.

“We have opened the door,” Holdman told reporters after the meeting. “… We do have one rather left-sided group coming, that we’ve reached out to to come and speak to us. But it just seems that the predominant folks—such as the Tax Foundation—tend to lean more conservatively than others.”

“Thumb’s not on the scale,” he added. “We told them that if you have others you want to come and speak, bring it on.”

The task force will meet next on September 29, with testimony expected from the nonpartisan Pew Research Foundation, the American Legislative Exchange Council—the conservative-leaning model legislation-maker better known as ALEC—and former Republican tax powerhouse Luke Kenley.

At an Oct. 20 meeting, the group plans to take public testimony on the individual income tax.

The Indiana Capital Chronicle is an independent, not-for-profit news organization that covers state government, policy and elections.