Indiana lawmakers near deal on multiyear income tax cut

Indiana Statehouse

Indiana lawmakers were in final negotiations Tuesday on a tax cut plan that a top Republican said would include phasing in a 10% income tax rate reduction over several years.

Republican House Speaker Todd Huston said a tentative proposal would cut the state’s current income tax rate of 3.23% to 2.9% in small steps over the next seven years but not include some business tax cuts that faced resistance from GOP senators.

The tax cut package was a major remaining issue as the Republican-dominated Legislature looked to possibly finish this year’s session on Tuesday. House Republicans had pushed the tax cut plan as the state saw big jumps in collections over the past year, fueled by federal COVID-19 relief funding.

GOP Gov. Eric Holcomb joined Senate Republican leaders in being hesitant to support major tax cuts because of worries about inflation and a possible economic slowdown. But Holcomb changed course last week, saying he believed the state could afford tax cuts because of continued strong revenues.

Details on the plan weren’t immediately released, but the seven-year implementation would push the full cut until 2028, spreading out both the impact on state revenues and the savings to taxpayers. The governor’s office estimated the income tax cut proposal would reduce state revenue by $900 million a year when fully implemented.

Those tax cuts, however, might not be automatic. Huston said negotiators continued discussing possibly linking them to whether state tax collections remain strong.

The governor’s proposal called for cutting the tax rate to 3.15% for 2023, which would amount to a $40 reduction for those with $50,000 in taxable income. The tax rate would then be cut by smaller steps, resulting in $25-a-year savings at that income level until reaching a total annual reduction of $165 when fully implemented in 2028.

Asked about whether taxpayers would notice a tax cut that was spread out over so many years, Huston said the goal was to put “hundreds of millions of dollars back in people’s pockets and that’s what we’re doing.”

“I think people will feel it in these times with all the inflationary prices,” Huston said.

Democrats criticized the Republican plan as going too slow on the income tax cut to give much help to working-class families. They also called for a suspension until July of the state’s 32 cents-a-gallon gasoline tax and the 7% sales tax on fuel, which they argued that would give immediate savings to residents amid a national surge in prices past $4 a gallon since the Russian invasion of Ukraine.

Democrats argued that if taxes are going to be cut, then residents should benefit quickly from the state’s cash reserves that projections have growing to a highest-ever level of more than $5 billion, or about 30% of state spending in a year, by the end of June.

“We’re looking at those dollars that we can get back to the community because we don’t want to have any more missed opportunities for working men and women,” said Rep. Greg Porter of Indianapolis, the top Democrat on the tax-writing House Ways and Means Committee.

The tentative Republican plan included cuts to utility company taxes amounting to an estimated $220 million a year but no changes to property taxes charged on business equipment sought by House Republicans that could have amounted to nearly $400 million a year. Senate Republican leaders objected to cutting the business equipment tax because of concerns over possible impact on local government revenues.

The Republican plan would result in state government becoming even more dependent on its 7% sales tax, which is already its biggest revenue source and the second-highest rate in the country. Indiana’s individual income tax is currently lower than any surrounding state.

Republicans previously turned aside proposals from Democrats for steps such as lowering the sales tax to 6.5%, increasing the state’s tax deduction on rent from $3,000 to $5,000 a year and eliminating the sales tax on diapers and tampons.