Prospects for tax cuts in Indiana got a big boost this week, as Governor Eric Holcomb added his voice in support of income reductions. Holcomb said, “I think that we can get there on individual income tax cuts,” noting the state’s economic situation and government revenues are both good.
In the legislature, the House-passed bill (HB 1002) to cut the income tax, eliminate the utility receipts tax, and change depreciation for personal property, is being negotiated. The bill hit a bump in the road last week as the Senate Tax and Fiscal Committee removed the tax cut language.
The House made it clear in passing HB 1002 that they support gradual reductions to the state’s income tax rate, eliminating the utility receipts tax, and removing the floor on personal property tax assessments so that businesses won’t have to pay taxes forever on old equipment.
Some Senators are interested in paying off an ongoing pension obligation to the TRF (Teacher’s Retirement Fund) that costs around $1 billion per year. The state could pay it off early, giving more budget flexibility in a few years.
Paying off obligations is a fiscally conservative move, nothing is wrong with that approach in a vacuum. Concerns lodged by local governments about the revenue impact of the personal property tax changes are not reasonable. Local governments are enjoying the same federal pandemic relief windfall the state government is, sharing in more than $2.6 billion in aid. Changes to the personal property tax are modest and will take years to be fully implemented.
Governor Holcomb initially proposed eliminating the 30% personal property tax assessment floor for future equipment in his State of the State address, and now has added support for income tax savings as well.
With both chambers of the legislature and the Governor willing to reduce the burdens on Hoosiers in principle, it would be unfortunate for lawmakers to leave this session without enacting some tax relief.
The great news for Hoosier taxpayers and legislators is that committing to tax cuts now, and paying off the pension obligation early, can go hand-in-hand. The resources are there to guarantee taxpayers see more of their hard-earned dollars returned, the pension obligation is paid off early, and the state retains flexibility going into future budgets.
A great policy option to help make this happen is using revenue triggers to enable income tax relief. By tying scheduled income tax reductions to certain revenue targets, taxes can be cut using future revenue growth. If the revenues aren’t there, the next tax cut is held off until the revenue is available – taxpayers get guaranteed relief and there are no revenue surprises.
This approach could enable even bolder cuts than the House proposal that reduces the income tax from 3.23% to 3%.
It is vital that legislators lock in relief for taxpayers at the same time they accelerate paying of the pension debt to ensure that there is not a big pot of unclaimed money lying around in the future (after the annual additional pension payments are finished) that leads to a feeding frenzy of special interests. This could lead to a responsible fiscal decision now, that results in more government spending being locked in for other spending priorities in the future. There is no guarantee what the makeup of the legislature will be in the future.
In this way, any Senators who are focused on paying off pensions first and then cutting taxes should be supportive of locking in tax cuts at the same time. That is the best way to ensure their responsible decision now does not lead to irresponsible spending later.
States have used revenue benchmarks to successfully cut taxes already, most notably North Carolina, which reformed taxes in 2013 using this approach. Now, the Tarheel State has improved their tax environment, and is a magnet for business and talent migration. Mississippi’s current income tax elimination efforts use this model as well.
After 14 states cut income taxes last year, more are working on easing their burdens this session. Iowa is just the latest state to pass tax relief, moving to a flat tax. Indiana is a strong low-tax, and limited regulation state that can continue to lead on fiscal responsibility by passing a significant tax relief package this session.