With inflation hitting 9.1% last month, state governments are seeking to lighten the load on their residents. The question that looms large is how exactly to do that.
Indiana Governor Eric Holcomb [R] proposes to send state residents $225 as an inflation relief measure thanks to excess revenues. State tax revenue is currently $1.07 billion, or 6.1% above the revised revenue forecast made in December 2021, and 17.3% higher than the original forecast from April that year. Under this plan, supported by the House, a total of $1 billion would go back to Hoosiers from the state’s record $5.1 billion budget reserve. His plan passed the House as HB 1001 and now sits with the Senate.
This cash would come on top of the state’s existing tax refund system, which has $125 currently scheduled to go to residents as part of the Use of Excess Reserves law. The state’s policy of returning excess tax collections to taxpayers is a good one.
Unfortunately, there are potential downsides to the additional relief, which comes in the form of writing checks to people – rather than refunding over-taxation or using surpluses to permanently cut taxes.
Some economists as well as lawmakers in the Senate are concerned that Holcomb’s plans could ramp up inflationary pressure. The Senate’s SB 3, which passed on July 30th and is now with the House, instead proposes to suspend the state’s 7% sales tax on utilities and telecoms services for 6 months as well as cap the sales tax on gasoline at a max of 29.5 cents per gallon until June 2023.
The Indiana Department of Revenue also predicts that processing and distributing the House’s $225 refund will cost over $4 million.
Under Indiana code, the special session must end no later than August 14. Both the House and Senate’s proposals are guided by the right principle – putting money back in the hands of Hoosiers.
Regardless of what happens in this special session, another year of exceedingly high tax receipts shows the state government is taxing Hoosiers too much. Indiana lawmakers should continue their efforts to permanently reduce the tax burden.
In March, Indiana enacted a reduction of the income tax rate from 3.23% to 2.9% over seven years, thanks in large part to the leadership and enthusiasm of the House and Gov. Holcomb.
The state can reap further dividends by following the nine states that have eliminated income tax altogether. Indiana’s 4.9% corporate tax can also be lowered to boost activity in the state and encourage growth in the face of a nationwide recession, despite Democrats’ panicked shifting of the goalposts.
One-time inflation relief checks have been the favored approach of Democrat states like California, which tapers payments for higher earners. While Blue States refuse to permanently reduce tax rates, Republican states like Indiana continue to make promising steps in the right direction.