Experts in tax policy alert Significant tax cuts in Indiana could harm the state’s lowest-earning residents

Indianapolis, Indiana – Some policy experts are advising the State and Local Tax Task Force against making significant cuts to the state’s individual income tax, as Indiana appears ready to restructure its tax structure in the coming years.

In Indiana, the sales tax makes up about half of state revenue, with the individual income tax contributing around one-third of the total.

Several experts who testified at the task force meeting on Friday stated that while Indiana is doing well economically—ranking seventh in the country for 2023 economic outlook according to the American Legislative Exchange Council—it is still necessary to make improvements to the state’s tax structure in order to maintain its competitiveness. They cited net migration levels among states that have lowered their income taxes.

Conversely, some highlighted that the most vulnerable Hoosiers could be those with lesser incomes.

Nearly half of the states lowered their individual income tax rates between 2021 and 2023. Lowering income taxes doesn’t always translate into a boost for state economies, according to Wesley Tharpe, senior counselor on state tax policy at the Center on State and Budget Policy Priorities.

”The personal income tax brings in eight billion dollars a year about to [Indiana’s] general fund, and meanwhile, 60 percent of the state’s general fund goes to just K-12 public schools and Medicaid,” Tharpe said.

By 2027, Indiana’s state income tax rate is expected to drop to 2.9 percent; nevertheless, a number of legislators have stated that a complete repeal of the tax is not possible.

”If we cut the income tax, you’re going to have to raise the sales tax,” State Rep. Gregory Porter of Indianapolis said.

Indiana has the second-highest sales tax rate in the US, after California, at 7%.

”Lower and middle-income households are paying an astronomical amount of sales taxes in Indiana, currently upwards of 12 percent of their income,” Neva Butkus, a state policy analyst with the Institute on Taxation and Economic Policy (ITEP) said.

Experts suggested adding more consumer services (such as those offered by theaters, spas, salons, and other higher-earning Indianaans) to the sales tax base in order to increase its base. However, state senator Fady Qaddoura expressed concern that this would negatively impact rural regions.

”Rural communities with limited options to raise sales taxes will be negatively impacted,” Sen. Qaddoura said.

In November, the tax task force will hear additional testimony.