Indiana Economic Digest: Pence tax cut would mostly benefit the rich
media mention12/17/2012 12:27:00 AM
Dan Carden, Times of Northwest Indiana
INDIANAPOLIS | Republican Gov.-elect Mike Pence is standing by his proposal to cut Indiana’s income tax rate, despite a nonpartisan study showing most taxpayers would get back less than $100 and a new poll showing most Hoosiers oppose Pence’s plan.
“I’m determined to keep my promise to the people of Indiana advancing that,” Pence told reporters last week.
An analysis of Pence’s proposal to reduce the individual income tax rate to 3.06 percent from 3.4 percent, conducted by the Washington, D.C.-based Institute on Taxation and Economic Policy, found 56 percent of the nearly half a billion dollars in lost state revenue would be returned to the top 20 percent of income earners, or those making more than $80,000 a year.
The top 1 percent of Hoosiers, those earning more than $325,000 a year, would receive an average tax cut of $2,264 under Pence’s plan, according to the study. The top 5 percent, earning between $145,000 and $325,000, would get back $533.
Meanwhile, Hoosiers in the middle fifth of the income scale, those making between $33,000 and $53,000 a year, would see their taxes reduced an average of $102.
The study found the poorest 12 percent of Hoosiers would get no tax cut due to their low incomes, despite paying more of their household budget in sales, excise, property and local taxes than any other income group.
Pence claims his tax cut will create jobs, as business owners use the extra money to hire Hoosiers.
However, the study found some 10 percent of the state revenue lost by Pence’s proposed tax cut, or approximately $50 million, would end up going directly to the federal government.
That’s because Hoosiers who itemize deductions on their federal income taxes can write off their state income tax payments. A lower state income tax rate would reduce federal deductions for those taxpayers, resulting in higher federal income taxes for about one in four Hoosiers.
The study suggests a more fair way to return excess state revenue to taxpayers would be to increase Indiana’s personal income exemption, the income not subject to income tax.
Indiana’s exemption has stood at $1,000 since the state income tax was created in 1963. If the exemption had risen with inflation, it would be worth about $7,500 today.
Increasing the exemption to $3,400 would cost the same as Pence’s tax cut, and 55 percent of Hoosiers would get a bigger benefit, the study found.
Republican legislative leaders have been skeptical of Pence’s tax cut plan since he announced it on the campaign trail this summer. Lawmakers aren’t sure the state can afford to lose more revenue after recently cutting the corporate income tax rate and phasing out the inheritance tax.
Their concerns are shared by Hoosiers.
A Nov. 12-24 Ball State University telephone poll of 602 Indiana adults found 31 percent support Pence’s tax cut, while 64 percent would prefer that money be invested in education or workforce training. The poll has a margin of error of plus- or minus- 4 percent.
Nevertheless, Pence said the tax cut is essential to creating jobs and vowed the budget plan he sends to the Legislature after taking office Jan. 14 will include a 10 percent reduction in the state’s income tax rate.
“I believe, with all my heart, that with the largest surplus in our state’s history that we have the ability to maintain the fiscal integrity of our state, strengthen our reserves, fund our priorities and provide Hoosiers and Hoosier businesses tax relief that will create jobs,” he said.