Indiana tax cut plan hits wall with state Senate opposition

February 15, 2022 GMT

INDIANAPOLIS (AP) — The prospects for major Indiana tax cuts dimmed further Tuesday as a leading state senator said he and other senators were “entrenched” in first paying down state debts.

That comment came as the Senate’s tax committee stripped provisions from a House-endorsed bill that would have potentially cut more than $1 billion a year in various business and individual income taxes.

Republican Senate leaders have said they’re worried about uncertainty in the economy and want to prioritize paying off the state’s future pension obligations. Senators also raised concerns about the House proposal cutting property taxes charged on business equipment, which largely goes to city and county governments and school districts.

“We’re pretty entrenched on the debt issue and not harming local units of government,” said Senate tax committee Chairman Travis Holdman of Markle.

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Key parts of the House Republican plan would cut Indiana’s current individual income tax rate of 3.23% to 3% over the next four years.

That would ultimately reduce state tax collections by an estimated $500 million a year when fully implemented in 2026. The plan also proposes cuts to several business taxes, potentially worth $700 million to $850 million a year.

House Ways and Means Chairman Tim Brown of Crawfordsville indicated the House would continue pushing for tax cuts before this year’s legislative session ends in early March as the state has seen a big jump in tax collections helped by federal COVID-19 relief funding.

“This isn’t our money. It’s the citizens’ money,” Brown told the Senate committee. “It’s every citizen’s in the state of Indiana and so we’re going to take less of it.”

The changes proposed by the House 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.

Republican Gov. Eric Holcomb has shared the caution of Senate members, saying he would rather wait on such a decision until a new two-year state budget is drafted in 2023 and there was more certainty about the economy’s direction.

Holcomb and senators have cited worries about the growth of state tax collections slowing down as federal COVID-19 relief payments end. Those payments have helped boost state government’s cash reserves to an anticipated highest-ever level of $5.1 billion, or 29% of state spending, by the end of June.

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Republican Sen. Ryan Mishler of Bremen said he was satisfied with the anticipated $125 payments being made this spring to all individual income tax filers because the size of the state’s reserves triggered Indiana’s automatic taxpayer refund law for the first time since 2012.

Mishler, who is chairman of the Senate Appropriations Committee, said the priority should remain reducing the state’s last remaining large debt, which is the nearly $10 billion owed for future pension payments to retired teachers who were hired before 1996.

“I think if we really want to be fiscally responsible, we really want to focus on paying down our debts first,” Mishler said. “Giving money away is great, but I think we pay our debts first and then do the hurrahs and give the money away, I guess.”