Published: August 8, 2012 3:00 a.m.
Niki Kelly | The Journal Gazette
INDIANAPOLIS – The majority of benefits from an income tax cut proposed by Republican gubernatorial candidate Mike Pence would flow to the highest-income Indiana taxpayers, a new analysis shows.
Pence, a six-term U.S. congressman, last week proposed dropping Indiana’s 3.4 percent income tax rate to 3.06 percent. He called it an “across the board” cut that would save an average family of four about $228 a year.
The Institute on Taxation and Economic Policy used its microsimulation tax model to analyze the plan.
ITEP is a non-profit, non-partisan research organization based in Washington, D.C., that works on federal, state and local tax policy. The organization’s focus is tax fairness and sustainability.
According to the ITEP report, if Pence’s rate cut had been in effect last year, a typical middle-income Indiana resident would have seen their taxes fall by about $102, while the state’s richest 1 percent of taxpayers would have received an average tax cut of $2,264.
In total, more than half the benefits of the rate cut would flow to the best-off 20 percent of Indiana residents.
Overall, about 12 percent of Hoosiers would see no benefit from cutting Indiana’s income tax rate, the report said. Most of this group consists of low-income taxpayers who are too poor to owe state income taxes but who pay significant amounts in sales taxes, excise taxes, property taxes, and other state and local taxes and fees.
Christy Denault, communications director for the Pence campaign, said his proposed tax cut is pro-taxpayer and pro-business.
“It is designed to put more money into the hands of taxpaying Hoosiers, including the 92 percent of businesses that pay the state through the individual income tax. Mike’s plan increases take-home pay for Hoosiers and provides permanent relief for our small businesses.”
The institute didn’t criticize Pence’s plan as unaffordable. Instead, it offers an alternative plan it said would cost the state about the same amount in tax revenue every year – about $450 million – but more equitably distribute the cut.
The alternative would be to increase the state’s personal exemption, which exempts a flat amount of income per family member for every Indiana household subject to the income tax.
Unlike some states and at the federal level, Indiana’s personal exemption of $1,000 is not tied to inflation and hasn’t been raised since it was enacted along with the income tax itself in 1963.
If the personal exemption was tripled to $3,400 per family member, the analysis found the reductions would be distributed more evenly among Indiana families of different income levels than a rate cut.
Specifically, the analysis showed the top 5 percent of households would see roughly 8 percent of the benefits associated with raising the personal exemption, as opposed to reaping 28 percent of the benefits under Pence’s preferred tax rate cut.
Focusing just on the richest 1 percent of Indiana taxpayers, their average tax cut under the personal exemption change would amount to $300 a household – much more in line with an average taxpayer’s benefit than the $2,264 cut they could expect from Pence’s proposal.
The institute has not done a similar review for Democratic gubernatorial candidate John Gregg’s proposal to eliminate the state sales tax on gasoline.
Spokeswoman Anne Singer said Gregg hasn’t provided enough information to adequately model anything. She did note, though, that taxes on gasoline tend to be regressive overall – taking a larger share of income from low-income families.
Daniel Altman, communications director for the Gregg campaign, said: “Gregg has a responsible plan to cut taxes for all Hoosiers that will ease the pain at the pump, spur job investment and help middle-class families offset the costs of daycare. Furthermore, he does it in a way that helps small businesses, farmers, and middle- and lower-class voters that have been hit especially hard during the recession.”
In May, the Citizens for Tax Justice a sister group to the Institute on Taxation and Economic Policy, critiqued Gregg’s plan as blasting a $540 million hole in the state sales tax base and paying for it through cutting unspecified waste.
Pence didn’t propose any replacement revenue, instead saying Indiana’s tax revenues and budget can take the hit and the cut would ultimately grow the economy.
The Journal Gazette: Report- Rich benefit most in Pence plan
Published: August 8, 2012 3:00 a.m.