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It’s no secret that Indiana’s gubernatorial race has been a breeding ground for bad tax ideas this year. So far on the tax front, the race has essentially been an endless barrage of promises regarding which taxes will be cut, and how deeply.
The most recent of these proposals comes from candidate Mike Pence, current U.S. Representative for Indiana’s 6th district. Pence has proposed cutting the state’s flat income tax rate from 3.4 percent to 3.06 percent to provide an “across the board” tax cut for “every Hoosier.” A new analysis from CTJ’s partner organization, however, shows that many Hoosier families won’t see any tax cuts at all under Pence’s plan, and that the cuts will hardly be distributed “across the board.”
Using its Microsimulation Tax Model, the Institute on Taxation and Economic Policy (ITEP) found that the largest tax cuts, by far, would be reserved for the state’s wealthiest taxpayers under Pence’s proposal. While a typical middle-income family could expect their taxes to fall by about $102, the state’s richest one percent would receive a cut averaging $2,264. Worse still, over half of all the tax cuts would flow to the best-off 20 percent of Indiana residents.
The story is dramatically different for the state’s poorest residents, however. Looking at the lowest 20 percent of earners, the average tax cut would be just $18 per household, with about one-third of this group receiving no tax cut at all. Many of these families are too poor to owe state income taxes, but they still pay significant amounts in sales taxes, excise taxes, property taxes, and other state and local taxes and fees. In November 2009, ITEP found that the poorest 20 percent of Indiana households devote more of their household budgets to paying state and local taxes than any other income group. Rep. Pence’s plan would do nothing to fix this fundamental inequity.
Of course, the broader issue is whether tax cuts should be a priority at all, given the uncertain budget situation created by recent taxpayer refunds, corporate tax cuts, and the repeal of the state’s inheritance tax. Moreover, Indiana still has the lingering problem of how to pay for its transportation investments after revenue from leasing its toll roads runs out. And the state also has yet to put money aside to expand its Medicaid program in order to take advantage of very generous federal matching dollars currently on the table.
Still, given all the talk coming from both sides of the aisle in favor of slashing Indiana taxes and the likelihood more cuts are in the state’s future, ITEP decided to ask a logical question: how difficult would it be to design a tax cut that’s fairer than what Rep. Pence has proposed? The answer? Not very difficult.
By raising the state’s personal exemption (unchanged since 1963) from $1,000 to $3,400, Indiana lawmakers could provide larger tax cuts to most Indiana residents—relative to Pence’s proposed rate cut—at the same overall cost to the state. Overall, 55 percent of Indiana residents would see a larger tax cut if lawmakers went with ITEP’s alternative of raising the personal exemption, rather than adopt Rep. Pence’s plan to cut the rate. Just 33 percent of Indiana residents would be better off under Pence’s plan than under the exemption increase, while the other 12 percent would be unaffected by either proposal.
The best part? Lower- and middle-income taxpayers would be the largest beneficiaries if lawmakers chose the personal exemption boost over the rate cut. (Not to mention that more cash in the pockets of lower income families provides a reliable economic boost.) If Hoosiers want a real “across the board” cut, it’s not the Pence plan they want, it’s ITEP’s.
For more detail, see ITEP’s new report: Most of Indiana Tax Rate Cut Would Flow to Upper-Income Taxpayers.