Skip to content

Indiana Budget Includes Income Tax Reduction

1 min readBy: Liz Malm

Newly inaugurated Indiana Governor Mike Pence (R) released a structurally balanced budget for FY 2014 and FY 2015. The budget’s growth rate of 1.4 percent is under the average of the last four budgets (2.8 percent) and below expected inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. .

Pence proposes cutting the state’s one-rate income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. by a tenth, from 3.4 percent to 3.06 percent (taking it a hair under Pennsylvania’s 3.07 percent). This would bring Indiana’s income tax rate to the lowest in the country among those states that levy an individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. . The cut would be phased in over two years and would have a biennial fiscal impact of $772 million. The Governor argues that reducing income taxes “permanently lowers taxes on most Indiana small businesses” and puts money “directly back into [the Indiana] economy by letting Hoosiers keep more of their own money.”

The proposed budget set asides all required reserves, and proposes using the remaining surplus exceeding the reserve requirement (anything over 12.5 percent of annual spending) to fund transportation infrastructure within the state. Currently, excess reserves serve two functions. Half funds a taxpayer refund, and the remaining half “shores up pension funds.” Pence argues that since pensions are funded 82 percent, the extra funding should be used for the transportation fund (no changes would be made to the refund program, however).

Critics are arguing that the Pence administration should spend more on education. Pence does increase education spending somewhat, but with the controversial catch that the second year of funding increases are based on school performance.

Follow Liz Malm on Twitter @elizabeth_malm.