Indiana legislators convened for a one-day special session on May 14 in part to address 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. conformity questions that had been left unsolved when the clock ran out on the regular session in late March. The conformity bill, HB 1316, made several adjustments to bring the state up to new federal definitions of income for corporate and individual purposes. Major changes include:
Business
- Decouples from the net interest deduction cap in the federal reform (IRC 163(j))
- Decouples from new federal net operating losses rules, retaining just a 20-year period for carry forwards, but leaving them uncapped
- Decouples from global intangible low-taxed income provisions in the federal reform, treating GILTI as foreign source dividends (which are deductible in Indiana’s tax system). To the extent any GILTI or RepatriationTax repatriation is the process by which multinational companies bring overseas earnings back to the home country. Prior to the 2017 Tax Cuts and Jobs Act (TCJA), the U.S. tax code created major disincentives for U.S. companies to repatriate their earnings. Changes from the TCJA eliminate these disincentives. Transition Tax income are included in Indiana income, this income will be apportioned and sourced based on dividends and investment rules. (More from Eversheds Sutherland here.)
Individual
- Changes the 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. measure used to calculate the Indiana earned income tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (now chained CPI)
- Retains the state’s personal exemption by carrying the 2017 federal definition of personal exemption
- Expands the 529 education savings plan credit to be equivalent to 10 percent of total contributions to the plan, up to $500 (then in 2019, 20 percent, up to $1,000). Plans can be used for private K-12 expenses, as in the federal reform.
Fiscal Impact
- The act will raise an additional $10.6 million in FY 2018, $56 million in 2019, and $88.7 million in FY 2020 in state revenue.
- Local governments will see a revenue increase of $10 million in FY 2018, $24 million in FY 2019, and $31 million in FY 2020.
While this package is not as headline-grabbing as some other reforms in Georgia, Idaho, or Iowa that were able to reduce overall rates, Indiana has managed to decouple from some of the pricklier parts of business conformity that may have resulted in unintended tax burden increases.
Be sure to read our comprehensive report on state conformity options here.
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