Indiana Approves Income Tax Reduction

May 14, 2013

Joseph Bishop-Henchman

Joseph Bishop-Henchman

Indiana Governor Mike Pence (R) last week signed into law the state’s 2014-15 two-year budget. The approved budget keeps spending increases below inflation and cuts the state’s single-rate income tax, the corporate income tax, and eliminates the inheritance tax:

Current

2014

2015

2016

2017

Individual Income Tax

3.4%

3.4%

3.3%

3.3%

3.23%

Corporate Income Tax

7.5%

7.0%

6.5%

6.5%

6.5%

Inheritance Tax

Repealed, retroactive to Jan. 1, 2013

Repealed

Repealed

Repealed

Repealed

The corporate tax reduction preserves one enacted in 2011, but the others are new. Indiana’s well-structured income tax – broad-based and low-rate – gets ever closer to Pennsylvania’s lowest-in-the-country rate of 3.07 percent. (Pence had initially sought a larger reduction but ultimately negotiated these rates with legislative leaders.) The inheritance tax was being phased out by 2022, and the budget accelerates that to, well, now.

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A 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.

An inheritance tax is levied upon an individual’s estate at death or upon the assets transferred from the decedent’s estate to their heirs. Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate.

An 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.

A corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.