Indiana Approves Tax Changes, Including Corporate Tax Rate Reduction

May 2, 2011

Indiana’s legislature adjourned Friday after approving a budget that now goes to Gov. Mitch Daniels (R). The $28 billion two-year budget includes a $1 billion surplus. Included in the budget and in other bills enacted this session are several tax provisions:

  • Automatic Taxpayer Refund. When the state’s rainy day reserves exceed 10% of budgeted spending (about $1.4 billion), the money will be split 50-50 between the teachers’ pension stabilization fund and refunds to taxpayers via an income tax credit. (The threshold is unlikely to be reached during the next budget biennium.)
  • Corporate Income Tax Reduction. From the current 8.5% rate, the rate will drop in steps to 6.5%, by ending a tax credit for the purchase of out-of-state municipal bonds. Indiana was the only state to offer the credit to all state bonds, not just its own. The rate reduction schedule:
    • July 1, 2012: 8.0%
    • July 1, 2013: 7.5%
    • July 1, 2014: 7.0%
    • July 1, 2015: 6.5%
  • Ends net operating loss carrybacks after 2011.
  • Modifies the tax on smokeless tobacco to be at a lower rate than the tax on cigarettes, better reflecting the risk associated with the product relative to cigarettes.
  • Reduces unemployment insurance benefits by 25 percent to forestall a tax increase and begin repaying $2 billion in loans from the federal government.
  • Establishes a commission to study the effectiveness of economic development tax credits and programs.

A Democratic proposal to suspend the state’s gasoline tax and sales tax on gasoline during the summer months was not included.

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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.

A sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.