Indiana Budget Includes Income Tax Reduction

February 12, 2013

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 inflation.

Pence proposes cutting the state’s one-rate income tax 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 tax. 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.

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