Indiana Legislature Approves Plan to Eliminate Inheritance Tax

The Indiana legislature has approved a bill that would eliminate the state’s inheritance tax. If Gov. Daniels signs the bill (SB 293), the tax will be gradually phased-down and finally eliminated in 2021. In addition to the phase-down, the exemption level is immediately increased from $100,000 to $250,000. The long phase-out period is designed to give policymakers ample time to deal with the modest revenue impact; the tax brings in about $145 million annually, less than 1% of total taxes and about 0.6% of total revenue. However, the long phase-down may also provide more chances for policymakers to back out of the changes before they become fully effective.

Supporters of the bill are claiming a victory for small business, and family farms specifically. The Tax Foundation has been critical of estate, gift, and inheritance taxes. We recently testified in Pennsylvania on the topic of estate and inheritance taxes. We noted that estate and inheritance taxes are ineffective at breaking up dynastic wealth, have high compliance costs, and are offset by reduced income tax revenue. We also noted that there is even evidence that taxes on wealth transfers may actually increase income inequality. See more of our work on these issues here.