Indiana Senate Tax Reform Proposal Would Improve Business Tax Climate Ranking

Indiana Senator Brandt Hershman (Chairman of the Senate Tax and Fiscal Policy Committee) today announced that he will introduce a bill in the Indiana Senate that would lower the state’s corporate income tax rate and reform elements of the state’s business personal property tax. Hershman’s S.B. 1 (Senate President Pro-Tempore David Long and State Senator Luke Kenley will join as co-sponsors) would lower the corporate tax rate from its current rate of 7.5 percent to 4.9 percent by 2019, and would create an exemption of $25,000 in the business personal property tax.

This news comes on the heels of other good proposals out of Indiana in recent weeks; Governor Pence announced recently that he would like to examine the state’s business personal property tax with an eye toward phasing it out entirely.

Indiana has good tax policy, and they’ve made strides in the past few years to make it even better. In fact, on Tuesday, we honored Governor Pence with our award for Outstanding Achievement in State Tax Reform. Working with the legislature in 2013, he approved a budget that lowers the state’s flat individual income tax from 3.4 percent to 3.23 percent by 2017, while maintaining scheduled corporate income tax reductions that Sen. Hershman sponsored in 2011 (the corporate rate is scheduled to drop to 6.5 percent by July 1, 2015). In 2013, Indiana also made immediate the repeal of its inheritance tax, which had been in the process of a rather lengthy phase-out stretching to 2022.

All these reforms worked together to bounce Indiana into the number 10 spot in our 2014 State Business Tax Climate Index ranking. The Hershman proposal introduced today would move Indiana further, from 10th to 8th. The corporate income tax component would move from 24th to 10th. Here’s the score breakdown if the corporate income tax cut had been in place for the snapshot date of the 2014 Index:

Indiana State Business Tax Climate Index Rankings Under S.B. 1 (Hershman)

One of the attractive things about this proposal is that cutting the state corporate income tax rate isn’t really that “expensive” to revenue coffers. In 2010, Indiana raised just 2.6 percent of state and local revenue from the corporate income tax. But while corporate taxes are not a significant part of government revenues, they are routinely found by economists to be the most harmful tax to economic growth. Remember also that corporate taxes are not actually borne by corporations, even though that entity cuts the tax check. Economists agree that they are actually borne by individuals: consumers pay them in the form of higher prices on products corporations make, shareholders pay them in the form of lower dividends on their corporate investments, and employees pay them in the form of lower wages. In many ways, cutting the corporate tax is a good move to get a lot of bang for your buck.

Indiana policymakers also seem open to reviewing and reforming tax credits in the code that distort the code and favor some business activities over others. I was asked last November to testify before the state’s Commission on State Tax and Financing Policy (of which Hershman is the Chair) on the effectiveness of tax credits, and a new bill introduced by Rep. Eric Koch of the Indiana House (HB 1020) expands the scope of that commission to review a broader swath of state and local incentives.

As I mentioned in a post a few weeks back, the Indiana movement to targeting business personal property taxes for reform is also good policy. Our comprehensive research paper on the topic back in 2012 shows that this type of tax is harmful to capital accumulation. It hurts businesses that are looking to expand their machinery, tools, even office equipment, and that hurts economic productivity. According to Hershman’s press release, enacting a $25,000 exemption would exempt 71 percent of all business personal property tax filers in Indiana. A de minimis exemption like this was actually a recommendation we put forward in our 2012 research as a way to start chipping away at taxes on business personal property.

We’ll be following this one closely.

More on Indiana here.

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