INDIANAPOLIS (AP) — Indiana’s individual income tax rate would be gradually cut over the next seven years under a Republican-driven plan approved by legislators early Wednesday.
The bill would cut the state’s current income tax rate of 3.23% to 2.9% in small steps until its planned full implementation in 2029 but not include some business tax cuts that faced resistance from Republican senators.
House members voted 82-17 and senators 50-0 in favor of the tax cut package that was the major remaining issue as the Republican-dominated Legislature adjourned this year’s session about 12:30 a.m. Wednesday.
House Republicans had pushed the tax cut plan as the state saw big jumps in collections over the past year, fueled by federal COVID-19 relief funding.
GOP Gov. Eric Holcomb joined Senate Republican leaders in being hesitant to support major tax cuts because of worries about inflation and a possible economic slowdown. But Holcomb changed course last week, saying he believed the state could afford tax cuts because of continued strong revenues.
The seven-year implementation of what amounts to a 10% income tax rate cut spreads out both the impact on state revenues and the savings to taxpayers. The plan would reduce state revenue by about $950 million a year when fully implemented.
The plan would cut the tax rate to 3.15% for 2023, which would amount to a $40 savings for those with $50,000 in taxable income. The tax rate would then be cut further in 2025, 2027 and 2029, until reaching a total annual reduction of $165 when fully implemented.
Those tax cuts, however, won’t be automatic. The bill calls for the first rate cut to happen for 2023, but the future cuts starting in 2025 only occur if state tax revenue grows by at least 2% in the previous budget year.
Asked about whether taxpayers would notice a tax cut that was spread out over so many years, Republican House Speaker Todd Huston said the goal was to put “hundreds of millions of dollars back in people’s pockets and that’s what we’re doing.”
“I think people will feel it in these times with all the inflationary prices,” Huston said.
Democrats criticized the Republican plan as going too slow on the income tax cut to give much help to working-class families. They also called for a suspension until July of the state’s 32 cents-a-gallon gasoline tax and the 7% sales tax on fuel, which they argued that would give immediate savings to residents amid a national surge in prices past $4 a gallon since the Russian invasion of Ukraine.
Democrats argued that if taxes are going to be cut, then residents should benefit quickly from the state’s cash reserves that projections have growing to a highest-ever level of more than $5 billion, or about 30% of state spending in a year, by the end of June.
“We’re looking at those dollars that we can get back to the community because we don’t want to have any more missed opportunities for working men and women,” said Rep. Greg Porter of Indianapolis, the top Democrat on the tax-writing House Ways and Means Committee.
The Republican plan included cuts to utility company taxes amounting to an estimated $220 million annually starting in July, with utilities required to reduce charges by a similar amount to its residential and business customers. But it makes no changes to property taxes charged on business equipment sought by House Republicans that could have amounted to nearly $400 million a year. Senate Republican leaders objected to cutting the business equipment tax because of concerns over possible impact on local government revenues.
The Republican plan would result in state government becoming even more dependent on its 7% sales tax, which is already its biggest revenue source and the second-highest rate in the country. Indiana’s individual income tax is currently lower than any surrounding state.
Republicans previously turned aside proposals from Democrats for steps such as lowering the sales tax to 6.5%, increasing the state’s tax deduction on rent from $3,000 to $5,000 a year and eliminating the sales tax on diapers and tampons.