INDIANAPOLIS — Axing Indiana’s individual income tax and replacing just half the revenue with a sales tax hike would cost the state’s poorest residents an additional $62 and hand the top 1% of earners a $30,000 tax cut, a think tank told state lawmakers on Friday.
Instead of “seeking deep cuts to the income tax or even getting rid of it altogether,” Indiana should make its tax system less regressive and make “meaningful investments in (its) future,” Institute on Taxation and Economic Policy analyst Neva Butkus said. The organization leans liberal.
Indiana leaders — and political candidates — hope to slash or scrap the income tax.
That’s the driving force behind the State and Local Tax Review Task Force. But its members heard no full-throated support for the proposal on Friday, even as national experts from across the ideological spectrum offered competing advice on what to do instead.
Conservative think tanks recommended that the Indiana General Assembly cut the income tax according to a recently approved schedule, and — with “caution” — make further cuts only if lawmakers broaden the sales tax base and see higher-than-expected collections.
“We currently don’t see a proper way to replace $8 billion dollars, at least in the short run. It’s definitely not possible,” said Tax Foundation analyst Andrey Yushkov.
Low- and middle-income Hoosiers already pay more of what they earn in state and local taxes than high-earners, according to Butkus: the poorest 20% pay almost 13%, while the top 1% pay nearly 7%.
She called the state’s tax system “deeply regressive,” meaning that lower-income residents contribute larger shares of their income toward government services. “Increasingly regressive state and local tax systems have contributed to a sobering level of inequality in both income and wealth across the nation,” Butkus said.
She argued that the income tax provides “some balance” because it’s a percentage of what a taxpayer earns — particularly when the tax has higher rates for higher earners. Indiana has a flat tax.
In contrast, Butkus said, sales taxes cost a larger percentage of low-earners’ income.
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