Indiana Lawmakers Respond to Federal Changes With Tax Increases

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By Alex Ebert

Indiana legislators passed extensive tax tweaks in a one-day special session aimed at partially conforming to federal changes and adjusting the state’s code for easier Department of Revenue operations.

On May 14, the Indiana House and Senate passed two bills ( H.B. 1242 and H.B. 1316) which combined would raise about $150 million in new revenue over the next three years, mostly from adopting the 2017 federal tax act’s ( Pub. L. No. 115-97) limits on pass-through entity excess-business losses.

The bills accomplish a policy priority for Gov. Eric Holcomb (R), who called the one-day special session to wrap-up passage of these two bills, two school bills, and one technical fixes bill. Since Indiana isn’t a “rolling-conformity” state, Holcomb and republican leaders in the House and Senate made it a priority to accomplish conformity, but a scramble on the last day of the session left the bills in limbo without House approval.

Holcomb is expected to sign the bills within days, following overwhelming approval in both chambers. However, some Democrats criticized how the bills choose to adopt some of the federal tax measures, but not others.

No GILTI Pleasure

The bills passed with overwhelming votes. But some opponents criticized the measures in H.B. 1316 for not conforming to new federal laws on net operating losses, limitations on net interest deductions, and inclusion of global intangible low-taxed income—known as the GILTI tax.

Without this, some Democrats said, the state was disadvantaging small pass-through entities that won’t benefit from federal tax changes to the advantage of large multinationals.

Full conformity “would have raised state revenues by $339 million over three years,” Rep. Edward DeLaney (D) said during floor debate May 14. “Instead, we’re limiting pass-through exemptions by $150 million from local entrepreneurs. These are people who invest in businesses, and they take early losses.”

Rep. Tim Brown (R) said that this selective conformity was actually in line with Indiana’s overall larger policy to be one of the most welcoming states for large business.

“Our policy was to get to one of the lowest corporate tax rates in the country that puts it equivalent to what individuals pay in income tax rates,” Brown said. “Corporations bring jobs, and we want jobs. We have the highest employment growth rate in the Midwest.”

The pass-through conformity issue is something the Indiana Chamber of Commerce might consider advocating about in the future when the economic impact becomes clearer, Bill Waltz, the chamber’s vice president of taxation and public finance told Bloomberg Tax May 14. “We understand that budget-makers want and need to have the ability to look at actual revenues next year and compare and see what some of the effects were from the changes.”

DOR Tweaks

H.B. 1242 and H.B. 1316 also included tweaks advocated by the Indiana DOR.

That included mandatory background checks for government employees that get access to confidential background checks, placing riverboat and racino taxes within the state’s system for other wagering taxes, and delaying sales tax provisions for short-term rentals until July 1, 2019.

The Next Level Indiana Innovation and Entrepreneurial Fund and the Maritime Opportunity District Property Tax Deduction programs were also eliminated. In May 14 floor debate Sen. Travis Holdman (R) said both the public employee investment option and deduction were being eliminated because neither were being used.

To contact the reporter on this story: Alex Ebert in Columbus, Ohio at aebert@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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