Indiana’s High Tax Ranking Adds to Status as Reform Model

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By Alex Ebert

Tax experts say Indiana’s moderation could be a go-to model for state tax reform.

In the Tax Foundation’s 2018 State Business Tax Climate Index report published Oct. 17, Indiana ranks ninth despite the fact that it collects all the major taxes states use to bolster their revenue. It’s also a rare state that is complimented on its tax structure and doesn’t boast major excise taxes on natural resources (like Alaska) or have world-destination tourism (like Florida).

Instead, politicians and experts say Indiana has found successful moderation in slightly lowering rates while broadening the tax base for revenue. They say this moderate approach could serve as a model for other states looking to increase business investment but retain revenue for state programs.

“Some states, like Wyoming, can afford to go without major taxes because they rely heavily on taxes on oil or other natural resources, a model other states can’t necessarily emulate,” Jared Walczak, senior policy analyst and lead author of the Tax Foundation report, told Bloomberg Tax in an email. “Indiana has a more typical economy and a typical set of tax types, but policymakers have broadened bases, lowered rates, and chosen to be competitive for all comers rather than picking winners and losers through the tax code. That’s a model that any state can emulate—and Indiana shows why they should.”

‘Collect as Little as Possible’

Indiana Sen. Brandt Hershman (R) told Bloomberg Tax that moderation was the driving force behind the reforms he’s led over the last decade. Those included slight decreases to the state’s income and corporate taxes, as well as increasing the state’s gas tax and broadening its sales tax base. He said the goal is to make sure everyone is paying into the system, but not paying much, so that the state doesn’t pick winners or losers in the economy and lures businesses from other states.

“The goal is to collect as little as possible, collect fairly and have strong compliance so that people will pay what they’re supposed to,” he said.

So far, the plan appears to be working. Despite lower corporate and individual income taxes, the state now boasts a rainy-day reserve close to $2 billion, a AAA bond rating, and an unemployment rate below the national average.

The key, Hershman said, was to be moderate. While the state cut taxes, it also eliminated expenditures. Indiana also has a committee that reviews all of the state’s expenditures every five years. A study by the Pew Charitable Trusts found Indiana’s tax incentive review program is one of the best in the nation.

“Too often, state tax codes introduce significant complexity, high compliance costs, and markedly unequal treatment of different economic activities,” Walczak said. “Indiana has chosen a smarter approach, with a tax code that raises revenue without unduly putting a thumb on the scales of economic decision-making.”

Phasing in Cuts

In Indiana, moderation is also visible in how long the tax cuts are phased in. At 6.0 percent in 2018, Indiana will still have slightly-less-than average corporate taxes. However, that number is going to be phased down to 4.9 percent in 2022.

“We did it in a series of steps over a period of time to not have a Kansas situation, but to send a strong message to companies about what was going to happen over a period of time,” Hershman said.

Indiana’s Republican-controlled Legislature also wasn’t shy about increasing certain taxes, even though those increases were panned by the vocal Americans for Tax Reform. The latest was a 10 cent increase to the state’s gas tax and higher registration fees for drivers, which will raise $5 billion for infrastructure updates over the next seven years.

Trump Praise

Indiana manages to steal companies from Illinois—Hershman said Indiana has nabbed 50 transfers directly because of the corporate rate differential. But it also manages to invest heavily in infrastructure and spend close to average per-capita amounts on major safety-net programs. This has generated praise and a little state envy.

“Indiana is a tremendous example of the prosperity that is unleashed when we cut taxes and set free the dreams of our citizens,” President Donald Trump said during his Sept. 27 remarks in Indianapolis at a rally touting his national tax reform plan. “And businesses all across the country have taken notice. In recent years, Indiana has welcomed dozens of companies fleeing high taxes and high-tax states. Thousands of new jobs and massive capital investment have followed—meaning a better quality of life for the people of Indiana. All of this is possible because the people of this state have made a decision. They chose to make Indiana competitive again.”

It’s economic growth that Kentucky Gov. Matt Bevin (R) said state legislators need to keep in mind when reforming taxes in the Bluegrass State, which came in 33rd on the Tax Foundation report and is facing difficulties meeting state pension obligations.

“By doing nothing as states around us have become more competitive, they have lowered their corporate tax rates and their individual tax rates, as they have moved themselves to more consumption taxes-based economies, that has, as we’ve sat still, caused them to leapfrog us,” Bevin said in a recorded video statement for the Kentucky Chamber of Commerce tax summit in September. At that event, myriad local politicians and national tax experts pointed to Indiana as a model for what Kentucky should do.

Ashli Watts, the chamber’s vice president of public affairs, especially pointed to a lower corporate tax rate as something Kentucky needs to compete with Indiana over regional corporate investment.

“With Indiana being a direct competitor and border state with Kentucky, it is time that we look to states that are ‘getting it right,’” Watts told Bloomberg Tax in an email.

Consider More Than Taxes

Not all national experts agreed that Indiana’s high Tax Foundation ranking necessarily means it’s tax structure would work for all states or that all states should stop what appears to be working for them.

“I would have a really hard time hearing an argument for why California and New York are not good places to set up businesses because then there are a lot of really dumb businesses out there,” Richard Auxier, a research associate with the Urban-Brookings Tax Policy Center, told Bloomberg Tax. “If the goal is economic growth, then you have to consider more than just taxes.”

California and New York list at 48 and 49, respectively, on the Tax Foundation report. Yet the two states’ economies remain incredibly powerful because those states have lifestyles, amenities, and government programs that matter as much to some employers as low taxes, Auxier said.

Since the middle of the Great Recession in 2008, Indiana’s state revenue has grown only 3.6 percent, according to a Pew Charitable Trusts study on how well states have bounced back. The national average is almost 4 percent higher, at 5.9 percent. New York’s revenue has grown by 11.5 percent, and California’s revenue has grown by 15.4 percent.

With its 6.6 million residents, Indiana also has an immense amount of tax expenditures—$16 billion—compared to Ohio’s $9.4 billion in expenditures for a state with nearly double the population.

“There is no perfect tax system,” Auxier said. “So what politicians should do is be very upfront with the trade-offs when considering tax cuts.”

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

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

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