Republican legislators split on Indiana tax cut prospects

Indiana’s fast-growing tax collections have some Republican lawmakers looking to push through tax cuts during the upcoming legislative session even as that move faces skepticism.

The debate is a significant turnaround from a year ago when the COVID19 pandemic recession had state officials worried about big drops in tax revenue. But an economy spurred by federal coronavirus relief spending has the Republican leader of the Indiana House saying tax cuts are a “huge priority goal.”

Republican House Speaker Todd Huston said Monday he expected the GOP-controlled House would support cuts to the state’s 3.23% individual income tax rate or expanded credits to reduce what income taxes are owed. Huston said a proposal would be finalized after an updated state revenue forecast is presented to legislators in about a month.

“We’ll have a bill that makes sure we’re giving money back to Hoosier taxpayers,” Huston said a day before the Legislature’s annual Organization Day meeting ahead of the legislative session starting in early January.

The Republicans who dominated the state Senate, however, plan to “proceed with extreme caution” when it comes to tax cuts, said Senate Majority Leader Mark Messmer of Jasper.

Indiana has seen big jumps in sales tax collections, which makes up about half of state government’s general revenue, but Messmer said no one can reliably predict what will happen with those collections when the federal relief spending ends.

State government saw overall tax revenue grow 14% during the last budget year as collections bounced back stronger than expected, pushing its cash reserves to $3.9 billion as of June 30. Tax revenue has kept growing, with the state collecting about $560 million, or 10%, more than expected during the four-month span through October.

The size of the state surplus is triggering Indiana’s automatic tax refund law, with about $545 million being divided evenly among taxpayers through an estimated $170 credit on state tax returns submitted next year.

Republican senators would likely rather wait until the Legislature drafts a new two-year state budget in 2023 before deciding to cut any taxes, instead relying on the tax refund law again if collections remain strong, Messmer said.

“That would be probably our preference, but obviously, we’ll look at the revised forecast in December and consider anything that the House sends to us but we’re not looking at cutting taxes at this point,” Messmer said.

Republican Gov. Eric Holcomb also sounded cautious last week, saying “we shall see” when asked about the tax cut possibility.

While the leader of the House budget-writing committee wants to look at expanding the state’s sales tax to include more spending on services in order to reduce the 7% rate, Huston said he believed cuts to individual income taxes and the property tax on business equipment were more likely steps.

Indiana’s 7% sales tax is among the highest in the country and greater than any surrounding state. Cutting a full percentage point off that tax rate would cost about $1.2 billion, according to the Indiana Office of Management and Budget.

Lowering Indiana’s individual income tax rate to a flat 3% from the current 3.23% would cost about $400 million annually. Indiana’s income tax rate is the lowest of all neighboring states.

Democrats are suggesting the state’s revenue growth should go toward steps such as increasing the decade-old $3,000 annual limit on tax deductions for renters and increased subsidies for child care expenses. Those are unlikely to gain Republican support, leading a top Democrat to also suggest waiting to see what happens with the economy in the coming year.

“I think we should just sit on this reserve,” said Democratic Rep. Terri Austin of Anderson. “It won’t hurt.”