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Clark County

May 7, 2013

Economist says $1 weekly bump in pay little more than symbolic

A new state income tax probably won’t go far in paying for a family trip to Disney World, but it could buy an extra gallon of gas each month, a couple nice dinners out per year or help start a new savings account.

The 5 percent cut to state income taxes approved by lawmakers and Gov. Mike Pence will result in an extra dollar or two per week in your paycheck, depending on how much you make. A worker will have to earn more than $100,000 per year to see enough savings to pay for one gallon of gas per week, that is, if prices are still around $3.50 per gallon in 2017 when the tax cut is fully phased-in.

An extra dollar per week isn’t going to be an immediate financial boon to the average person. But if used thoughtfully, an extra dollar can make a difference in the long term, financial planners said.

That extra dollar can provide clean water to a person in Africa for one year. Or it could buy one or two extra gallons of milk for a family each month. Or over a year, the money could pay for one or two extra dinner-and-movie date nights.

Lawmakers who wanted the tax cut think the extra money spread across all of Indiana will help boost the state’s economy, while an economist said the 5 percent cut is a political move that sounds good compared to the actual benefit it gives to Hoosiers.

“Reducing the individual income tax by 5 percent over two biennium when fully implemented will leave some nearly $300 million in the Indiana economy,” Pence said following approval of the tax cut.

A 10 percent tax cut was one of the main goals Pence had for the state since taking office in January.

Lawmakers settled on 5 percent, but in either case, the cut doesn’t have a large impact on Hoosier paychecks, economist Morton Marcus said. Workers won’t see any change this year or next, since the first of two rate cuts won’t start until 2015.

The state income tax rate will be cut from 3.4 percent to 3.3 percent in 2015, then to 3.23 percent in 2017. After the second cut in 2017, workers will get to keep about an extra $1 per week for every $30,000 they earn annually. The state is expected to lose about $300 million per year in revenue by granting the tax cut, about 1 percent of the Indiana budget.

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