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January 23, 2014

MARCUS: Indiana twiddling with tax reform

— January is the month for the State of the Entity speech by the chief executive. We have the State of the Union, the State, the City and, some places, the County. Most such speeches are recitations of “successes” and outlines of ideas for the future. It is a fine tradition that is sometimes inspirational, sometimes informative, and too often meaningless.

Gov. Pence maintained the tradition. The intent of each specific proposal was to further the state according to the governor’s general philosophy. Hence, pre-kindergarten was endorsed with no assurances that the health and safety of children would be safeguarded better than they are currently in many religious-affiliated day care centers.

The abolition of personal property taxes for businesses was advocated with the provision that local governments not be hurt (much), and that the burden not be shifted to individuals. Which businesses then will pay the nearly $1 billion in revenues now collected by local governments?

The governor seems to have opened the door for some wonderful fights among the lobbyists representing Indiana’s various business interests. Those firms that buy new equipment will be aligned against those who have no need to modernize equipment. Which tax will the governor raise on those firms not caught in the vise of continuously upgrading equipment? 

Last year, Gov. Pence proposed that the individual income tax be reduced by 10 percent. This idea did not sit well with the General Assembly which delayed the idea for a few years. (In case you do not recall, a 10 percent reduction in the 3.4 percent state income tax would reduce the rate to 3.06 percent — making the income tax even more difficult for Hoosier graduates to calculate.)

This year, Gov. Pence called for indexing the personal exemption to the inflation rate. That is more twiddling with taxes to little advantage for the people of Indiana. Revenues would be reduced and the excuse for cutting services enhanced.

Currently, there is a personal exemption of $1,000 for adults, $1,500 for dependent children, and an additional $1,000 for those over 65. If the rate of inflation was 2 percent, those figures would rise to $1,020 for adults, $1,530 for dependent children.

How much is this worth to the taxpayer? Assume a family of four, two adults under age 65 and two children. Currently they get a total exemption of $5,000. This would rise to $5,100.

At today’s income tax rate (3.4 percent), this $100 added exemption would be worth $3.40 to that household. For some in our state, any reduction in taxes is valuable as a means of cutting back government.

Instead of playing games with rates and exemptions, plus changing the tax base for personal property taxes, the General Assembly ought to be working on a comprehensive review of Indiana’s tax policies. Rather than a piecemeal approach to taxation, let’s look at the larger picture of revenue needs and the means of supporting, rather than undercutting, government services.

— Morton Marcus is an independent economist, writer and speaker. Contact him at mortonjmarcus@yahoo.com

 

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