News and Tribune

May 7, 2013

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

By Steve Garbacz
Daily Journal of Johnson County

— 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.



OTHER USES

While the notion of cutting taxes 5 percent sounds good to voters, the cut won’t significantly benefit taxpayers and will deprive the state of cash that could be used for education or road repairs, Marcus said.

And the people who need extra money the most, such as the unemployed, may not even get that extra $1 per week because their income isn’t high enough, said Carol Phipps, co-manager of the Interchurch Food Pantry in Franklin.

“Every little bit helps, but my personal feeling is that it wouldn’t make a significant difference. And some of the people who need it the most aren’t working. We have a number of clients here who are between jobs or lost their job,” she said.

People receiving Social Security or military combat pay don’t pay income taxes, but everyone else who works a job, as well as people receiving unemployment, have taxes withheld by the state. Although the amount is the same whether a person gets it all at once or spread out across 52 weeks, receiving $1 extra each week doesn’t give a person many immediate options on how to use it, Marcus said.

For example, the food pantry does get fewer visitors around the annual April 15 tax-filing deadline each year, since people who receive a lump of money in their tax refund can put it toward food and other expenses, Phipps said.

But an extra 50 cents per week every week won’t go very far toward helping a family buy food.

“If they got it at once, then it feels like extra money they weren’t expecting,” Phipps said.

The flat rate cut also doesn’t do much to help people earning low wages or families who may need extra money, Marcus said.

Finding a different method that would create a larger lump sum in an annual tax refund check would benefit low-income people more and given them more options for how to use it, he said.

“If you really wanted to do something for the citizens of Indiana, not just the taxpayers — which is a distinction I think needs to be made — you would increase the allowance per child or per person for the [income tax] exemption,” Marcus said.

The new state budget will increase school funding about $300 million over the next two years and also adds about $200 million extra to help pay for state and local roads. Both areas could benefit from more funding to further improve schools, fix potholes or improve state highways.

Pence called the 5 percent income tax cut a great victory in a statement released after lawmakers approved the state’s two-year budget. Lawmakers also cut inheritance taxes and certain business taxes, which Pence said come together to form the biggest tax cut in Indiana history.

The biggest tax cut in Indiana history, however, has come out as more political gusto than actual benefit to individual Hoosiers, Marcus said.

“It’s just nothing of real consequence. But it’s symbolic,” Marcus said.



REDUCING TAX BURDEN

The size of the tax cut to individuals may not be large, but the tax cut will put more money in pockets over the long term and will benefit the state as a whole, said Andrea Neal of the Indiana Policy Review Foundation.

“I would say anything that reduces overall tax burden on citizens is a positive for individuals and for business community. Also, taxes go up more often than they go down, so all reductions are welcome,” she said.

Although the tax cut won’t cause a big jump in a weekly paycheck, some local residents also weren’t ready to dismiss the value of $1.

Al Pickett, who teaches personal finance to students at Franklin Community High School, would advise taking the money from a tax break and put it into savings, even though saving the small weekly amounts would require some discipline and dedication in order to build a pot.

“I try to teach my students through our personal finance classes that whenever they get a windfall to take that money into something that will earn something for them,” he said.

If a person invests $3 per month with a 6 percent return, he or she would earn $35 in interest over the first five years, according to Cherie Lowe, a Greenwood resident who writes a blog focused on debt, saving and thrifty spending. Over 20 years, the income from interest would about double the investment.

“The worst thing anyone can do when they come into extra income is leave it alone, because you’ll spend it and then some more,” Lowe said.

Lowe advises people to use any extra money, even an extra $1, to pay off debt first, before considering saving or spending it on something they need.