News and Tribune

February 19, 2013

HAYDEN: What to do with the state surplus?

A tax cut would mean about $100 more in the average Hoosier’s pocket

By MAUREEN HAYDEN
CNHI Statehouse Bureau

INDIANAPOLIS — We Hoosiers like to think of ourselves as special, but when it comes to the current debate in the Indiana Statehouse over the budget, we’re a lot like other states: Grappling with some post-recession questions about how to balance spending and taxes. 

The struggle unfolding in the Statehouse has to do with the state’s $2 billion surplus and two distinctly different views about what to do with it. 

The stash of cash follows lean years brought on by the 2008 recession, when Indiana — like many other states — saw deep drops in tax revenues and subsequent deep cuts in state spending on education and other public services. 

Slowly but steadily, those tax collections have been rising as Indiana and other states gets back on their feet. 

It’s good news, but here’s the dilemma that it’s led to: Should we restore those lost dollars to schools and other public services or use the surplus to lower taxes and lock in those cuts made under economic duress? States across the nation, from Connecticut to California, have been wrestling with the same issue. 

Republican Gov. Mike Pence is committed in large part to the latter. His number one campaign promise last year was to lower the personal income tax rate in Indiana from 3.4 percent to 3.06 percent. 

The sound of a tax cut has Pavlovian appeal: It triggers a reflexive positive response. But the reality isn’t that impressive. A typical middle-income Indiana resident would see their state tax obligation drop about $100; the poorest 20 percent of Hoosiers would see a tax cut of $18 or less. The richest one percent of Hoosiers might like it, since their taxes would be cut by about $2,200. 

Yet a good chunk of those dollars would likely end up not in Hoosier pockets but in the federal Treasury. 

Why? Because one of four Indiana taxpayers claims itemized deductions on their federal tax returns, and can write off the state and local income tax payments they make. By lowering their state tax bill, the Pence tax rate cut would raise their federal tax bill. 

The Pence tax rate cut would take more $770 million out of state revenues over the next two years.  

That’s money that the fiscally conservative Republican leaders in the House want to spend making what they call “strategic investments” to bolster the Indiana economy. 

The budget plan that GOP House leaders rolled out last Friday would direct most of those dollars back to local schools and state universities that took a hit in the budget-cutting years and back to local municipalities for repair of their crumbling roads and bridges. 

The Republicans who control the Statehouse are having an interesting intra-party fight and so far, Pence seems to be on the losing side. The Republican budget-makers in the Senate seem as unconvinced of the merits of the Pence tax rate cut plan as their brethren in the House. 

The Statehouse politics of it are intriguing, especially since Pence’s possible presidential aspirations are thrown into the mix. But likely not so entertaining for many Hoosiers, living in a state with an unemployment rate higher than the national average, who are still hoping and praying for something good to jolt the economy.