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March 13, 2013

NEAL: For growth’s sake, cut state income tax

(Continued)

The Civitas research echoes a 2008 study of the economic effects of state income taxes, by economists Barry Poulson and Jules Kaplan, confirming “evidence of a negative effect of taxes on various measures of state economic performance.”

Critics argue that the North Carolina plan is regressive because consumption and sales taxes, which would be increased to replace the income tax revenue, disproportionately hurt the poor. The Civitas study suggests that employment and income growth that accompany income tax repeal are of far greater benefit to low-income households than lower sales taxes.

In Indiana, the sales tax is already high at 7 percent so getting rid of the income tax right now is not realistic. But Pence’s plan is a move in the right direction. According to the Tax Foundation, it would make Indiana’s income tax rate “the lowest in the country among those states that levy an individual income tax.”

Senate President David Long says Pence’s idea is still alive and likely to make its way into legislation once updated revenue forecasts come out. House Speaker Brian Bosma appears less receptive. In a recent letter to Republican county chairmen, Bosma indicated a preference for moving up the timetable to phase out the inheritance tax. He noted that Indiana’s income tax rate is already among the lowest.

Bosma’s letter to county chairmen was highly unusual for taking on the governor so early in his administration and appealing directly to the Republican political base. That’s where the debate over tax cuts may play out in the short term. In the March 1 Fort Wayne Journal Gazette, Allen County GOP Chairman Steve Shine said he backed the governor, noting, “Many other states are moving in that direction and we don’t want to be lagging behind.”

That’s what lawmakers should be concerned about. Our unemployment rate is 8.3 percent, which is not much better than North Carolina’s. We don’t want to lose jobs to states that are more aggressive in creating a low-tax atmosphere. Remember: Indiana is not a low-tax state. We’re smack dab in the middle.

— Andrea Neal is adjunct scholar with the Indiana Policy Review Foundation.

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