A plan for gradually cutting Indiana’s individual income tax rate over the next seven years has been signed into law by Gov. Eric Holcomb, the governor’s office announced Wednesday.
The bill approved by legislators last week will reduce Indiana’s current income tax rate of 3.23% to 2.9% in small steps until its planned full implementation in 2029. It comes as both Republican- and Democratic-led states across the country are looking at tax cuts amid soaring tax revenue and billions in COVID-19 aid from the federal government.
The Indiana plan will cut the tax rate to 3.15% for 2023, which would amount to $40 savings for individuals or families with $50,000 in taxable income. Further reductions in 2025, 2027 and 2029, reaching a total annual reduction of $165 at that income level, would occur if state tax revenue grows by at least 2% in the previous budget year.
Holcomb and state Senate Republican leaders for months resisted backing significant tax cuts sought by House Republicans, citing concerns about inflation and a possible slowdown in the state’s booming tax collections with the end of federal COVID-19 relief funding.
But that hesitancy faded away in the final weeks of the legislative session, with Holcomb saying ongoing strong tax revenue made him confident the state could afford the tax cuts.
“Because we can, we should,” the Republican governor said in announcing his support.
While the final package did not include some sizeable business tax cuts that House Republicans sought, the plan would reduce total income taxes charged to individuals by about $180 million during 2023, according to Republican legislative staff estimates. That would grow to about $950 million a year in 2029 if the rate cuts are fully implemented.
The plan also includes cuts to utility company taxes amounting to an estimated $220 million annually starting in July, with utilities required to reduce charges by a similar amount to its residential and business customers.
Republican House Speaker Todd Huston said last week he believed the state government could afford the tax cut plan with its $5 billion in projected cash reserves and still meet spending needs when a new two-year state budget is put together next week.
“What we want to do is continue to make sure that we’re being responsible, keeping as much money in the Indiana economy, not the state coffers,” Huston said.
The Republican plan will make state government even more dependent on its 7% sales tax, which is already its biggest revenue source and the second-highest rate in the country. Indiana’s individual income tax, meanwhile, is already lower than any surrounding state.
Many Democratic legislators voted for the tax-cut plan but criticized Republicans as going too slow on the income tax cut to give much help to working-class families. Republicans brushed off calls from Democrats for a suspension of the state’s 32-cents-a-gallon gasoline tax and the 7% sales tax on fuel, which they argued would be a bigger help amid a national surge in prices past $4 a gallon since the Russian invasion of Ukraine.
“You would go immediately to the gas station and feel the results,” said Senate Democratic leader Greg Taylor of Indianapolis. “We know that gas prices are gonna go up and we did nothing.”
Republicans maintained that the gas tax money was dedicated to the state’s highway construction program.
Huston put the blame on federal energy policy, even though gasoline prices have been rising in tandem with oil prices since spring 2020 because demand has grown faster than worldwide production with economies rebounding from the pandemic.
“The gas price issue isn’t about what the state’s collecting; it’s, frankly, bad national public policy we’ve had for a while that’s constrained resources and driven up prices,” Huston said.