Inconvenient Facts About Indiana Tax Revenue
Total state revenue is expected to decline as personal income falls, but we observe that Indiana revenue fell more precipitously than personal income during the recent recession and recovery. Indiana’s combined state and local revenue collected as a percentage of personal income between 2000-2010 averaged 11.3 percent. However, this average fell from a high of 12 percent (2007-2008) to a low of 10 percent in 2010.
Chart 1* below indicates that per capita personal income in Indiana adjusted for inflation fell from 2007 and recovered somewhat between 2009 and 2010. Ironically, this recovery in income is not reflected in Indiana state and local tax revenue.
Chart 2 clearly shows that state and local taxes collected per Indiana resident declined from a high of $4,300 (inflation adjusted) to a record low of about $3,500 in 2010.
There is undoubtedly a lag in taxes collected as income increases, but this alone does not explain the overall pattern of tax revenues in Indiana between 2000 and 2010. Although per capita income increased in Indiana in 2010, tax revenue declined.
The General Assembly’s changes to Indiana’s tax structure between 2000 and 2010 certainly affected tax collections. It is no surprise that property taxes averaged a negative annualized rate of 1.4 percent due in part to the imposition of property-tax caps followed by a decline real-estate market assessments due to foreclosures and recession. Corporate income taxes also experienced an annualized rate of decline averaging 7.2 percent. Before elimination of gross corporate income taxes could fully recover due to the significant increase on adjusted earnings from 3.4 percent to 8.5 percent, the recession reduced or made profits nonexistent.
Our focus here, however, is on Hoosier income and sales taxes per capita. Indiana local income taxes per capita are represented by the lowest line in Chart 3. In spite of increases in total local income taxes collected, the per capita inflation adjusted amount declined from $128 in 2000 to $92 in 2010. Although part of this decline is due to an administrative lag whereby collections of the County Option Income Tax (COIT) are based on income earned two years ago, business cycles and growth trends must be considered.
State individual income taxes represent the most significant change in the composition of Indiana’s tax revenue; state income taxes declined as indicated in Chart 3. Assuming that the General Assembly has not made significant changes to the tax code, why have Indiana state income taxes declined on a per-person adjusted basis from $780 to $598? The distressing answer must be that total personal income from four major sources (wage and salary income, small business/farmers’ income, plus dividends, interest and rental income) did not increase significantly in real terms per-person in Indiana between 2000 and 2010. The percentage of persons in Indiana aged 18-64 who report income from wages or salaries dropped precipitously between 2000 and 2010.
On the other hand, the growth of transfer income as a share of personal income in Indiana exceeds the national average (John Ottensmann, ”Policy Choices,” July 2011, Indiana University Public Policy Institute, Number 11-C21). Transfers represent income derived from welfare, social security, unemployment compensation, etc. State and local income taxes are paid on part of this income, and starting in 2012 individuals can choose to have state and local taxes withheld from their weekly unemployment insurance benefits. It will be challenging, however, to maintain average per-person revenue collected through state and local income taxes if the base on which most of these taxes are paid is shrinking. In certain cases, lower tax rates on a wider base produces greater tax revenue.
By 2002, sales taxes exceeded individual income taxes as a source of revenue for Indiana. In that year, the sales-tax rate was increased from 5 to 6 percent. Subsequently, in 2008 the sales-tax rate was again increased from 6 to 7 percent. Nevertheless, in 2010 state sales taxes averaged $912 per resident down from $974 in 2009. It is too soon to know if this reduction in spending represents a long-term change in spending in Indiana.
Suppose, though, that Hoosiers have fundamentally changed their behavior and are now thriftier. They spend less and save more. Such behavior should actually begin to produce greater tax revenue on dividends and interest. That is, unless income taxes on personal income are raised. For taxes are certain but the amount collected from a single source is not.
Maryann O. Keating, Ph.D., is an adjunct scholar with the Indiana Policy Review Foundation. Contact her at firstname.lastname@example.org.
*All charts based on Indiana University Public Policy Institute, September 2011, No. 11-C26.