Keating: Indiana Tax Rates
by Maryann O. Keating, Ph.D.
Larry DeBoer and Tamara Ogle of Purdue University presented a comprehensive webinar last month entitled “On Local Government: A Look at State and Local Taxes in Indiana.” It is worthwhile summarizing a few of their findings.
The webinar, sponsored by Community Development Extension, asked, “How high or low are Indiana’s taxes compared with other states?” It analyzed Indiana’s tax regime both in terms of economic incentives and in taxes paid by low income households.
In 2016, residents in Indiana’s four surrounding states paid higher percentages of their personal income in state and local taxes. Hoosiers, like those in Texas and Utah, remitted approximately 8.5 percent to 10 percent of their incomes to local and state government. Those living in New York, North Dakota, Maine, Minnesota, Rhode Island and Vermont paid 11 percent or more.
However, Indiana’s 7 percent sales-tax rate is tied for 2nd highest in the U.S. Indiana relies more heavily on general sales taxes than most other states. Except for groceries, the Indiana sales tax is widely applied to most goods and services. A wide sales-tax base is desirable given economists’ fear of distortions resulting from exemptions granted certain industries.
Fortunately, local cities or counties within Indiana do not have a sales tax in addition to the general sales tax. Indiana is also less likely than other states to depend on selective miscellaneous or motor vehicle taxes.
Indiana’s income tax is a flat tax, meaning that higher income households pay more but at the same rate as lower income households. Although Indiana remains in the bottom third of states relying on income-tax revenue, it is one of the few states in which some towns and counties assess an additional local income tax.
Local property tax rates in Indiana are capped, but obviously the amount paid depends heavily on how property is assessed. Property values in Indiana tend to be low relative to the rest of the country, and the amount collected as a percent of home values is 0.82 percent. This is well below the average U.S. rate.
A chart breaks down the shares of total tax revenue collected by various types of state and local taxes in Indians and for the whole of the U.S. It shows that compared with Indiana, states as a whole depend more on property and less on sales taxes. It shows as well that the share paid on individual and corporate income taxes exceeds that of the U.S. as a whole.
The Purdue webinar went on to show that Indiana taxes are pretty evenly balanced between types of taxes as compared with states such as New Hampshire with no general sales tax but raising 65 percent of its state and local revenue with property taxes.
Taxes should have low collection costs for both taxpayers and government. In addition, taxes can be evaluated on two criteria: first, on non-interference with household and business private decision-making; and secondly, on fairness both in terms of services received and in not contributing to income inequality. Two organizations that evaluate state and local taxes are the Tax Foundation and the Institute on Taxation and Economic Policy (ITEP).
The Tax Foundation in 2019 rated Indiana 10th best of all states in having a healthy business climate. Indiana achieved this ranking for the most part due to relatively low rates applied broadly and for having flat rates on individual and corporate income.
On the other hand, ITEP ranks Indiana 12th worse in terms of promoting post-tax income equality. The 20 percent of Indiana households at the bottom of the income scale pay between 12 and 13 percent of their before-transfer income in state and local income taxes; whereas the high income top 20 percent of households pay somewhere between 7 and 8 percent. The difference to a large degree results from Indiana’s reliance on regressive sales taxes. Lower income people spend rather than save and hence pay a higher share of their income in sales taxes. In addition, Indiana does not compensate for its regressive sales tax with progressive higher income-tax rates. Indiana does, however, offer a refundable Earned Income Tax Credit.
Indiana ranks above neighboring states, Kentucky, Michigan, Ohio and Illinois, in terms of Business Tax Climate and above Illinois in terms of ITEP’s Tax Equality Ranking. The Purdue study singles out Utah for further analysis, because it manages to attain the same relatively high ranking as Indiana on Business Climate but ranks much higher in terms of Tax Equality. Utah’s low income families benefit from income-tax credits and deductions and a lower sales-tax rate.
Factors unrelated to tax structure can affect the variation in taxes paid as a percentage of income between low- and high-income households. For example, Utah’s pre-tax median income is relatively high allowing some lower income households to save as well as spend. Also, pre-tax income equality in Utah exceeds that of any other state in the country; thus, differences between households in the percentages of income paid in state and local taxes tend to be smaller.
How state and local spending reallocates income between households is a completely different story and beyond the scope of how tax revenue is collected. Hoosiers need to decide the extent to which both the state and local tax and spending regimes reflect personal priorities.
Meanwhile, we might derive some satisfaction in knowing that as a percentage of personal income we presently enjoy relatively low taxes compared with other states and the country in general.
Maryann O. Keating, Ph.D., a resident of South Bend and an adjunct scholar of the Indiana Policy Review Foundation, is co-author of “Microeconomics for Public Managers,” Wiley/Blackwell.