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December 5, 2022

Indiana cuts income taxes over the next seven years

Indiana Gov. Eric Holcomb signed a bill this week that cuts the state’s income tax by small amounts over the next seven years, taking it below 3% for the first time in years.

Indiana currently has a flat 3.23% state income tax.

With the new law passed, that rate will drop to 3.15% in tax years 2023 and 2024, to 3.1% in 2025 and 2026, 3% in 2027 and 2028 and then 2.9% for 2029.

Republican legislators celebrated the cut, which, if other states don’t make even deeper cuts in the next seven years, will make Indiana tied with North Dakota for the lowest state income tax in the nation, among states that have an income tax.

Others are asking why Indiana can’t go further and eliminate the state income tax altogether.

“Nine other states have no income tax,” said former Libertarian Party candidate for governor Donald Rainwater this week. “Why can’t we be number 10?”

“We’d like to see it eliminated completely,” says Joshua Webb, the Indiana state director for Americans for Prosperity.

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming each have no income tax.

For most of its history, Indiana had neither an income tax nor a sales tax – only a property tax. The state income tax was introduced in 1933, during the Great Depression, and the sales tax was imposed in 1962.

This year’s state income tax cut was unexpected, even after it was announced that because of increased state tax collections, the state was expecting to have a $5.1 billion surplus. Senate President Pro Tem Rodric Bay had said in December and January he wanted to wait until 2023 to consider passing tax cuts when the General Assembly does another two-year budget and would have a better handle on the state’s economic condition following the recovery from the COVID-19 pandemic.

Holcomb had also said publicly he wanted to wait on a state income tax cut.

But the Indiana House moved forward, passing a bill, authored by Rep. Tim Brown, R-Crawfordsville, the chairman of the Ways & Means Committee, that provides a total of $1.1 billion in tax relief that comes from lowering the income tax to 2.9% over seven years and also repealing two utility taxes – the utility receipts tax and utility use tax.

The bill as it passed the House had also included specific tax relief for businesses in the state, which, in addition to corporate income taxes, also pay an annual tax on all tangible assets owned by the business – including all computers, furniture and equipment (with the first $80,000 worth of property exempted).

The House bill would have eliminated the 30% depreciation floor on new business personal property – meaning businesses would no longer have to keep paying an annual tax on equipment that was several years old and had no longer retained 30% of its original value.

But that didn’t make it through the Senate.

“When it went to the Senate, they stripped the tax cuts out,” said Natalie Robinson, the NFIB state director in Indiana.

Small businesses affected by the tax include small manufacturers and farmers, who own expensive equipment they may use for a decade or longer, said Robinson.

This article was originally posted on Indiana cuts income taxes over the next seven years