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The Tax Advantages of Indiana

By Morton Marcus

Facts and Figures, How does your state compare? is an annual publication of the Tax Foundation. It is mailed to every state legislator and governor.

Many Hoosier legislators and administrators quote the Foundation’s State Business Tax Climate Index. As of July 1, 2020, Indiana ranked #9 among the 50 states. That places us in the top quintile of favorable states. Such eminence! We’re up there with Wyoming (#1), South Dakota (#2), and Alaska (#3).

How do we get to be #9? For that Index, we rank #13 in Corporate Income tax, #15 in Individual Income tax, #20 in Sales tax, and #27 in Unemployment Insurance tax. There must be something that propels us up to #9. Turns out we are #2 in Property taxes on business and that offsets all those other taxes.

In the early 1970s, Indiana got about a third of its state and local tax revenues from property taxes. Today, about a quarter of our tax collections come from property taxes.

On a per capita basis, including every infant, our property taxes are $1,033 and we rank 39th behind the highest state, New Jersey ($3,378 per capita), with Alabama 50th at $598 per capita.

Alternatively, Indiana ranks 30th with property tax paid at 0.81% of owner-occupied housing value. By this measure, Alabama is lowest (at 0.37%) among the 48 continental states, while New Jersey is again in first place at 2.13% of value.

While Indiana is low on property taxes, we make it up on sales taxes. Our 7% statewide sales tax rate is the highest in the nation (tied with MS, RI, and TN). Unlike most states, we don’t permit local sales taxes or have a statewide sales tax earmarked for local governments.

Indiana has the lowest statewide flat tax (3.23%) on individual income. Most states have graduated income tax rates as incomes rise, in addition to local income taxes. Indiana’s state income tax raises $900 per capita, the 10th lowest amount in the nation among the 43 states with income taxes.

Our gasoline tax rate at 42.16 cents per gallon is the 10th highest in the nation, lower by 10 cents from Illinois, but higher than neighboring Kentucky, Michigan, and Ohio.

Indiana’s gasoline taxes and license fees pay for 68.7 percent of our state and local road spending, the highest level in the nation. As crossroads of the nation, with heavy truck traffic, we might ask, “Do we get our fair share of federal highway funds?”

Before any action by the current Indiana Legislature, we had the 13th lowest cigarette tax rate. No vaping or marijuana tax. The seventh lowest tax on spirits, the 15th lowest tax on wine, and the eighth lowest tax on beer.

Thus, Indiana’s low taxes are favorable for both business and unhealthy choices.

Morton Marcus is an economist. Reach him at mortonjmarcus@yahoo.com. Follow his views and those of John Guy on Who gets what? wherever podcasts are available or at mortonjohn.libsyn.com

Indiana drops corporate tax rate as Illinois considers increasing it

JULY 17, 2020

Illinois Gov. J.B. Pritzker’s ‘fair tax’ would raise Illinois business taxes to the highest in the nation as neighboring Indiana cuts taxes to draw businesses across the border.

Other Midwest states are working to be more business friendly, but Illinois is trying to tax businesses more.

On July 1, Indiana reduced the corporate tax rate from 5.5% to 5.25%. It has been dropping every July since 2012, when it was at 8.5%. Next year, the corporate tax rate will decrease again to 4.9%.

Illinois’ corporate tax rate currently is 9.5%, but will increase to 10.49% if state voters are persuaded by the $56.5 millionworth of “fair tax” messages for which Gov. J.B. Pritzker is paying. Voting to remove Illinois’ flat tax protections will give Illinois a corporate tax rate that is the highest in the nation and more than twice as high as neighboring Indiana.

Pritzker's progressive tax could give Illinois highest corporate income tax rate in U.S.

Small businesses would fare even worse. Tax rates on more than 100,000 Illinois small businesses could jump as much as 47%, from 6.45% to 9.49% – also nearly twice as high as Indiana’s corporate income tax. That is bad for Illinois jobs, because small businesses are responsible for about 60% of the state’s job creation and have already taken the brunt of the COVID-19 economic harm.

Imposing progressive taxes would drop Illinois from 36th to 48th in the nation for its business tax climate, a Tax Foundation analysis found in 2019.

Thousands of Illinois small businesses are not expected to recover from the COVID-19 restrictions and economic downturn. Even big business is suffering, with Chicago-based United Airlines expected to lay off nearly half of its employees. By adding on a massive tax increase, more businesses will close or cut workers.

Many will simply pack up for a state that encourages their growth rather than punishes it.

“My personal opinion is that the governor is making the wrong judgment because you’re going to do a progressive tax and start pushing people out of Illinois,” said Antonio Cavazos, who owns a sangria manufacturing business with his wife in Oak Lawn. “We’ve considered [moving]. And looking at excise tax, Indiana and Wisconsin are a heck of a lot cheaper than Illinois.”

Illinoisans will vote on Pritzker’s progressive income tax measure Nov. 3.

State of Indiana extends due date for property tax bills

The governor of Indiana has…”mandated that all counties waive penalties for delinquent non-escrow property taxes paid within sixty (60) days after May 11, 2020 – the May 11, 2020 – the May installment due date.” “…the spring installment may be paid up to and including July 10, 2020 without penalty.” However, know that “This waiver does not apply to tax payments which have been escrowed by financial institutions on behalf of property tax payers.”

Indiana has around half the population of Illinois. But its building new homes at a rate more than 60% higher.

For nearly five decades, Illinois issued more permits for single-family homes than Indiana – with a blip in 1980 when Indiana built more homes. That was to be expected because Illinois has nearly double the population.

But the situation flipped in 2009, and during the past decade Indiana issued 30,508 more home permits than Illinois.

Illinois averaged around 40,000 permits a year prior to the Great Recession. In 2018 Illinois saw that plunge to only 10,000 permits issued for new single-family homes, according to the U.S. Census Bureau. That 75% plunge is the worst decline of any state in the nation. Indiana, Michigan, Wisconsin and Missouri have all seen more single-family home construction than Illinois for three years running.

Even when including permits for new multi-unit housing, Illinois’ drop is still the worst in the nation, declining to 21,500 units in 2018 from a yearly average of 58,100 prior to the recession. In 2018, Indiana saw nearly 21,500 new units with a population half as large. Colorado saw 42,600.

What’s to blame for so few new homes in Illinois? One of the biggest factors is sky-high property tax bills, two major income tax hikes during the past decade and working-age population loss that has caused demand for Illinois homes – and therefore housing prices – to remain weak.

Property taxes are a significant pain point in Illinois, where homeowners suffer the second-highest tax bills in the country. Unfortunately, Illinois politicians have for years failed to confront the root cause of tax increases: Pension costs.

Until Gov. J.B. Pritzker and other state leaders build support for constitutional pension reform, Indiana and other neighbors will continue sawing away at Illinois’ demand for homes.

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