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- Indiana Tax Conference: If You're Not At The Table, You're On The Menu
Friday, June 20, 2014
By Derek Thomas
On Tuesday, June 24th, Governor Pence will hold a closed-to-the-public ‘Tax Competitiveness and Simplification Conference’ at the Indiana Government Center. According to Indiana Law Blog, the event leans heavily on “outside sources” and will feature academics, national think-tanks, local law firms, large CPA firms, state and local officials, the Indiana Chamber of Commerce and Indiana Manufacturers Association.
Because work is the key to economic self‐sufficiency, policymakers should be commended for ensuring that Indiana is a business‐friendly environment. However, the last decade has disproportionately been defined legislatively by picking winners in Indiana’s economy through lopsided tax-cuts for high-income earners and profitable corporations. Yet, according to The Times of Northwest Indiana, "Indiana came in dead last [in 2013] among surrounding states in total facilities or expansions per capita...and was second to last after only Minnesota in the 12 U.S. Census Bureau-designated Midwestern states". Moreover, in the past several years, Indiana has seen increases in poverty-wage jobs at a rate faster than all neighboring states and the national average. And over the last decade, Hoosiers themselves have experienced some of the largest declines in household incomes, swelling of inequality, and increases in impoverished and low-income individuals in the nation. Reworking these low-road growth strategies of low-taxes and light-regulations into transformational strategies to improve the economic health of working families will be, perhaps, the greatest challenge for policymakers. Because working-families haven’t had a representative seat at the table, here are some suggestions we’ve submitted on their behalf - a toolbox of family-friendly tax-policies to raise the standard of living for all hard-working Hoosiers.
Ensure That Profitable Multi-National Corporations Are Paying Something Resembling The Legal Rate – When large companies are able to dodge almost all state income taxes on their U.S. profits, the inevitable impact is a tax shift away from big corporations and onto everyone else, including small businesses and middle-income families. Creating a level playing field between large businesses and “mom and pop” businesses should be a priority for state policymakers—but that is best done by repealing harmful tax giveaways, not through reducing corporate income tax rates.
INDIVIDUAL INCOME TAX
Provide Relief To Those With The Largest Burdens – To reflect the realities of struggling working-poor families, and to help more Hoosiers close the gap between stagnant wages and the cost of the most basic needs. The most recent 3% reduction in the states personal income tax was regressive in its distribution. More than half (55%) of the 3% cut will flow to the best-off 20% of Indiana residents, while the bottom 60% will see 23% of the cuts, and the poorest 20% will receive just 2% of the cut. Currently, Indiana ranks as the 9th most regressive tax system in the nation (with the 7th highest taxes on the poor). Combining all of the state and local income, property, sales and excise taxes, the average overall effective tax rates for Hoosiers, by income group are: 12.3 percent for the bottom 20 percent; 10.8 percent for the middle 20 percent; 5.4 percent for the top one percent. According to the Institute on Taxation and Economic Policy, if the 3% cut had been in effect in 2012: the poorest 20% of Hoosiers would see an average tax cut of just $6 per year; the middle 20% of Hoosiers would receive a tax cut of $33 annually and; the top 1% of taxpayers would see cuts averaging over $694 per year.
Increase Indiana’s Tax Threshold And Personal Exemptions — Currently Indiana is one of 15 states that taxes below the Federal Poverty Guidelines ($22,350 for a family of four in 2011). By enacting a $25,000 no‐tax floor, for example, families making below that amount owe no income taxes, but once income surpasses that level the tax is owed on all taxable income from one dollar up. When the Indiana income tax was enacted in 1963, the basic personal exemption was set at $1,000 per family member — where it remains today. Since then, inflation has eroded the value of $1,000 substantially.
Increase The State’s Earned Income Tax Credit From 9% To 25% Of The Federal EITC —The Earned Income Tax Credit (EITC) is a federal tax credit for low‐ to moderate‐ income working individuals and families, to which the state EITC is indexed. The credit reduces the tax burden placed on workers by offsetting payroll and income taxes. The credit is also refundable –meaning that if the credit exceeds the amount of taxes owed, the difference is given back to the worker. Given the current status of working families, a stronger EITC may be more important to working families than ever before, particularly when low‐income workers are taxed in a regressive system.
Eliminate the Marriage Tax Penalty (Recouple The State EITC With The Federal EITC Formula) – During the 2011 Session the budget bill HB 1001 decoupled Indiana’s State EITC eligibility guidelines from the federal guidelines originally expanded under the recovery act. As a result, those claiming Indiana’s EITC no longer benefit from the larger EITC payment to families with three or more children. Also, they no longer benefit from the reduction of the “marriage penalty,” which started the income phase out at a higher income level for married couples. Marriage penalties are not only regressive, but encourage cohabitation over marriage for low-income individuals.
SALES AND USE TAX
Expand the Sales Tax Base to Services — A less regressive way to increase state sales tax revenues in a more equitable manner would be to expand the sales tax base to include services, since low‐income taxpayers pay more in sales taxes than those of higher incomes, who tend to purchase more services. For example, if an individual purchases cleaning supplies to clean their home, they pay sales tax. However, if the same individual hires a cleaning service, they do not pay any sales tax.
Outreach to Employers on the Work Opportunity Tax Credit to Increase Employment Opportunities for Populations Who Face Significant Employment Barriers — The Work Opportunity Tax Credit (WOTC) is a Federal tax credit for private sector businesses for hiring individuals from nine target groups who have consistently faced significant barriers to employment.
Smooth Out “Cliffs” in Childcare — At the same time that low-income Hoosiers are burdened by paying the highest effective tax rates, they also pay some of the highest effective marginal tax rates - "the percentage of an additional dollar of earnings that is unavailable to a worker because it is paid in taxes or offset by reductions in benefits from government programs". . This occurs when a small increase in income leads to a large loss of public resources – also known as the “cliff effect” phenomenon. At a wage of $8 per hour, a single mother with one preschool age child and one school age child, with the support of federal and state tax credits, SNAP, public health insurance, and a child care subsidy is self-sufficient. The first significant loss in net resources occurs when the participant loses SNAP benefits between the wages of $11.50 and $12.00 per hour—a total annual net resource loss of $2651—nearly 11 percent of annual income. Most dramatically though is the “cliff” that occurs as child care subsidies are lost between the wages of $15.00 and $15.50 per hour—a total net resource loss of $8,454—a painful 25 percent loss in annual resources as a result of a $0.50 raise. The unintended consequence of this design either leads to a disincentive towards economic mobility, or leads to a situation in which the parent or guardian is working harder, but is financially worse off – effectively trapping families into poverty. By smoothing out the “benefit cliff”, policymakers could begin restore a system that rewards hard work.