INDIANAPOLIS – Part of Indiana’s new budget may save you money: state lawmakers have accelerate an income tax cut approved last year.
The full income tax cut was supposed to take effect in 2029 as long as the state hit certain revenue benchmarks. Now those requirements have been removed, and the full tax cut has been moved up to 2027.
Indiana Republican lawmakers who worked on the budget have said they believe the state can afford to cut income taxes more quickly for Hoosiers.
It will make Indiana’s income tax rate among the lowest in the nation for states that have one, according to David Ober, vice president of taxation and public finance for the Indiana Chamber of Commerce.
“The individual income tax rate, you think of individuals, but this tax rate would also impact business owners,” Ober said.
That’s because roughly 500,000 business owners in the state have to pay that tax on the income their business earns, he said.
“This will be a great benefit to those homegrown businesses that are mom and pop shops around the state,” Ober said.
Lawmakers approved the tax cut in 2022 when the income tax rate was 3.23%. This year, it dropped to 3.15%.
The income tax rate will continue to decrease gradually each year until 2027 when it falls to 2.9%.
By that time, the total tax cut will save $165 per year for Hoosiers making a $50,000 income.
“When you cut taxes for households, that gives them some free cash flow, so they spend some of it and they save some of it,” said Philip Powell, business economics professor at the IU Kelley School of Business.
A separate law passed this session creates a commission to study whether Indiana should end its income tax altogether.
Although that may make Indiana more competitive for new workers, businesses and retirees, there are several factors lawmakers need to consider, Powell said.
“If we get rid of the income tax, we might find ourselves during recessionary times having to cut the budget even more,” Powell explained. “So there are risks here.”