INDIANAPOLIS – Indiana lawmakers have advanced a bill to study the possibility of ending the state income tax.
During a committee hearing Tuesday, State Sen. Travis Holdman (R-Markle) said he believes Indiana’s finances allow the state to consider changes to its tax structure.
“In some five to six years, we will have our pre-96 teacher retirement fund liability paid off,” Holdman said. “And rather than wait until we get to that point, be rushing to reform our taxation laws in the state of Indiana, we thought it would be best to get a head start on that and put together a two-year study.”
Holdman has introduced Senate Bill 3, which would create a task force to study Indiana’s tax laws and the feasibility of eliminating the state’s income tax. The bill passed unanimously out of committee Tuesday.
State Sen. Ryan Mishler (R-Mishawaka) added an amendment that would also require the commission to examine whether homestead property taxes should be eliminated.
Mishler acknowledged that tax cut alone would cost local governments $2.8 billion statewide.
“We’d have to figure out a way to backfill that,” Mishler said. “But not only does it give everybody one free property, I think it alleviates all those issues we come back every year and try to adjust.”
State data shows income taxes make up more than a third of Indiana’s annual revenue.
Bridget Stomberg, associate professor of accounting at the IU Kelley School of Business, points out in states without income tax, other taxes are usually higher.
“For example, in Tennessee, they get about 40% of their state tax revenue from the sales tax, and they have one of the highest sales tax rates in the country,” Stomberg said.
And a higher sales tax could have a bigger impact on low-income families, she added.
That’s why some lawmakers say they’re concerned Indiana could see a similar outcome if its income tax is eliminated someday and want to see the task force have a different focus.
“I think the larger question to me that is much more important than just replacing one [tax] mechanism with another is the quality of life and services that we offer to all Hoosiers,” said State Sen. Fady Qaddoura (D-Indianapolis).
Under the bill, the study would need to be completed by December 2024, which is shortly before lawmakers write a new state budget in 2025.
The bill now heads to the Senate floor.