INDIANA – Republican lawmakers are preparing to pass another round of potentially deep income and business tax cuts this week in House Bill 1002. They’ve spent much of the past decade aggressively doing similar cuts, but economic experts question whether any of its paid off for Hoosiers.
While the cuts from the last decade have benefited businesses, the state’s residents have gotten poorer when compared to the country as a whole, and more than half of Indiana’s counties lost population between 2010-2020. The cuts fell short in important goals like attracting high-wage industries and diverting money away from the quality of life initiatives, like improving education and making college tuition cheaper, economists say.
K-12 education spending hasn’t kept up with inflation, despite the often-touted spending increase during the 2021 budget cycle. Likewise, since 2010 state and local governments added only $17 million to the budgets of colleges and universities but spent an additional $5 billion on business tax incentives, according to a study from Michael Hicks, an economics professor at Ball State University.
“A number of Americans have long believed that tax cuts spur economic activity, but that’s not what economists have been saying for 50 years,” Hicks said. “What economists say is all things being equal, tax cuts will cause better capital growth or people might migrate because of it, but all things are never equal.”
What governments spend money on, and how much, matters too, Hicks said. Quality of life things that tax money can buy, like good schools, parks, and career training programs are not only important to residents, but also to businesses.
Republicans say their tax cuts have generated economic growth. But, they’re looking at different metrics, not the average pay of Hoosiers or inbound migration to the state.
Larry DeBoer, a retired economist at Purdue University, estimated Hoosier homeowners likely paid 11% less on property taxes in 2021 than they would have without those tax caps. Local governments likely lost out on an estimated $1.1 billion in 2021 alone that they use for services such as building and repairing roads and parks.
To be sure, Republicans have increased some taxes as well, and those have largely been regressive taxes that shift the tax burden from higher-income to middle and low-income Hoosiers. In 2017, for instance, after years of cutting business-related taxes and appealing an inheritance tax on wealthy estates, Republicans increased the gas tax by 10 cents per gallon to raise $1.2 billion per year for road and upkeep construction.
According to the Tax Foundation, Indiana now has the ninth-best state business tax climate in the country, surpassing all neighboring states. When it comes to property taxes, Indiana is ranked No. 1.
But as Hicks and other economists point out, that hasn’t necessarily translated to economic growth. A report designed to help Indiana grow in a post-pandemic world from the Metropolitan Policy Program at Washington D.C.-based Brookings Institute reached similar conclusions. While the median income increased by 0.6% nationwide between 2007 and 2019 when adjusting for inflation, Indiana’s gains were just half that. Likewise, the state’s employment growth lagged the national average in those same years.
For a state that has spent more than a decade making it cheaper for businesses in Indiana, some Hoosiers still struggle with low wages at those businesses.
Many factory jobs start at less than $20 an hour, not enough to raise a family and barely enough to keep up with rising rent and housing prices.
Other studies from around the country paint similar pictures. In Kansas, for example, where lawmakers reduced taxes on both businesses and personal income for high earners, there was no increase in private sector employment, according to one study.
Tax policy is just one factor in determining the wealth of a state, economists say. Others include climate, labor force, and location.
But even so, it’s become apparent to Aaron Renn, an economic development and urban analyst who recently wrote a scathing journal article about the state’s economic plan, that continuing the state’s decades-long pursuit of cutting taxes for businesses won’t make the state more prosperous. He called certain cuts a giveaway.
“Ultimately, it shows me that the state government is completely out of ideas,” Renn, a former senior analyst at the conservative think tank Manhattan Institute, said of the proposed tax cuts. “Indiana is getting poorer, and all these guys think to do is cut taxes.”
If one of the goals of cutting more business taxes is to increase well-paying jobs to the state, the policy isn’t working, he said.
Renn noted that Indiana lost a number of manufacturing businesses to other states, including GM’s plans to expand in Michigan and Indianapolis-based Eli Lilly Co., which announced plans in January to build a plant in North Carolina.
Some of the cases can be attributed to the nicer climate in southern states, Renn said, but businesses like Lilly are also looking for a skilled labor force and a good quality of life for their employees. So, instead, Indiana’s tax policies have attracted low-wage employers, like warehouses, because those are the businesses searching for savings.
There’s proof of that: between 2009-2019, the biggest category of employment growth in Indiana was for people with less than a high school diploma.
Democrats argue instead of cutting taxes, the state could remedy some of Indiana’s economic woes by investing more in education and other workforce initiatives in an attempt to drive Indiana’s level of educational attainment. That could mean increasing the amount spent on K-12 education or colleges, offering more debt relief and education grants, or paying for Pre-K.
Already, House Democrats say the state will lose about $1.05 billion in 2024 because of tax cuts under Daniels and Pence. That money, most of which benefited wealthy Hoosiers, could have been spent elsewhere, they say, such as for education, transportation, or pre-k, or to provide tax cuts on diapers.
Indiana’s educational attainment problem is clear: between 2010-2019, Indiana had its biggest drop both in the number and percentage of residents with a bachelor’s degree, since the 1940 census.
Just like the tax cuts of the past decade or so, not all economists are sold on the latest idea that House Republicans and Holcomb are pitching.
Lowering the income tax, for example, does amount to a small pay raise for Hoosiers but isn’t a guarantee that more workers will want to live in Indiana. After all, a hundred bucks a year only goes so far.
In fact, in Indiana, more employment growth is occurring in parts of the state that have a higher combined tax rate, like in Hamilton County and Indianapolis, according to data from Hicks. It’s a similar story in Texas.
And likewise, local governments depend on those equipment taxes lawmakers are considering reducing. Removing those would further reduce the ability for locals to create places people outside of Indiana want to move to, economists say.