Wednesday, October 17, 2018
New Analysis: Indiana’s Tax System
is Among the Dozen Most Regressive in the Country
Low-Income
Hoosier Taxpayers pay 53% more as a share of their income in state and local
taxes than top 1% of taxpayers
By Andrew Bradley, Senior Policy Analyst
 |
Source:
Institute on Taxation and Economic Policy
|
A new study released today by the Institute on Taxation and Economic Policy
(ITEP) and the Indiana Institute for Working Families finds that Indiana’s
state tax structure is among the dozen most regressive in the nation, with the lowest-income
Hoosiers paying 53% more as a share of their income in state and local taxes compared
to the state’s wealthiest residents.
The
study, Who
Pays? A Distributional Analysis of the Tax Systems in All 50 States evaluates all
major state and local taxes in each of the 50 states, including personal and
corporate income taxes, property taxes, sales and other excise taxes. The
analysis reveals that, in addition to being among the dozen states with the
most-regressive state tax structures, Indiana taxes its low-income residents at
the 8th-highest rate in the country, and second-highest in the
Midwest. ITEP finds that the lowest-income 20 percent of Hoosiers contribute
12.8 percent of their income in state and local taxes—considerably more than
any other income group in the state.
"The wealthiest Hoosiers have benefited most
from our growing national economy. It’s not unreasonable to ask the
highest-income residents and corporations to pay their fair share of state and
local taxes,” said the Indiana Institute for Working Families’ Senior Policy
Analyst Andrew Bradley. “Combined with lower wages compared to our Midwestern
neighbors, Indiana’s regressive state tax structure is fueling increased inequality
and prevents working Hoosier families from having the same economic
opportunities that previous generations used to rely on,” Bradley said.
Indiana’s
state tax system is regarded as regressive because the lower one’s income, the
higher one’s effective tax rate. This is in part because Indiana, like most
other states, relies more heavily on sales and excise taxes to raise revenue, has
a flat personal income tax, and offers relatively few tax benefits for low-wage
workers. The lowest-income Hoosiers who earn $11,400 on average per year, pay
12.8% of their incomes in state and local taxes, the 8th-highest
taxation rate in the U.S. on the lowest earners, and 2nd-highest in
the Midwest. Among the next-lowest quintile of Hoosier taxpayers, with an
average income is $27,800, state and local taxes are the 6th highest nationally
and, on average, account for 11.3% of their income. But in comparison, the
wealthiest 1% of Hoosiers, with an average income of $1 million, contribute
just 6.8% of their income in state and local taxes. Compared to the rest of the
country, Indiana’s state and local tax levy on the top 1% is the 24th
lowest (or 28th highest).
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| Source: Institute on Taxation and Economic Policy |
To pay for state and local government services, Indiana derives 42% of its tax revenue from sales and excise taxes—significantly above the national average of 35 percent.Sales and excise taxes are a particularly regressive burden on working families, taking up 7.1% of family incomes for low-income Hoosiers, compared to just 1% for the wealthiest earners.
The new ‘Who Pays?’ analysis follows the Institute’s August report ‘The Status of Working Families in Indiana, 2018’ which found the wealthiest Indiana earners have received an extra $2,446 from combined state income, corporate, and fuel tax changes since 2012, while taxes for the bottom 60% of middle class and working families have increased by an average $36. The report found these upside-down state tax changes have occurred in an era when inequality increased at a faster rate in Indiana than in the Midwest and the U.S. overall, while Hoosiers’ hourly wages fell from near the middle of the Midwest in 2001 to second-lowest by 2017.
The new ‘Who Pays?’ analysis follows the Institute’s August report ‘The Status of Working Families in Indiana, 2018’ which found the wealthiest Indiana earners have received an extra $2,446 from combined state income, corporate, and fuel tax changes since 2012, while taxes for the bottom 60% of middle class and working families have increased by an average $36. The report found these upside-down state tax changes have occurred in an era when inequality increased at a faster rate in Indiana than in the Midwest and the U.S. overall, while Hoosiers’ hourly wages fell from near the middle of the Midwest in 2001 to second-lowest by 2017.
While
Indiana should be praised for having a state Earned Income Tax Credit, this
year the General Assembly voted to reduce the value of our EITC, effectively raising taxes on
low-income working families by $5 million annually starting in 2027. Starting
in 2019, Indiana can begin making its tax system fairer by recoupling the state
EITC to the federal credit and holding low-income working families harmless to
EITC changes. To make long-term progress, Indiana needs to reverse the changes that
have made the state’s tax system even more regressive and which exacerbate
inequality and income problems for working Hoosier families. Indiana could also
take proactive steps to make its tax structure more working family-friendly,
including joining the 25 states with a child
and dependent care tax credit.
ITEP’s
new report “Who Pays?” and data for Indiana can be found at www.whopays.org, while IIWF’s ‘Status of Working Families in Indiana, 2018’ can
be found at www.incap.org/iiwf/2018status.html.
