Pence Proposes 10% Cut In Indiana's Income Tax Rate

Republican gubernatorial candidate Mike Pence announced his first major state finance proposal today. He wants to cut the individual income tax rate by 10%, providing the largest income tax cut in Indiana history. Pence would reduce the individual income tax rate from 3.4% to 3.06%. The average family of four would save about $228 a year in taxes. A small business owner with a net income of $300,000 would save about $1,000 a year.

"The time has come to cut taxes for every Hoosier, in the city, in the factory and on the farm," said Pence. "We will make Indiana the most attractive place in the Midwest to start a business, grow a business, or get a job."   

"I believe strongly that when government has too much money, it needs to return that money to taxpayers who first earned it," said Pence. "Thanks to Governor Daniels, we are in such a positive fiscal condition that we can afford to do that on a permanent basis."

Pence says that the tax cut would reduce state revenues by about $533 million a year, but he says Indiana would benefit from having the lowest effective tax burden in the Midwest. Even with the tax cut, Pence says that he believes tax revenues will exceed expenditures by a little more than a billion dollars over the next two years. Indiana's current budget surplus is about $2 billion if you discount the fact that the state's public pension systems are grossly underfunded and the more than $2 billion the state borrowed from the federal government after the state's unemployment insurance trust fund went broke at the beginning of the recession that started in 2008. Current Indiana law already requires the state to refund to taxpayers half the surplus in excess of 12.5% of appropriations and half of that amount to paying down the state's unfunded pension liability.

Pence's Democratic opponent, John Gregg, welcomed Pence to the tax-cutting argument that he has already put forward. Gregg earlier proposed the elimination of the sales tax on gasoline, which he says would save the average family between $261 and $522 annually, and result in a loss of state revenues of about $540 million. Gregg told the Star's Mary Beth Schneider that his tax cut plan was "more significant" than Pence's tax cut plan.

I'm all in favor of keeping taxes as low as possible, but I wonder how wise Pence's and Gregg's tax cut proposals are at this time. The surplus can disappear just as quickly as it appeared if the recession takes a double dip as it appears it may, and the surplus really just exists on paper by excluding the state's outstanding obligations. Gov. Daniels will also have spent all of the money realized from the leasing of the state's toll road by the end of his term and the state will face difficult challenges in keeping up with its transportation needs.