George Harrison lamented the high tax rate on the British uber-rich in the Beatles’ 1966 song, "Taxman." But the wealthiest Indiana taxpayers filing state returns ahead of the deadline earlier this month had little reason to complain. An analysis of state tax systems shows the wealthiest Hoosiers pay just 6.8 percent of their income in state and local taxes; the lowest-income Hoosiers pay 12.8 percent.
Those differences serve to make Indiana’s tax system among the most regressive in the nation, according to the study by the left-leaning Institute on Taxation and Economic Policy and the Indiana Institute for Working Families.
"Who Pays? A Distributional Analysis of the Tax Systems in all 50 States" evaluates major state and local taxes in each state, including personal and corporate income taxes, property taxes, sales and excise taxes. Indiana’s low-income residents are taxed at the eighth-highest rate in the country; second-highest in the Midwest.
Indiana’s sales and excise tax rates are largely to blame. When the Indiana General Assembly overhauled the state’s property tax system in 2008, it shifted many costs formerly funded by local property taxes to the state sales tax, increasing the sales tax rate by 17 percent. Indiana collects 42 percent of its tax revenue from sales and excise taxes – well above the 35 percent national average.
"Indiana’s state tax system is regarded as regressive because the lower one’s income, the higher one’s effective tax rate," according to the Indiana Institute for Working Families. "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."
As a result, families in the lowest 20 percent of wage-earners spend 7.1 percent of their family income on sales and excise taxes while the top 1 percent of wage-earners spend just 1 percent of family income on sales and excise taxes. Relative to their incomes, young families are likely to be buying more goods subject to sales and excise taxes: clothing, furniture, gasoline and more.
"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," according to the institute.
The burden is greatest on those lower-income households, but all Hoosiers are affected. When families spend more of their income on taxes, they have less to spend elsewhere in the state’s economy. The taxman’s disproportionate bite on working families shouldn’t be overlooked when policymakers weigh the next corporate income tax cut.
