Capital Comments

How Low are Indiana’s Taxes?

Thursday, October 24th, 2019

We’d like our taxes to be low. Sure, we value the schools, police and fire protection, roads and parks and libraries that our taxes support. But we all like a bargain. We’d like to have all those things at a low, low price.  How low are taxes in Indiana?

The Census Bureau provides a great source for tax revenue numbers in each state, called “State and Local Government Finances.” The bureau surveys the states each year to collect the data. It takes a while to add them up, though, so the most recent figures are from 2016. To compare taxes, let’s divide tax revenues by income, to see what share of income people in each state pay to each tax.

Start with property taxes. Indiana people and businesses paid 2.2% of our incomes to local property taxes in 2016, which ranked 42nd highest among the states. Indiana property taxes are low.

We can confirm that with another Census data source, the American Community Survey. One survey question asks how much people pay in real estate taxes. The median or middle value among homeowners sampled in Indiana was $1,214, which was also 2.2% of median household income. That ranked 44th highest among the states.

That’s just the property taxes paid by homeowners, which is less than half the total. So we can guess that property taxes on businesses rank a bit higher. But still low.

Indiana’s state sales tax rate is 7%, which is tied for second highest in the country, after California’s 7.25%. But 38 states also have local sales taxes, which are local rates tacked on to the state rate. Indiana doesn’t. Add in the average local rates for all the states, and Indiana’s 7% sales tax ranks 21st.

Of course, the tax base matters too. How much of our spending is taxed? Indiana taxes goods aside from groceries, plus utilities and rentals. Other states tax differently. So again, let’s use the Census Bureau’s Government Finances data to get the definitive ranking. Indiana people spent 2.5% of their incomes on state and local general sales taxes, which ranks us 19th. That implies that we tax a slightly larger share of all sales than is typical, since our tax rate ranks 21st. Our sales taxes are in the top half, but nowhere near the very highest.

It’s no surprise that we’re low on property taxes but higher on sales taxes. We’ve been moving in that direction for almost 50 years. Three times we’ve increased the state sales tax to provide property tax relief. In 1973 we increased the sales tax from 2% to 4% in order to provide a 20% property tax credit. In 2002 the sales tax was raised from 5% to 6%, partly to provide a homeowner property tax credit. And in 2008 we increased the sales tax to 7%, to replace the general fund property tax for school districts.

The individual income tax is the third big tax. Indiana has a flat rate of 3.23%, but we’re one of the few states with local income taxes. In only nine states do local governments collect significant revenues from income taxes.

In 2016, according to Government Finances, Indiana people paid 2.3% of their incomes to state and local individual income taxes. That ranked us 29th, toward the middle of all the states.

All the other taxes combined raise less money than each of the big three. Still, we have the 18th highest corporate income taxes as a percentage of income. The corporate tax rate is lower now than it was in 2016, and it will be reduced some more in coming years, so that rank is probably falling. If we add up all the excise taxes (motor fuel, tobacco, alcohol and so forth), we rank 40th.

So, we’re low on property taxes, higher on sales taxes, middling on individual income taxes, higher but falling on corporate income taxes and low on everything else. Altogether, Indiana people paid 8.9% of their incomes in state and local taxes in 2016. That’s lower than any of our neighbors. And it ranks 34th among all the states.

Indiana taxes are low. Not rock bottom, but toward the lower third of the United States.

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Author: Larry DeBoer, ldeboer@purdue.edu
Editor: Charles Wineland, cwinelan@purdue.edu
Category: Agricultural Economics, Extension

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