The new budget plan in Indiana includes tax hikes and promises future pain after a late revenue report showed a big spending gap.
Legislative leaders and the governor announced a budget agreement Wednesday and rushed it through in the middle of the night early Friday morning.
The plan will hit Hoosiers with tax hikes that are likely to miss revenue projections and cause future headaches for taxpayers.
Seeming panic over late revenue numbers resulted in lawmakers putting together a series of tax hikes to raise around $800 million, along with $1 billion in spending reductions, to cover the budget hole.
The targets of the tax hikes seem like they were selected based on their political convenience, as tobacco products were singled out. The tax on a pack of cigarettes was raised by 300%. Cigar taxes were hiked. Taxes on vapes would go up as well, making live-saving alternatives to smoking more costly.
A major pitfall of these hikes is that they are likely to miss revenue projections, as smuggling picks up and people try to find alternatives to paying the high tax rates. Indiana would have the highest cigarette tax in the region. Neighboring Illinois already struggles with lost revenue due to smuggling. Over one quarter of all cigarettes sold there are illicit.
Only three out of 32 state tobacco increases between 2009 and 2013 met tax revenue estimates.
Criminal smuggling networks also engage in human trafficking & money laundering. The US State Department has explicitly called tobacco smuggling a “threat to national security”.
Worse for those seeking revenues, an analysis from Mackinac Center shows such punitive rates can even reduce tax collections.
Prospects for tax reform in the future are now more gloomy than they should have been after what was largely a landmark session on tax relief.
Before the revenue report led to the panic and tax increases in the budget, Indiana lawmakers had accomplished a great deal on tax policy.
Both chambers passed, and Governor Braun signed, legislation (SB 451) to gradually eliminate the state income tax as the government takes in more revenue than needed.
This major achievement means eventually Indiana’s income tax will phase out. Though, unreliable revenue mechanisms like those passed in the budget make it more difficult to hit revenue trigger levels.
After heated debates on property taxes, the legislature avoided pitfalls that simply grow local government and passed a plan to limit the property taxes locals can impose on their residents. Indiana also passed universal school choice in the budget.
