Morton Marcus
The most recent Indiana legislature decreed a Study Committee to examine Indiana’s tax policy. What a huge task that is! What’s the appropriate balance among the various taxes and fees charged by the state? How do state taxes relate to local taxes? Which level of government should control the use of those taxes?
One area this committee will examine is the individual income tax. Prepare thyself for that which follows!
Seven states have no personal income tax. In Alaska, Texas and Wyoming carbon-laden products (oil, gas, and coal) provide healthy revenues. Then there’s Florida and Nevada where they tax people who choose to singe their skin or be skinned by gamblers.
Indiana is one of 11 states without a graduated income tax.
As befits flat earth people, we have a flat 3.15% income tax rate, without regard to the amount of income earned. Some think it’s “fair,” even morally superior to a graduated tax rate as incomes rise.
What do other states do? Two states do not tax income from working. New Hampshire taxes at 4%, but only income from interest and dividend payments; Washington levies a 7 percent tax on capital gains, ignoring other sources of income.
Nonetheless, nothing In Indiana’s income tax is simple.
A person filing alone gets a $1,000 exemption ($2,000 filing as a couple and another $1,000 for each dependent). A Hoosier family of four, with an income of $50,000, pays $1,449. That’s 3.15% of $46,000 because the first $4,000 is exempt from the tax.
There are many deductions and credits exhibiting the generosity (bias) of legislators. There are deductions for renters and home owners. A ream of deductions are specified for those who have served in the military, but none for teaching K–12 grades.
Indiana offers deductions for education expenditures associated with your child’s private school or homeschooling. And there is a credit for gifts to Indiana colleges, but not Indiana’s public libraries.
A family of four in Michigan with $50,000 in income, would have an exemption of $5,000 per person and pay 4.25% ($1,275) on $30,000 of taxable income.
In 30 states and the District of Columbia incremental income is taxed at increasing rates. In Wisconsin, where there is a standard deduction of $23,620 for a couple, plus personal exemptions of $700 for each of the four in that family, the tax bill on $50,000 would be $892 (3.54% of the first $18,420 after deductions and exemptions, plus 4.65% of the final $5,160)
Complex? Yes. Deductions, exemptions and credits, far beyond those mentioned here, are chosen and manipulated to provide an appearance of equity. Some give a nod to the ability to pay. Others are merely demonstrations of political patronage and power.
We’ll see what our studious legislators come up with next.
Mr. Marcus is an economist. Reach him at [email protected]. Follow him and John Guy on Who Gets What? wherever podcasts are available or at mortonjohn.libsyn.com.
