Indiana tax cuts: Economists say Indiana, wages falling behind – IndyStar

Growing up, Maria Millbrooks watched her mom take the bus before the sun rose to her first job and return home long after the sun set.
“My whole life, she worked two jobs,” she said. “It really hurt my feelings, so I set goals and ambitions for myself to be a registered nurse.”
At 35, she’s still pursuing the dream. As a nursing assistant, Millbrooks makes about $22 an hour, barely enough to raise her two kids. She could double, or even triple, her salary with a nursing degree. 
All she needs, like a lot of middle class families these days, is some financial help with tuition.
“If the government offered more grants, I’d be able to do it,” she said. “That would mean everything to me.”
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Republican lawmakers are preparing to pass another round of potentially deep income and business tax cuts this week in House Bill 1002. They’ve spent much of the past decade aggressively doing similar cuts, but economic experts question whether any of its paid off for Hoosiers like Millbrooks. 
While the cuts from the last decade have benefited businesses, the state’s residents have gotten poorer when compared to the country as whole, and more than half of Indiana’s counties lost population between 2010-2020. The cuts fell short in important goals like attracting high wage industries and diverted money away from quality of life initiatives, like improving education and making college tuition cheaper, economists say.
K-12 education spending hasn’t kept up with inflation, despite the often-touted spending increase during the 2021 budget cycle.  Likewise, since 2010 state and local governments added only $17 million to the budgets of colleges and universities but spent an additional $5 billion on business tax incentives, according to a study from Michael Hicks, an economics professor at Ball State University.
“A number of Americans have long believed that tax cuts spur economic activity, but that’s not what economists have been saying for 50 years,” Hicks said. “What economists say is all things being equal, tax cuts will cause better capital growth or people might migrate because of it, but all things are never equal.”
What governments spend money on, and how much, matters too, Hicks said. Quality of life things that tax money can buy, like good schools, parks and career training programs are not only important to residents, but also to businesses.
Republicans say their tax cuts have generated economic growth. But, they’re looking at different metrics, not the average pay of Hoosiers or inbound migration to the state.
Crawfordsville Republican Rep. Tim Brown, who has been the lead budget writer in the House since 2012, said the number of new companies and investment coming to Indiana today simply wasn’t happening in the ’80s and ’90s.
“Starting in the 2000s and 2010s, we were getting companies coming in to spend money to build buildings and build places to work, and then that means places to live,” Brown said. “Our tax climate has offered predictability and stability to business, which is I think what they wanted.”
The statistics bare out. From 2005 to 2020, the number of applications for new businesses in the state nearly doubled to more than 68,000, according to census data. 
Likewise, in his annual State of the State speech, Gov. Eric Holcomb, a Republican, boasted about Indiana’s unemployment rate — the lowest it’s been in 21 years —  and instead chose to compare Indiana’s growth only to its neighbors, rather than the country as a whole. From 2015-2020, a more narrow timespan, Indiana’s GDP growth and personal income growth surpassed all of its neighbors.
It’s worth noting that for Republicans, cutting taxes also is about more than just generating economic development; it’s also centered around a philosophical belief that people and businesses should keep their money.
“The state doesn’t need the amount of money coming in, and so it’s your money,” Brown told IndyStar. “It’s important that people keep their own money, and then they choose where to spend it.”
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When former Gov. Mitch Daniels took office in 2005, he was the first Republican to do so since the 1980s, bringing with him a different fiscal approach to the Statehouse and the start of billions of dollars worth of tax cuts. Those tax cuts haven’t necessarily led to more wealth and career opportunities for Hoosiers, some economists and researchers say.
Among a host of government reforms, he lowered corporate income taxes and capped Hoosier property taxes, which in some cases amounted to a local tax cut.
Larry DeBoer, a retired economist at Purdue University, estimated Hoosier homeowners likely paid 11% less on property taxes in 2021, than they would have without those tax caps. Local governments likely lost out on an estimated $1.1 billion in 2021 alone that they use for services such as building and repairing roads and parks.
But it was Daniels’ successor, former Gov. Mike Pence who is better known for sweeping state tax cuts when Republicans had control of both legislative chambers. He reduced the tax on income, corporations and banks and eliminated the inheritance tax. In fact, former President Donald Trump touted the tax cuts under Pence as a national model.
“Indiana is a tremendous example of the prosperity that is unleashed when we cut taxes and set free the dreams of our citizens,” Trump said in 2017. “This state has claimed a powerful competitive edge built on low taxes and less regulation.”
To be sure, Republicans have increased some taxes as well, and those have largely been regressive taxes that shift the tax burden from higher income to middle and low-income Hoosiers. In 2017, for instance, after years of cutting business-related taxes and appealing an inheritance tax on wealthy estates, Republicans increased the gas tax by 10 cents per gallon to raise $1.2 billion per year for road and upkeep construction.
Daniels defended the tax cuts in an interview with IndyStar. Tax cuts aren’t some panacea, he said, but they certainly help bring people to the state. 
“We were on nobody’s list of the best places to do business,” Daniels said. “And now we’re on everyone’s list and our tax system was just one reason that we made that change.”
He added that while Indiana’s wages may not be keeping up with the rest of the nation, the cost of living here is lower. 
Holcomb, too, praised the economic policies of his predecessors when he unveiled support for broad tax cuts last week, including a reduction of the income tax rate from 3.23% to 2.9%, a savings of nearly $100 for the average Hoosier per year by the time it’s phased in.
“Since 2005, Indiana has demonstrated strong stewardship of taxpayer dollars while constantly finding ways to responsibly return those dollars to the people and businesses that have helped our state grow —proving that cutting taxes can increase revenue,” Holcomb wrote.
According to the Tax Foundation, Indiana now has the ninth best state business tax climate in the country, surpassing all neighboring states. When it comes to property taxes, Indiana is ranked No. 1.
But as Hicks, and other economists points out, that hasn’t necessarily translated to economic growth. A report designed to help Indiana grow in a post pandemic world from the Metropolitan Policy Program at Washington D.C.-based Brookings Institute, reached similar conclusions. While the median income increased by 0.6% nationwide between 2007 and 2019 when adjusting for inflation, Indiana’s gains were just half that. Likewise, the state’s employment growth lagged the national average in those same years.
“In terms of the measures that are used to talk about whether the economy is improving or not, those measures aren’t painting a positive picture,” Dagney Faulk, a Ball State economist, said.
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For a state that has spent more than a decade making it cheaper for businesses in Indiana, some Hoosiers still struggle with low wages at those businesses. 
Many factory jobs start at less than $20 an hour, not enough to raise a family and barely enough to keep up with rising rent and housing prices.
Rich LeTourneau, the bargaining chairman for a GM plant by Fort Wayne, is fighting for wage increases at his plant.
More than a decade after General Motors filed for bankruptcy, the company has more than recovered and is making billions in profits. Tax cuts have helped the company grow, said Daniel Flores, a spokesperson for the company. 
“In the end, if the company can thrive, then the employees thrive,” Flores said. 
But many of the new hires at General Motors aren’t feeling the turnaround. Workers are hired as temporary employees for up to two years at about $16 an hour before they earn a higher full-time wage.  
“If you’re trying to put a roof over your head, 16 bucks isn’t much,” LeTourneau said, adding that it’s hard to find workers at the rate. 
Other studies from around the country paint similar pictures. In Kansas, for example, where lawmakers reduced taxes on both businesses and personal income for high earners, there was no increase in private sector employment, according to one study.
Tax policy is just one factor in determining the wealth of a state, economists say. Others include climate, labor force and location.
But even so, it’s become apparent to Aaron Renn, an economic development and urban analyst who recently wrote a scathing journal article about the state’s economic plan, that continuing the state’s decades-long pursuit of cutting taxes for businesses won’t make the state more prosperous. He called certain cuts a giveaway. 
“Ultimately, it shows me that the state government is completely out of ideas,” Renn, a former senior analyst at the conservative think tank Manhattan Institute, said of the proposed tax cuts. “Indiana is getting poorer, and all these guys think to do is cut taxes.”
If one of the goals of cutting more business taxes is to increase well-paying jobs to the state, the policy isn’t working, he said. 
Renn noted that Indiana lost a number of manufacturing businesses to other states, including GM’s plans to expand in Michigan and Indianapolis-based Eli Lilly Co., which announced plans in January to build a plant in North Carolina.
“Lilly selected Concord because of the manufacturing technology experience of the local labor force; its proximity to universities with strong science, technology, engineering and math (STEM) programs; and its access to major transportation infrastructure,” the company said in a news release.
Just in January, Intel, a Silicon Valley semiconductor maker, announced it would invest $20 billion for two chip factories in central Ohio, boasting an average wage of $135,000 per year. One of the reasons? The “strong talent pipeline sustained by world-class educational institutions,” according to a Columbus Dispatch guest column. 
Some of the cases can be attributed to the nicer climate in southern states, Renn said, but businesses like Lilly are also looking for a skilled labor force and a good quality of life for their employees. So, instead, Indiana’s tax policies have attracted low wage employers, like warehouses, because those are the businesses searching for savings.
There’s proof of that: between 2009-2019, the biggest category of employment growth in Indiana was for people with less than a high school diploma.
Hicks compared it to picking a car or tennis shoes based solely on price. That just doesn’t happen, or everyone would be driving a 1992 Corolla and wearing Dollar General tennis shoes, Hicks quipped.
“No business is so unsophisticated as to make decisions on price alone,” Hicks said. “They’re balancing price and quality.”
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Democrats argue instead of cutting taxes, the state could remedy some of Indiana’s economic woes by investing more in education and other workforce initiatives in an attempt to drive up Indiana’s level of educational attainment.  That could mean increasing the amount spent on K-12 education or colleges, offering more debt relief and education grants or paying for Pre-K.
Already, House Democrats say the state will lose about $1.05 billion in 2024 because of tax cuts under Daniels and Pence. That money, most of which benefited wealthy Hoosiers, could have been spent elsewhere, they say, such as for education, transportation or pre-k, or to provide tax cuts on diapers.
“It’s just like, ‘We’re going to help a certain group of people, we’re not going to help all people,’” said Rep. Gregory Porter, an Indianapolis Democrat and chief Democrat on the House’s budget writing committee. “We’re going to help those who might need it, but can do without it, versus helping those who definitely need it and can’t live without it.”
Indiana’s educational attainment problem is clear: between 2010-2019, Indiana had its biggest drop both in the number and percentage of residents with a bachelor’s degree, since the 1940 census.
Brown, though, argued that spending more money on education won’t increase the number of Hoosiers who are able to graduate or lead to higher wage growth.  
He put the onus on families. 
“That’s something we can’t change,” Brown said of losing companies due to a lack of an educated workforce. “We need to have the verbiage out there and the words among families, it’s important to get a certificate or a degree after high school.”
But Hoosiers like Millbrooks say tuition assistance or a reduction in the cost of college is the gateway to a better life.  
More than a decade ago, Millbrooks took on debt to go to nursing school but never finished because she had health problems that forced her to drop out. And she’s scared to go into debt again. 
“I’m still working from check to check,” she said. “I don’t want to spend another 13 years paying it off.”
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Just like the tax cuts of the past decade or so, not all economists are sold on the latest idea that House Republicans and Holcomb are pitching.
Lowering the income tax, for example, does amount to a small pay raise for Hoosiers but isn’t a guarantee that more workers will want to live in Indiana. After all, a hundred bucks a year only goes so far. 
In fact, in Indiana, more employment growth is occurring in parts of the state that have a higher combined tax rate, like in Hamilton County and Indianapolis, according to data from Hicks. It’s a similar story in Texas. 
And likewise, local governments depend on those equipment taxes lawmakers are considering reducing. Removing those would further reduce the ability for locals to create places people outside of Indiana want to move to, economists say.
Supporters, though, say that tax cut will drive investment. The Indiana manufacturers association argued during committee hearings that Indiana is missing out on development opportunities because the structure of the equipment tax can be costly for high wage manufacturers.
Justin Ross, a professor specializing in tax policy at Indiana University, sees the tax cuts as good for business growth.
When companies get taxed on the production process, like on their equipment, they often pass the cost on to the consumer anyway, Ross said. He argues it’s more transparent to directly tax consumers. 
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The proposed tax cuts aren’t the only tool lawmakers are using to try to encourage economic development in Indiana, as even state officials acknowledge they are falling short in some areas. The Indiana Economic Development Commission is pushing for a revamp of their tool kit to offer incentives to employers to move to Indiana in a separate bill: Senate Bill 361.
Among those tools is the creation of the Innovation Development Districts which would capture most new state income, state sales and local property taxes generated by the districts. That money could be used for incentives to lure companies to those districts.
The final version of both Senate Bill 351 and House Bill 1002 still have to be ironed out before lawmakers can leave the Statehouse for the year, but most measures in both bills have the backing of the Holcomb administration, making their passage seem all that more likely.
Call IndyStar reporter Kaitlin Lange at 317-432-9270. Follow her on Twitter: @kaitlin_lange.

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