The task force is considering other potential changes as well, such as simply lowering the income tax rate or eliminating property taxes. But the idea that generated the most enthusiasm among Senate Republican leadership has been nixing the personal income tax.

Holdman clarified after Friday’s meeting that he personally would rather leave the local income tax in place, which generates roughly $4 billion for local communities. That means Hoosiers would still have to pay both local and federal income taxes, even if the state tax is eliminated.

Currently nine states don’t have an individual income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. (Washington taxes only capital gains income and New Hampshire taxes interest and dividends).

State Affairs looked at how other states have functioned without an income tax, and what doing away with it in Indiana could mean for you. Holdman pointed to Tennessee as a potential model to look at when figuring out how to make Indiana’s budget work because, he said, it’s the most similar to Indiana.

Sales taxes could increase

Probably the most feasible option to fix the budget hole would be to replace the tax dollars, at least partially, with something else.

Some states rely on higher combined local and state sales tax rates in lieu of an income tax. Tennessee, which doesn’t collect personal income taxes, has the highest average combined state and local sales tax rate in the country, with Washington falling not far behind. 

In Tennessee, consumers pay on average $9.55 in taxes for each $100 item, compared to $7 in Indiana. That’s largely because local governments in Tennessee can enact their own sales taxes, while in Indiana local governments cannot.

When looking at just the state sales tax alone, Indiana is tied for the second-highest sales tax rate in the country, along with Tennessee. That means if the state wants to up its sales tax collections, it likely would have to expand the number of goods and services the state taxes. Some states, like South Dakota and Tennessee, tax groceries, for example. 

Or, the state could allow local governments to collect sales taxes.

Increasing sales tax collection would likely be among the most popular options among Indiana lawmakers. Historically, Republican legislative leaders have shown support for taxes that can be applied to those visiting from out of state, instead of those that impact just those who live in Indiana. For example, Indiana has one of the highest gasoline taxes in the country. 

It could mean higher property taxes

Six of the nine states that don’t have income taxes have higher property taxes on owner-occupied houses than in Indiana. Most notably, Texas’ rate is nearly double that of Indiana’s. 

Property taxes are already rapidly increasing due to the rising assessed values of property. That means increasing property taxes further to make up for the budget hole likely wouldn’t be popular.

Residential property tax liability was expected to increase by more than 18% on average across the state this year, according to an analysis by the Association of Indiana Counties and Policy Analytics. Lawmakers dealt with significant pressure to address the issue during the most recent legislative session. 

Some states rely on other taxes

Some states are uniquely positioned to capitalize on other taxes. Tourism-heavy Florida, for example, allows counties to implement taxes on hotels.

Meanwhile, Alaska and Wyoming benefit from taxes on oil, a natural resource Indiana doesn’t have. 

So does Indiana have anything comparable or uniquely Hoosier to tax?

Not really, but lawmakers could legalize — and tax — marijuana. That’s unlikely. Republican leaders have repeatedly emphasized that they don’t want to legalize the product until the federal government does so. 

Even if lawmakers did have a change of heart, the money wouldn’t be enough to backfill the $8 billion loss in personal income taxes. The tax dollars from marijuana only make up a small portion of revenue in the states that do tax the product. In Colorado, for example, taxing cannabis generates $350 million, or just 1.7% of total revenues. 

Holdman said, “Nothing’s off the table.”

Cutting income taxes could mean less government spending

A majority of the nine states without an income tax spend less per person on state and local services when looking at both local and state governments combined, according to data from DeBoer. That includes Tennessee.  

Lt. Gov Suzanne Crouch, a Republican gubernatorial candidate who has recently centered her campaign around calls to “axe the tax,” has largely built her plan on less spending. Aside from looking for efficiencies, she wants to limit the state’s budget to an increase of 2% each year.

State revenues are forecast to increase 2.5% from fiscal year 2023 to FY 2024. She also wants to reduce the budget surplus to what is “reasonably necessary,” and use that to help implement tax cuts. 

Other Republican gubernatorial candidates have questioned whether those cuts can result in enough savings to completely end the individual income tax. 

Cuts in the budget could of course mean fewer government programs or a reduction in how much money schools receive each year.

How Indiana’s tax climate compares to other states

Kurt Couchman, a senior fellow in fiscal policy for Americans for Prosperity, called the state “frugal” and “responsible with taxpayer dollars.”

The Tax Foundation ranks Indiana as the ninth-most business-friendly state when it comes to taxes. 

Two former prominent Republican lawmakers warned the task force that nixing the income tax altogether could be problematic, in part because Indiana doesn’t have the climate or tourism of some states, such as Florida and Texas. Income taxes make up a larger portion of Indiana’s total revenues than 41 other states, highlighting the state’s reliance on it.

“I wonder if that’s really going to hold up,” said former Sen. Luke Kenley, who previously chaired the Senate Appropriations Committee. “If you eliminate any part of it, when you hit the next recession, the first thing that’s going to happen is they’re going to reinstate [it] even on a temporary basis.”

Kenley is concerned that should that happen, the state would implement a progressive tax rate that taxes those who earn more at a higher rate, rather than revert to the flat one now in place. 

What’s next

The task force will meet again Oct. 20 and hear from other experts, including former Rep Tim Brown, the former House Ways and Means chair. Holdman said there will be an opportunity for public testimony in the future, likely at a January meeting. 

The task force is poised to issue recommendations just before the 2025 legislative session. So any additional tax savings or hits to state revenue would be farther down the road. 

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“The highlight of my public service career has been working with my team of dedicated public servants who provide accountable and reliable back-office functions that keep our State running efficiently and successfully,” Klutz said in the release. “My service as the State Comptroller afforded me the opportunity to travel the state and meet so many Hoosiers. I am especially grateful for the welcome and respect our local and state officials have shown me.”

In the release, Klutz said during her time in office she overhauled the state’s transparency portal and modernized the state’s payroll system. She also lobbied the state legislature this past legislative session to change her office’s public name to state comptroller to more accurately reflect its duties. 

Klutz is the fourth state auditor in a row to not finish out their term. 

She was appointed by Holcomb in 2017 to replace then-auditor Suzanne Crouch, who left the office to serve as Holcomb’s No. 2. Klutz was later elected in 2018 and won her general reelection bid by nearly 24 percentage points in November 2022, after running unopposed at the Republican convention. 

Prior to serving in state government, Klutz was the Allen County auditor, where she was named Auditor of the Year by the Indiana Auditors’ Association.

Holcomb praised Klutz for her service. 

“As the first CPA to serve in the position, Tera has been a faithful fiscal steward with a keen focus on transparency and accountability, most notably by modernizing technology,” Holcomb said in a separate news release. “Throughout her tenure, Indiana has been recognized nationally for its responsible financial reporting.”

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Header image: State Auditor Tera Klutz talks with State Affairs. (Credit: Kaitlin Lange)

“For carbon capture, while this is a technology that the state is invested in, it is not yet at the scale needed to accommodate all the utilities in the state,” Brian C. Rockensuess, commissioner of the Indiana Department of Environmental Management, told lawmakers during a committee meeting this month. 

Environmental advocates, however, are characterizing the concerns as overblown. They point to two federal bills — the Inflation Reduction Act and the Bipartisan Infrastructure Law — that contain grants and incentives for power plants to transition away from coal and gas. And they say the power industry always raises concerns about any new regulations but always finds a way to comply.

“They are like the boy who cried wolf,” said David Doniger, a former EPA official and current senior strategic director at the nonprofit Natural Resources Defense Council. “If you look at the track record, they say this every time and then, if the regulations are in fact adopted, the compliance goes smoothly.”

Indiana agency head raises concerns

Rockensuess voiced his concerns about the new EPA rules to Indiana lawmakers during an Interim Study Committee on Energy, Utilities, and Telecommunications meeting this month.

He didn’t dive into the pros and cons of the environmental impacts; rather, he focused on the difficulty for policymakers and regulators in Indiana who will be tasked with enforcing the final rules adopted by the federal government. 

Among the difficulties, he said, are requirements for some power plants to use hydrogen to generate electricity or rely on carbon capture and storage to reduce emissions. Both technologies, he said, are not ready for wide use, yet the federal government would require Indiana to explain how the state would implement the new federal rules within 24 months. 

“Bottom line is they are asking for a lot in too short of a time,” he said. “Indiana and other states are being set up to run afoul of that timeframe from the start.”

Those concerns were echoed in a joint letter sent to the EPA by his department, the Indiana Utility Regulatory Commission and the Indiana Office of Utility Consumer Counselor. 

The study committee also featured an out-of-state speaker who shared fiery testimony in opposition to the EPA proposal. By the end of the presentation, Rep. Matt Pierce, D-Bloomington, questioned whether the Republican leaders considered inviting anyone with a different viewpoint. 

“I was just kind of curious as to whether the chairman attempted to invite testimony from anyone in support of the rules, such as the Clean Air Task Force or the Natural Resources Defense Council, people along those lines?” Piece asked. 

Committee chair Sen. Eric Koch, R-Bedford, said that such viewpoints were already well-known because of the EPA’s plans, but he would consider Pierce’s request if lawmakers take up legislation on the matter when the legislative session begins in January. 

Koch, who also leads the Senate utilities committee, later confirmed to State Affairs that he was unsure what actions the Indiana General Assembly might take in response to the federal rule, but he does not plan to file legislation this year. 

The chair for the House utilities committee — Rep. Ed Soliday, R-Valparaiso — told State Affairs he did not yet know if he would file anything. 

Environmental advocates push back

While they were not invited to speak at the public meeting, many environmental advocates in Indiana are supportive of the president’s efforts to curb carbon emissions. 

“Probably what you didn’t hear in the testimony at the Statehouse was the cost of mitigating and addressing issues related to climate change. And you probably didn’t hear the effects of air pollution and how that contributes to asthma and other diseases,” said Sam Carpenter, executive director of the nonprofit Hoosier Environmental Council. “In the big picture, all those things need to be considered.”

The Biden administration estimates up to $85 billion in environmental and public health benefits over the next 20 years. 

Indiana once relied almost exclusively on coal for electricity. And while the state continues to be a top-five consumer of coal for electricity, the major utility companies have started shifting away from coal in recent years. They’ve largely replaced that fuel source, though, not with renewables but with natural gas. That’s because gas is relatively affordable, and it easily enables utility companies to both meet the daily electricity demands but also rapidly ramp up production during cold snaps and heat waves. 

Some utilities are seeking state approval to build new gas plants even now. Indiana customers will be on the hook for whatever is constructed now — such as a gas plant — even if those plants are rarely used or even shut down because of federal regulations. And then Hoosiers will also have to pay for whatever the utility companies build next.  

“This continued investment into fossil fuels is going to be a stranded investment,” Carpenter said. “Down the road that’s not going to be paying off. That’s just a bad path to take.”

Future battles

If enacted, the new EPA rules are sure to draw litigation from Republican officials. 

Attorney General Todd Rokita has already promised Indiana’s involvement: “Fortunately, the courts will almost certainly strike down these new EPA mandates — and on behalf of Hoosiers, I’ll do everything in my power to ensure that happens,” Rokita said in a statement about the proposed rules. 

His comments align with those made by Indiana’s major utility companies. They accuse the EPA of overstepping — arguments that were at the center of a U.S. Supreme Court decision in 2021 that said the EPA lacked the authority under the Clean Air Act to regulate carbon emissions. 

Others aren’t as confident as Rokita and utility companies. 

Rockensuess, the state environmental management department commissioner, noted in his testimony that the EPA does have the authority because of new language contained in the Inflation Reduction Act, which Congress passed after the Supreme Court decision. 

“It clarified and granted them the authority to regulate greenhouse gasses,” Rockensuess told lawmakers. 

Rockensuess said he expected to see the final EPA rule by next May.

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Header image: A row of solar panels sits outside AES Indiana’s Harding Street power plant. (Credit: Ryan Martin)

In a statement to State Affairs, Indiana Chamber President and CEO Kevin Brinegar said the state is providing a “two-tiered educational system” depending on income and ZIP code. 

“Hoosier students should not be limited academically solely due to where they live. And that’s the case now in some of the smaller school districts where students are not afforded the opportunity to take a full array of STEM, Advanced Placement or college preparation courses,” Brinegar said in the statement. “The Chamber’s stance on smaller school district consolidation is rooted in wanting to lift up young Hoosiers in these rural communities, so they have a better chance at prosperity by properly preparing them for the state’s current and future job opportunities.”

The statement also contained a specific response to Doden’s criticism. 

“We would be happy to sit down with Mr. Doden and go through the research and show him why we have adopted this position for the betterment of the academic and economic opportunities for our young people,” Brinegar said in the statement. “The status quo that Mr. Doden is championing has and will continue to leave small communities, schools and students behind. That’s not acceptable.”

But whereas the business group sees consolidation as one way to improve life in rural Indiana, Doden sees the opposite. 

“Across our state it’s easy to see the remnants of a school consolidation push that began in the 1950s,” Doden wrote in his letter. “Too many towns that lost their local school to consolidation dried up and were virtually swept from the maps while other towns kept their schools and their identities. These communities had a better opportunity to survive.” 

Doden also cited one of his policy proposals, which would redirect $100 million in state money toward small towns — in an effort to address declines in populations and quality of life. 

“With local leadership and local control, we can revitalize our small towns and hometowns with a fraction of the investment we give away in the form of incentives,” Doden wrote.

Doden addressed the letter to Vanessa Green Sinders, who will replace Brinegar as the Indiana Chamber’s leader. Her tenure will begin in January, so she was unavailable to provide comment to State Affairs.  Either way, the Indiana Chamber’s members are the ones who suggest policy positions for the board of directors to approve before each legislative session.

In addition to Doden, the crowded Republican field for governor includes U.S. Sen. Mike Braun, former Commerce Secretary Brad Chambers, Lt. Gov. Suzanne Crouch and former Attorney General Curtis Hill. 

Jennifer McCormick, the former state superintendent of public education, has emerged as the leading Democratic candidate. Instead of school district consolidation, the state should reevaluate its expansion of school choice vouchers, McCormick has previously said. 

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Header image: Eric Doden, 2024 Republican candidate for governor of Indiana (Credit: Eric Doden for Indiana Governor/Facebook)