The ink is dry on a new two-year budget, authored for the first time by Rep. Jeff Thompson (R-Lizton). A longtime member of the Ways and Means Committee, Thompson took the helm last year following the retirement of former Rep. Tim Brown, who chaired the committee for a decade. By contrast, this year marks the third round of budget negotiations for Sen. Ryan Mishler (R-Mishawaka), who succeeded former Sen. Luke Kenley (R-Noblesville) as chair of the Appropriations Committee.
The just-passed budget plan includes $44.5 billion in spending priorities for the next two years (plus an additional $1.125 billion for the current fiscal year). To put that into perspective, during my first legislative session as a lawmaker in 2013, the Legislature passed a $29.8 billion budget (a 50% increase over 10 years).
Among the items to receive funding in this budget are some programs that will contribute positively to the state’s business environment. They include: (1) a $500 million second round of Regional Economic Acceleration and Development Initiative (READI) grants, (2) new tools and funding to support workforce development efforts, (3) income tax cuts, (4) tax incentives to support private investment in childcare, housing and community redevelopment projects, and (5) investments in transportation infrastructure, among many more. Read more about these efforts in the respective areas of this report.
Housing Issues Part of the Framework
Legislators paid serious attention to a report from the Housing Task Force and worked diligently to enact many of the recommendations in the report. The chairman of the task force, Rep. Doug Miller (R-Elkhart), authored House Bill 1005, which gained passage in the final week of session. The legislation creates a revolving loan program to assist in extending infrastructure to support new housing developments. It is estimated that infrastructure costs associated with housing projects are on average $5,500 per dwelling. The bill also includes language from Senate Bill 300, which alters a recent law to enable more communities to participate in the residential housing tax increment financing (TIF) program. This addition was not without controversy as SB 300, authored by Sen. Linda Rogers (R-Granger), included a provision that removes the authority of school boards to sign off on new housing TIF areas.
Lawmakers acted on other proposals to address housing issues. House Bill 1575, authored by Rep. Tim O’Brien (R-Evansville), begins a process to update residential building codes. House Bill 1627, courtesy of Rep. Maureen Bauer (D-South Bend), will allow nonprofit organizations to participate in tax sales. Senate Bill 35, from Sen. Mike Gaskill (R-Pendleton), provides financial literacy education to high schoolers. Senate Bill 339, authored by Sen. Linda Rogers (R-Granger), was included in the budget bill and provides tax incentives for housing investments. In all, a large majority of the recommendations made by the Housing Task Force were adopted in some form.
Agency Bills Hold Key Tax Provisions for Business
The annual agency update bills for the Department of Local Government Finance (House Bill 1454) and the Department of Revenue (Senate Bill 419) contain a number of provisions that will aid the business community. It is typical for these agency bills to become “Christmas tree” bills, adorned with many and various ornaments throughout the process – and HB 1454 is no exception. The final version of the measure, authored by Rep. Craig Snow (R-Warsaw), is longer than the budget bill and totals 281 pages.
There are numerous provisions that are valuable to the business community. They include: (1) a tax credit for employing disabled workers, (2) a tax credit for restoring and preserving historic buildings, (3) certainty in the property tax appeals process, and (4) exempting broadband expansion grants from income tax, among many others. House Bill 1454 also includes a provision that the Chamber opposed that caps the tax due on certain premium cigars sold in the state. Under current law, a 24% tax is paid on the wholesale price of any cigar. The amended law places a cap on the tax such that the maximum amount of tax due on a cigar is $1.
Senate Bill 419, authored by Sen. Travis Holdman (R-Markle), included a critical provision regarding tax treatment of research and development expenses. The 2017 Tax Cuts and Jobs Act requires that beginning in 2022 these investments must be amortized over five years instead of being deducted in the year they are disbursed.
Lawmakers included a provision in SB 419 that allows businesses to fully deduct these investments for state tax purposes, saving Hoosier businesses tens of millions of dollars in taxes. Another provision related to payroll withholding for out-of-state workers was also approved. Businesses will no longer be required to withhold payroll taxes for employees who don’t reside in Indiana but perform work duties in the state so long as those duty days don’t exceed 30 days in a calendar year. Additionally, out-of-state workers do not need to submit an Indiana state tax return.
Near-miss for Business on Property Tax Relief Proposal
Even before the legislative session began, some key legislators expressed concerns about riptides in housing markets leading to large increases in property tax burdens across the state. House Bill 1499, authored by Rep. Thompson, became the primary vehicle for a slate of reforms intended to place an upper bound on tax liabilities without altering the complex system of property assessment.
As introduced, HB 1499 included a provision that would temporarily reduce the property tax cap for homestead properties by 5% beginning in 2024. The bill also temporarily increased the supplemental homestead deduction and placed temporary limits on how much certain local government tax levies may grow. In total, the legislation would have reduced state revenues by between $50-$55 million over two years, and over the same time, local revenues would have declined by approximately $366 million. Most concerning was the roughly $33 million burden shift that would have been placed on businesses across the state by increasing the supplemental homestead deduction.
The sponsor of the legislation, Sen. Holdman, had expressed skepticism publicly about the need for such sweeping tax relief. In committee, HB 1499 was essentially stripped of its underlying content and replaced with various other matters related to local food and beverage taxes, innkeeper’s taxes and property tax relief for seniors. The amended bill received unanimous support in committee.
Remarkably, on the Senate floor an amendment was adopted that reinserted the increased supplemental homestead deduction provision as well as a higher limit on levy growth. These two provisions alone would have caused an $80 million shift of property tax liabilities to Hoosier businesses.
Representatives and senators quickly began the work of ironing out their differences on HB 1499, which was one of the final bills to be voted on in the waning hours of the legislative session. In the end, lawmakers settled on a temporary relief in the form of stricter limits on levy growth and an increased supplemental homestead deduction. Additionally, there are some pro-taxpayer provisions related to assessment appeals, levy freezes and transparency.
Ultimately, the Legislature opted to shift the cost of local government from homeowners (voters) to other property owners. However, the shift is smaller than it otherwise might have been. As property assessments are mailed out around the state, one thing is certain: Lawmakers will continue to be pressed by constituents to address increasing property tax burdens in pockets around the state.
Indiana’s Tax Structure Up in the Air
A new effort to keep an eye on over the next two years calls for the establishment of a state and local tax review task force to study a potential reduction or outright elimination of certain state taxes. This was found in Senate Bill 3, authored by Senator Travis Holdman, the chair of the Senate Tax and Fiscal Policy Committee who led the push for this two-year examination of Indiana’s tax model. Rest assured, the Indiana Chamber will be engaging where appropriate on this topic once the review gets underway to ensure the business community’s interests are adequately considered and remain at the forefront.
