June 23, 2014

Indiana Needs Comprehensive Tax Reform Plan

Maurice P. McTigue

Vice President, Outreach

Bob Williams

Summary

Simple tweaks to Indiana’s tax system will be insufficient to attract leading firms and spur the success of those at home; reforms must be part of a well-planned growth strategy. If the Hoosier State wants to position itself as a global competitor, its leaders must approve a comprehensive plan that lightens the tax burden on citizens and businesses in a way that allows government to serve the people by performing its core functions.

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On Tuesday, tax experts from around the country will gather with Gov. Mike Pence to discuss policies that could fuel economic growth, spur job creation, and sustain prosperity across the state. Indiana has been a leading “growth” state in recent years, and with the right reforms, it is poised to keep — or even exceed — that momentum.

Simple tweaks to Indiana’s tax system will be insufficient to attract leading firms and spur the success of those at home; reforms must be part of a well-planned growth strategy. If the Hoosier State wants to position itself as a global competitor, its leaders must approve a comprehensive plan that lightens the tax burden on citizens and businesses in a way that allows government to serve the people by performing its core functions.

Fortunately, Indiana’s economy is doing well. In April, its unemployment rate was 5.7 percent, compared with 6.3 percent nationally. The American Legislative Exchange Council ranks its economic outlook as an impressive third in the nation.

While CNBC and Forbes both rank it in the top 20 states for business, Indiana lacks some specific measures. CNBC ranks the state 37th in access to capital — an important indicator of future growth. Furthermore, the state does not compete to attract businesses with just 49 other states — it also competes with countries around the world.

Greater prosperity usually is preceded by two things: business investment (either by in-state or outside interests, both large and small), followed by an increase in hiring. Investment flows to places that businesses find attractive for competing globally.

Consider the case of a small bookstore owner who sells more books than she can supply. In order to hire an additional salesperson, she must invest in more counter space, install a second cash register, expand her shelves, and purchase more books. Only at this point can she can hire an additional staffer.

Before implementing reforms to Indiana’s revenue system, lawmakers must ask a few simple questions: Will this proposal encourage investment, innovation and hiring? Will it treat all businesses equally, or pick winners and losers? Will it make the system less complex and more accessible?

First, the most important question is: Will a proposal distort the decisions of business owners and innovators? Red tape means more than a bureaucratic headache — it requires businesses to spend resources they could use to make money, and some will decide the investment isn’t worth the price. For a business with slim profit margins, any added compliance expense can make the difference between hiring a new employee or not.

Second, is a new tax expenditure a fair charge to taxpayers? If the state gives special tax concessions to favored businesses, existing enterprises and ordinary citizens must pick up the bill. In such a case, a tax expenditure may discourage expansion in the rest of the business community.

Third, revenue systems must be as simple as possible in order to do as little harm to investment and innovation as possible. Tax compliance is costly in both time and money, and can be destructive to business decision making. A system with no deductions, credits and exemptions is the simplest, least disruptive, and has the lowest compliance costs.

For small businesses especially, complexity in compliance is a major killer of expansion.

Additionally, Indiana policymakers should continue to address the state’s spending and budget. In particular, it should pursue priority-based budgeting. Most states only consider how much money goes to specific departments and programs, while priority-based budgeting focuses on outcomes. The concept makes so much common sense that it would shock most people to learn it is not already the norm.

Lawmakers and officials must first ask whether the proposed activity is a core function of government and then decide the best way to measure progress. With that vital information in hand, officials can look at available resources and determine the most efficient use of funds. Indiana already has taken meaningful steps to improve its budgeting process; future reforms should carefully consider how to keep Indiana competitive.

Growth and competitiveness are always a work in progress; there is never going to be a time when a government can say its work is finished. There are other economies out there trying to win away your investors every single day. Success goes to the eternally vigilant.