Even during the height of last year’s gubernatorial campaign, longtime legislative leaders such as House Speaker Brian Bosma and Senate Appropriations Committee Chairman Luke Kenley expressed deep reservations about then Republican candidate Mike Pence’s proposal to cut the state income tax by 10 percent.
Why were they skeptical? Let’s put to rest any nonsense that Bosma and Kenley are anything less than fiscal conservatives. They and other Republicans in the Indiana House and Senate worked closely with former Gov. Mitch Daniels to craft honestly balanced budgets for eight years. At the same time, they championed a cap on property taxes, elimination of the inventory tax, a phasing out of the inheritance tax and even across-the-board income tax refunds for Hoosiers when surpluses reach certain levels.
All of those steps took place during economically turbulent times. It was exceedingly difficult to keep the state on a fiscally sustainable path while tax revenues tumbled and the demand for services grew as a result of rising unemployment and falling incomes.
But because of a series of fiscally prudent decisions made at the time by the Daniels administration and legislative leaders, Indiana made it through the worst of the recession without the type of devastating budget cuts and sharp tax increases inflicted on many other states. Yes, even schools eventually saw less money from the state because of declining tax revenues, but the cuts amounted to a mere 3 percent at a time when nearly every private enterprise and government agency was forced to become much more efficient.
So when a first-time candidate for governor, with no executive branch experience, made a campaign promise to cut 10 percent from one of the state’s major sources of revenue, it was understandable that the reception in the General Assembly has been for the most part chilly.
Veteran lawmakers know firsthand the feast-or-famine cycle that state government has long operated under. For instance, during Gov. Frank O’Bannon’s first term in the late 1990s the state built a record surplus of $2 billion. O’Bannon, a Democrat, promptly pushed $1.5 billion in tax cuts through the General Assembly. That move became a major theme in his 2000 re-election campaign.
But within a couple of years, not only was the surplus gone, but the state found itself saddled with a structural deficit of more than $800 million. Legislators, rather than dealing with the problems directly, resorted to raiding pension funds and delaying payments to schools and local governments in order to pass a two-year budget that was balanced in name only.
Indiana would be wise not to repeat that bit of history of a decade or so ago.
But what of Pence’s argument that the tax cut would stimulate the state economy by making Indiana a more attractive location to do business?
Recent history is again a good guide. Mitch Daniels entered office as governor in 2005 declaring that he wanted to build a “better sand box” for economic development in the state. He streamlined the regulatory process, launched a massive road and bridge building campaign in part to make it easier to get goods to market, and even pushed adoption of daylight-saving time as a means to help a growing logistics sector. Above all of that, though, was the drive to create a tax environment attractive to new businesses. Corporate tax rates were cut. The inventory tax was abolished. And a constitutional cap on property taxes promised more predictable expenses for business managers.
Those moves have earned Indiana high ratings relative to other states in terms of the business climate. What holds back faster economic growth now is less about taxes than the lack of a well-educated workforce and higher than average business costs associated with Hoosiers’ poor health.
Pence, to his credit, has vowed to tackle head-on the first of those challenges. His proposal to strengthen vocational education around the state is a smart move. Business recruiters and educators report that in many places in the state employers can’t find enough skilled workers to fill open positions, despite high unemployment.
It’s better training, not lower taxes, that is Indiana’s most pressing economic development need.
The promise of a tax cut is always alluring. And sometimes tax cuts are the right prescription for improving economic vitality. But in this instance, given Indiana’s needs, its previous series of tax cuts and its history of rapidly rising and falling state revenues, the Pence tax plan is not fiscally prudent.
— The Indianapolis Star