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Winning the Jobs War: The Economic Case for a 10 Percent Reduction in Income Tax

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When I ran for Governor, I heard in every corner of our great state that the condition of our economy and the jobs it produces were Hoosiers' primary concern. I have continued to hear the same thing since taking office in January.

Well, yesterday we received some good news. Our economic forecast showed that Indiana enjoys job growth at a rate faster than 42 other states.

In addition, the forecast showed that Hoosiers can expect job growth and falling unemployment over the next several years. We can expect our state's overall economic output to grow as well. That's great news for Hoosiers.

Our economic fundamentals look good. The revenue forecast shows that job growth is moving in the right direction.

This is welcome news for all Hoosiers. However, we also need to maintain some perspective.

Despite our positive trajectory our economy's growth is not matching Hoosiers' hopes and aspirations for greater opportunity. This feeling is not unfounded.
There's plenty of room to grow.

Even though we have seen strong job growth since the depths of the recession, job growth is not as strong as we'd like. We need more high-wage, high-demand jobs in Indiana. Our per capita income stands at 86 percent of the national average. We continue to languish in the lower half of states when it comes to personal income.

When it comes to per capita GDP growth, we are pretty much in the middle of the pack nationally. Our state's challenges are compounded by national trends. Just last week we learned that consumer spending is down across the board and has, in fact, been worse than we thought since the beginning of the year.

The reason I'm focusing on Indiana's position compared to other states is because we are in a national and global competition for jobs.

States that understand the nature of the competition we are in are the states with the best economies. They also understand that a successful job creation strategy must be multi-faceted and based on the key factors that help you win in the competition.

That's why I have made job creation job one since my first day in office. That's why we proposed a bold agenda and a jobs budget that are faithful to this task. My budget responds to the realities of the competition we face from other states. More specifically, I have proposed:

- An honestly balanced budget that holds the line of spending, protects reserves, funds our priorities in roads and schools and provides a permanent 10 percent reduction in income taxes.
- Regional works councils--which I signed into law earlier this week--to help address the skills gap that exists around our state by making sure every graduate who wants a job right out of high school is career ready.
- A regulatory freeze, enacted on day one by executive order--since small businesses cite licensing and regulatory burdens as the number one growth killer. Since signing this order, new regulations by state agencies are down 92 percent from last year.
- A higher education system that rewards on-time graduation, provides a clear degree path, and makes college more affordable--ideas that have seen support in both Chambers--all to confront some of the main drivers of our college bubble problem and the skills gap that exists even among college graduates.
- A new model of collaboration between our companies and our universities for commercializing innovation more rapidly and effectively, starting with our life sciences sector--which the Senate supported in their budget with $25 million in seed money.
- And, yes, a ten percent reduction in Indiana's income tax rate, which I first proposed before this group on July 31 of last year.

Today, as I did last summer, I'd like to focus on tax reform and why I believe, in combination with these other initiatives; it will make Indiana more competitive and create jobs for Hoosiers. The discussion my tax proposal has started, I believe, has been good for the Hoosier state. It has added to the healthy debate we have been having about how tax policy affects growth in Indiana.

For instance, because of Speaker Bosma's leadership and the bold action by Senators Long and Kenley, among others, that debate has led to a growing consensus to accelerate the phase-out of Indiana's inheritance tax. I strongly support this measure as part of a final budget agreement. I welcome the day inheritance tax is phased out completely. Death should not be a taxable event.

Regarding my income tax proposal, much of the debate has centered on whether we can afford a 10 percent reduction in income taxes. As yesterday's revenue forecast showed an additional $290 million in revenue over the next 27 months, it is clear that we can afford it.

The larger question is whether we can afford NOT to pursue a 10 percent reduction in our income tax.

Here's why: the net effect of a reduction in income taxes--in today's competitive national and global economy--is greater economic growth at home. That economic growth is felt not only in rising per capita GDP, but also in rising personal income. We need both in Indiana.

My proposed budget has shown that we can spur this kind of growth by reducing income taxes, while increasing funding for schools and funding our infrastructure needs.

Our fiscal situation is strong, and putting more dollars back into the hands of Hoosier taxpayers to boost local economies across the state should be our first priority.

Now, I know that skeptics of my proposal tend to focus on what they claim are meager effects on households' budgets. They do so to the detriment of three larger points.

First, $500 million in the pockets of Hoosiers rather than the coffers of the state is no small number. Second, it's not a matter of whether the money gets spent, but who spends it. I believe families and small businesses should get to spend those dollars how they choose and put those dollars back into the economy, not the government.

But today I want to highlight a third point that has received much less attention in the debate we have been having about taxes: Better income tax policy leads to a better economy. In a word, lower income taxes mean more jobs.

Simply put, lowering our income tax rate will put us in a stronger position in the competition for jobs and investment.

It is imperative that we understand our situation in Indiana against the backdrop of what is happening across the country.

- The nine states with NO income tax experienced job growth at nearly 26 percent above the national average over the past decade. They account for approximately 20 percent of the nation's population, but created 62 percent of the nation's jobs over the past ten years. Tax policy has a direct effect on where entrepreneurs, companies, and families decide to locate. And right now, states with a more favorable income tax are scooping up investment and jobs that could just as easily come to Indiana.
- We are a net exporter of talent. According to Ball State, we rank 44th nationally in the percentage of our population with college degrees, despite ranking 14th in degrees conferred. That means other states are providing better employment options for college graduates than we are. A Battelle study attributes this to a disquieting decline in a number of high-skilled occupations in Indiana over the past decade.
- Despite recent progress, our tax situation has gotten worse in Indiana, and that makes the case for additional tax relief more urgent:

- According to the Tax Foundation, our overall tax burden has gone from 8.2 percent to 9.6 percent over the past decade, making us 23rd nationally.
- Federal taxes have just gone up on 53 percent of all business income.
- The payroll tax holiday ended, which amounts to more than $2 billion that Hoosiers will send to Washington instead of retaining as income.
- The sun-setting of the payroll tax break creates a disincentive to hire.
- The Affordable Care Act (ACA) is putting the brakes on job growth. A Kelley School of Business study last year found that in our latest economic expansion, 15 percent of all new jobs would have been at risk had ACA been in place at the time. Since 95 percent of these jobs came from smaller, growing firms, what this really means is that ACA is especially bad for young, small companies--our job creators. This, as you know, was confirmed by the U.S. Chamber's survey of small businesses, which found that 72 percent of respondents said ACA makes hiring harder.

To put our situation another way: We are squeezed on the one side by the increasing pressure taxes place on job creation, and on the other by states whose competitive tax environments are beating us in the jobs war. And again, Indiana must seize this moment to make our state more attractive to investment that creates jobs. Income tax relief is a critical component.

We need to confront this situation head-on, guided by the evidence rather than ideology. We need to admit that, despite all of our recent successes here in Indiana, we still have work to do if we want to be competitive.

So let's take a look. For instance:

- There is strong evidence that lower income tax rates mean more jobs. Economists Robert Barro and C.J. Redlick have found that reducing income tax rates by 1 percent increases economic growth the following year by half a percent.
- Another study by economists Karel Mertens and Morton Raven demonstrates the merits of reducing income tax rates. They found that every 1 percent reduction in the income tax rate generates a 1.4 percent increase in real GDP the following quarter and a 1.8 percent increase over the next three quarters.
- Clearly, reducing income taxes has a positive economic benefit. Raising income taxes, as you might expect, has the opposite effect.
- Economists Randall Holcombe and Donald Lacombe looked at the effects of different income tax rates on both sides of state borders over the course of 30 years. The study is especially useful because it helps you see how parts of the country with similar geography, climate, and industrial sectors are affected by differing tax rates. The authors found that states with higher income taxes experienced slower growth and, on average, a 3.4 percent reduction in per capita income.
- As other states look to reduce their income tax rates, if we stay the same, for all practical purposes, that's a tax increase in the eyes of entrepreneurs deciding where to locate.
- In another study looking at states' tax burdens over 30 years, we learn from W. Robert Reed that a 1 percent increase in the tax burden is associated with a 2.6 percent decrease in per capita income in the first five years and a 1.5 percent decrease in future five year periods.
- Let's drill down a little more. What we also know from the literature is that income taxes affect entrepreneurs.
- A study by Douglas Holtz-Eakin and his colleagues shows that a 5 percent increase in income tax rates lowers the proportion of entrepreneurs who make new capital investments by 10.5 percent and lowers mean capital outlays by 10 percent.

The point is this: If we want Indiana to be more competitive in today's global jobs war, we have to care about the battle over income taxes. Lowering income taxes across the board by 10 percent will increase our GDP. It will increase personal income. It will bring new investment and more jobs.

Let me summarize what I've said with a quote from another academic article by Poulson and Kaplan:

Most states introduced an income tax and came to rely on the income tax as the primary source of revenue. Jurisdictions that imposed an income tax to generate a given level of revenue experienced lower rates of economic growth relative to jurisdictions that relied on alternative taxes to generate the same revenue.

And if that wasn't enough, let me offer this, from a study by Brian Goff, Alex Lebedinsky, and Stephen Lile. They write:

Our results provide strong support for the idea that lower tax burdens tend to lead to higher levels of economic growth. Among tax variables, individual income taxes matter most.

Higher income taxes negatively affect growth, period. It's hard to argue with the evidence.

A permanent 10 percent income tax reduction gives small- and medium-sized businesses the predictability they need as they plan to grow over the long haul. The value in my tax proposal can't be calculated simply by looking at how much an average household will save next year, but by looking at the overall impact on Indiana's economy over the next decade and beyond.

The greatest benefit is long-term predictability for small businesses that will give them the confidence to expand, purchase equipment and hire Hoosiers.

Every week I make job creation job one. Since my first day in office we've met weekly with our economic development team. We've had great jobs announcements with Amazon, Chrysler, Dow AgroSciences, Geico and other. When I call CEOs of companies across America and in other countries in an effort to persuade them to come to Indiana, they consistently tell me that our AAA rating and the fiscal discipline on which it rests are absolutely essential in their considerations.

Our fiscal stability is another important source of predictability for private enterprise.

Make no mistake about it: Our fiscal discipline as a state is directly related to our competitiveness in today's global economy.

All the action today in the competition for jobs is around income tax relief and reform. When Indiana adds a 10 percent tax cut to an honestly balanced budget and combines that with our reputation for education reform and workplace freedoms as well as our new commitment to cutting red tape, improving career and technical education and promoting life sciences, we will put Indiana in the lead to win the war for jobs for this generation and generations to come.

That's how we make Indiana the state that works.

Thank you.


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