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Reform and Simplification of Indiana State Taxes: The Retail Sales Tax

The Indiana state sales tax yielded over $6.8 billion in fiscal 2013, roughly 40 percent of total Indiana state tax revenue, over a third more than yielded by the second most productive tax (the individual income tax), and more revenue than from any source outside of federal aid. Figure 1 shows the trend toward greater retail sales tax reliance over the years since 1970, when only around 20 percent of tax revenue came from the tax. Whether by design or by policy accident, Indiana has substantially shifted toward heavier use of the sales tax in support of state services, making it the foundation for the state revenue system. The tax applies to retail transactions involving tangible personal property, public utility services, renters of accommodations for less than 30 days, and renters of other properties at a rate of 7 percent, one of the highest statutory tax rates in the United States. The previously noted high reliance is possible only with this high rate because of the narrowness of the sales tax base. Competitive problems that might otherwise emerge with this high rate are mitigated somewhat because, in contrast to the adjacent states of Ohio and Illinois (and many other states), Indiana localities may not levy their own sales taxes, so the state rate is the only rate applied to taxable transactions. This absence of local rates makes the sales tax much less complicated for consumers, vendors, and tax administrators. Given the importance of the tax for support of government services in Indiana, it is imperative that the tax be structured in a way that does least damage to the economy and citizens of the state. Although Indiana lawmakers have avoided many of the more egregious structural elements found in a number of other state sales taxes, the Indiana structure is not now fully appropriate to the conditions of the twenty-first century. Reasonable reforms can make the tax both simpler to operate and a more robust revenue source. Although many tax experts would agree with Richard Bird that the retail sales tax “is now an aberration in the world perspective,”1 it is an American and Hoosier institution with a firm place in the revenue profile. As such, it is important to structure the tax so that it avoids the worst of the problems that cause it to merit that low international regard.

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