Taxation Effects

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"If we can prevent the government from wasting the labors of the people, under the pretense of taking care of them, they must become happy." - Thomas Jefferson

Indiana Sales Tax: A Nickel and a Penny, November 2002, by Larry DeBoer, Professor, Agricultural Economics, Purdue University.

On December 1, for the first time in a generation, Indiana's sales tax will increase. The tax restructuring bill passed by the special session of the General Assembly on June 22 included an increase in the sales tax. The rate will rise from 5% to 6%, just in time for Christmas.

The sales tax is different from the income and property taxes. With the income tax, taxpayers know to the dollar how much they pay, once they fill out their tax forms. The property tax bill arrives each Spring showing how much must be paid. Even homeowners who pay their tax with their mortgages receive a bank statement showing how much they paid.

But people pay the sales tax with nickels and quarters and dollars in purchases throughout the year. Many taxpayers have no idea how much sales tax they pay.

The amount must be substantial, though. In the fiscal year which ended on June 30, the sales tax raised $3.8 billion for Indiana. The state income tax raised less, $3.5 billion. All those sales tax nickels add up to a tax payment at least as large as the yearly income tax bill, for many taxpayers. The extra penny on the sales tax will increase these payments, by about $800 million in fiscal year 2003-2004, which starts next July.

We can make a good guess about how much families pay in sales taxes. The U.S. Bureau of Labor Statistics collects data on household spending. On their website, at http://stats.bls.gov/cex (that's right, no "www"), you can find out how much an average family of four with a pre-tax income of $35,000 spends on laundry and cleaning supplies ($159 a year) or floor coverings ($41 a year) or pork ($188 a year), or just about anything else. We can identify which items are taxed, and compute tax payments at the old 5% rate and the new 6% rate.

What is taxed? Most tangible goods are taxed. Most food is not taxable, unless it's served in a restaurant. Drugs are exempt. Tobacco and alcohol are taxed. Most services are exempt, though utilities and rentals are taxed.

So, let's take that favorite household of analysts everywhere, the family of four, give them an income of $50,000, and ask how much they pay in sales taxes. The answer comes back: $1,073 a year at 5%, $1,277 a year at 6%. The sales tax hike costs this household an extra $204 a year. These are averages, of course. Your taxes may differ.

Smaller households pay less. One person with no spouse or kids and a $50,000 income pays $692 at 5%, $825 at 6%. That's an extra $133 with the tax increase. Lower income families pay less, upper income families more. A family of four with a $25,000 income pays $796 at 5% and $948 at 6%, $152 more with the tax hike. Families with higher incomes pay more in dollars, but not as a share of their incomes. At 6%, the family with $25,000 pays 3.8% of their income in sales taxes. The family with $50,000 pays 2.6%. That's why the sales tax is often called "regressive," because the share of income paid to the tax decreases as incomes rise. It happens because upper income families save more of their incomes, and savings aren't sales taxable.

The extra penny on each dollar adds up to $800 million a year. What's to be done with the money? The sales tax hike is the largest piece of a total $1.5 billion tax increase, with cigarette and gambling taxes contributing most of the rest. About a billion dollars of this revenue will be returned to taxpayers in property tax cuts, mostly for homeowners. Some homeowners will see their property tax bills drop enough to offset their higher sales taxes. Some won't.

The other $500 million will be used to fill in part of the state budget gap. It's enough to keep the state from an unconstitutional budget deficit, but not enough to pay for new spending. Despite the new penny, the General Assembly will have to make some tough budget decisions when their session starts in January.

Myrtle Bailey's Boone County Christmas Toy Drive:
2002 Recipients - 1,013 (The Lebanon Reporter, 12/23/02)
2001 Recipients - 893 (The Lebanon Reporter, 12/24/01)
2000 Recipients - 863 (The Lebanon Reporter, 12/24/01)
1977 Recipients - 263 (The Lebanon Reporter, 11/08/03)

Percent of Students Receiving Free Lunches / Textbooks
    Lebanon Community School Corporation
    (The Lebanon Reporter, 09/12/02)
        1999-00 18%
        2000-01 21%
        2001-02 24%

INSPIRE Indiana Virtual Library

Institute on Taxation and Economic Policy
Who Pays State and Local Taxes? (2002 Edition)
Indiana Taxes Hit Poor & Middle Class Far Harder than the Wealthy

STATS Indiana
    Indiana Counties and Regions IN Depth
    Monthly Labor Force Estimates
        November 2002 Unemployed / Unemployment Rate
            Indiana - 147,775 / 4.7%
            Boone County - 890 / 3.5%
        November 2001 Unemployed / Unemployment Rate
            Indiana - 150,985 / 4.8%
            Boone County - 760 / 3.0%
        November 2000 Unemployed / Unemployment Rate
            Indiana - 79,034 / 2.5%
            Boone County - 350 / 1.4%

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This page was last updated on 04/01/13.