EDITORIAL: Simplifying taxes is not so simple

Pence called it the Indiana Tax Competitiveness and Simplification Conference. He said he was not aiming to cut or raise taxes, but to “lessen the burden of compliance” and “create a more attractive environment for investment.”

Pence deserves credit for refusing to be satisfied with the status quo. Making Indiana’s tax laws smarter won’t be easy, but it’s worth trying.

For nearly all Hoosiers, prosperity depends directly or indirectly on private businesses thriving and creating jobs.

Businesses like low taxes, but they also appreciate states and communities that work efficiently, provide an educated work force and offer desirable places for employees to live.

Finding the right balance is the hard part, as Pence learned last winter when he proposed to end the business inventory tax, saving businesses $1 billion across the state.

Pence’s idea ran into a roadblock at the Legislature, even among his fellow Republicans, who feared his idea would cripple local governments.

Instead of adopting Pence’s ideas, lawmakers cut the corporate tax rate, which will phase down to the second-lowest rate in the nation by 2021 if no states undercut us by then.

By one expert rating, the changes improve Indiana’s tax climate for businesses from 10th best to eighth best among the states.

The Legislature also gave individual counties the option to reduce their business taxes.

If Pence wants to study the wisdom of our tax laws, the growing trend toward more county options would be a good place to start. We’re steadily creating a patchwork quilt of 92 different county tax policies.

Some leaders fear that in competition to lure employers, some counties will cut business taxes more than they can afford.

Lawmakers also are cutting our personal income taxes. Our 3.4 percent income tax rate will drop to 3.3 percent in 2015 and then to 3.23 percent in 2017.

Those gains will be more than offset if state funding cuts and new requirements force counties to raise local taxes. Already, 17 Indiana counties assess county income tax rates of 2 percent or above, with DeKalb County poised to join them soon.

Despite the state cuts, a DeKalb County resident who pays 4.9 percent in state and local taxes now could pay 5.3 percent in 2015.

Indiana’s low state income tax rate can be deceiving. Indiana gives a minimal $1,000 personal exemption, and its flat rate favors Hoosiers with higher incomes.

A chart from tax-rates.org shows that 35 states use graduated income tax rates like the federal government — with higher rates for higher incomes.

Indiana’s income taxes rank among the very best for high incomes and better than most for average incomes, but among the worst for low-income residents. No one ever seems to mention that in discussion of Hoosier tax policies.

Pence is likely to find that simplifying taxes will not be so simple. But there’s always room to improve, as long as we look at the whole picture.