Did you know that Indiana has a higher income tax rate than Illinois?
It's true. Our income tax rate is 3 percent. Indiana's rate is 3.4%. (It was raised from 3% to 3.4% in 1987).
In fact, every Midwestern state has a higher income tax rate than Illinois.
That's the main reason why most Illinois schools don't have good programs. We don't tax our income enough to fund education.
Mitch Daniels, the former budget chief for President Bush, is the new Republican Governor of Indiana. Indiana is facing a budget deficit just like Illinois (and about every other state).
Governor Daniels proposes an increase in the income tax to 4.4% for income earned above $100,000. Here's a story on it from the Indianapolis Star. It's a one-year proposal. Here is his State of the State address where he talks about the 4.4% income tax near the end of it.
So an Indiana resident would pay $3,400 for the first $100,000 earned, and then 4.4% on any income earned above that.
It's great policy.
One main advantage is the federal offset. Read this policy brief to understand the federal offset -- basically, high-income people deduct their state income taxes from their taxable income on their federal returns. They can pay a rate of 30% at higher levels of income. So for every extra dollar that a high-income Indiana resident pays in Indiana state income tax, that is one dollar less that is taxable from the federal government. Which means that is 30 cents that is not sent to Washington D.C.
So the dollar extra paid to Indiana state government is really only 70 cents of extra tax paid by the Indiana resident, since if the resident didn't pay the extra dollar to the state government, she would have sent 30 cents to Washington as that dollar would have been taxable income for her federal taxes.
That's why it makes sense for states to tax high-incomes, because we keep more of the income earned in our state in our state, and we do not send it to Washington.
We do not tax the income of high-income earners enough in Illinois.
So if Mitch Daniels can propose an income tax increase on income above $100,000, why can't Rod Blagojevich?
I hope more legislators and Governor Blagojevich support Will Davis' legislation, HB 155. It shifts the income tax burden onto the higher-income earners to take advantage of the federal offset and shifts away from low-income earners who do not get the advantage of the federal offset (because their federal tax rates are lower and often they do not deduct their state taxes from the federal returns).