Barely one week into his first term as Indiana’s governor, Mitch Daniels–the state’s first Republican governor in 16 years and former budget director for President George W. Bush–proposed a temporary income tax hike on persons who earn more than $100,000.
The proposal came in response to what Daniels referred to as a “structural” budget deficit of about $645 million. Daniels said his plan would balance the state’s budget in one year.
In his January 18 State of the State address, Daniels proposed raising the state’s income tax rate on $100,000 and up earners from 3.4 to 4.4 percent for one year, a 29 percent jump in their tax burden. The tax also would apply to persons who run subchapter S corporations, in which business profits are counted as income.
Opposes General Tax Hike
Daniels estimated the tax hike would apply to 140,000 taxpayers and bring in about $290 million of additional income tax revenue. He pledged to “veto any attempt to raise general taxes on our citizens, and any attempt to extend for even one day the one temporary measure I reluctantly propose tonight.”
He also proposed holding spending to current levels in many programs, including schools and prisons, slower growth in Medicaid spending, and a 120-day moratorium on school bond issues. Daniels said the state plans to draft tougher standards for approving construction bonds during that time.
Total spending, though, would increase by about $1 billion over the next two years.
Briane House, who earns more than $100,000 a year as legal counsel to an energy firm, supported Daniels’ call for a temporary income tax hike to fix the budget.
“Don’t go to Starbucks four times a week and you’re there,” House told FoxNews Online in a January 27 article. “You’re not going to miss it.”
Many Legislators Unimpressed
Legislators from both sides of the aisle appeared to give the proposals a cool response.
“I’m upset,” said State Sen. Dennis Kruse (R-Auburn). “I agreed with most of what he said, but then he mentioned he wanted a tax increase on people who earn over $100,000. I oppose that. I don’t want any tax increases.
“We have too many taxes already,” said Kruse. “The answer is to cut government spending more. We can balance the budget that way.”
Kruse said the state’s last budget raised several taxes. The state sales tax went from 5 to 6 percent, bringing in upwards of $1 billion more, Kruse said. The cigarette tax was upped 15.5 cents a pack, raising another $100 million. And casino taxes were hiked another $50 million.
On the Democrat side, the reception was even more subdued. Democrats applauded twice during Daniels’ address–when he stepped onto the House floor and when he left.
State Rep. Craig Fry (D-Mishawaka) said he “was surprised by his immediate call for a tax increase. Daniels is asking us to raise taxes by a substantial amount, and it looks like we can grow out of our budget problem with an improving economy.”
Further Medicaid Cuts Suggested
Medicaid spending in Indiana has recently grown by more than 10 percent a year. Daniels said he would slow growth to about 5 percent through a variety of program changes affecting eligibility, benefit levels, and provider payments.
Kruse said the governor should go farther with Medicaid spending cuts.
“If we have no growth in Medicaid, we could balance the budget on that,” Kruse said. “It’s the second-largest expenditure in the state next to education. If we keep it from growing, the budget is balanced.”
Prospects Called Dim
Because of these and other recent tax increases, and spending increases including $2 billion more for education over the past eight years, Kruse said he believes prospects for the governor’s budget proposals “are dim.”
“This is a Republican governor, and there are a lot of Republicans who are opposing it,” Kruse said. “Some of them are key leaders. They’re saying balance the budget some way else.”
“The biggest problem besides the tax proposal is increasing spending by $1 billion at the same time he’s flatlining schools,” Fry said. “He’s projecting increases in Medicaid, and general government spending is going up. He’ll get no support from Democrats if he flatlines education.”
Accused of Betrayal
For a January 19 news story, House Minority Leader B. Patrick Bauer (D-South Bend) told South Bend Tribune reporter Martin DeAgostino that Daniels’ proposals would hurt many public school districts and force local governments to raise taxes. Like Fry, he said Indiana’s recovering economy will generate enough new revenue to cover the budget deficit without new taxes.
“At this time, I say he’s premature, premature at best,” Bauer told DeAgostino.
The taxpayer advocacy group Americans for Tax Reform (ATR) also jumped on Daniels’ State of the State remarks, with a January 20 news release headlined, “Gov. Mitch Daniels Sets New Record–Betrays the Taxpayers After Only 8 Days in Office!”
“This is the fastest any governor claiming to be a Reagan Republican has folded under the pressure of the big-spending interests,” ATR President Grover Norquist said in the release. “Daniels is not serious about reform–raising taxes is what you do instead of reforming broken government. He proposes to spend more this year and next than was spent last year, so his tax increase would fund higher spending.”
Steve Stanek ([email protected]) is managing editor of Budget & Tax News.