LEGISLATIVE SERVICES AGENCY
OFFICE OF FISCAL AND MANAGEMENT ANALYSIS
FISCAL IMPACT STATEMENT
LS 6984 NOTE PREPARED: Jan 1, 2025
BILL NUMBER: HB 1345 BILL AMENDED:
SUBJECT: Income Tax Replacement.
FIRST AUTHOR: Rep. Borders BILL STATUS: As Introduced
FIRST SPONSOR:
FUNDS AFFECTED:XGENERAL IMPACT: State & Local
DEDICATED
FEDERAL
Summary of Legislation: The bill eliminates the state Adjusted Gross Income Tax by reducing the rate to
zero. It provides that the reduction in revenue resulting from the elimination of the state Adjusted Gross
Income Tax must be offset by adjustments to the state Gross Retail Tax.
It provides that in calculating the Local Income Tax (LIT), which is imposed based on a local taxpayer's state
adjusted gross income, the calculation of a taxpayer's state adjusted gross income for LIT purposes shall be
calculated under the Adjusted Gross Income Tax provisions as if those provisions, and the most recent
Adjusted Gross Income Tax rate before its elimination, were still in effect.
Effective Date: July 1, 2025.
Explanation of State Expenditures: Department of State Revenue (DOR): The DOR will incur additional
expenses to revise tax forms, instructions, and software. The DOR’s current level of resources should be
sufficient to implement the tax provisions outlined in the bill. With the elimination of the state Adjusted
Gross Income Taxes, the bill will reduce the agency workload in the long term. [DOR will still process
Individual Adjusted Gross Income Tax returns for the purposes of local income tax.]
Explanation of State Revenues: Summary - The bill will replace the revenue generated by Individual
Adjusted Gross Income Tax and Corporate Adjusted Gross Income Tax by imposing a higher Sales Tax rate
or making other adjustments to the tax base that will replace the revenue loss from the repeal of the income
taxes. The fiscal impact from the bill is indeterminable.
The revenue from Individual Income Tax and Corporate Income Tax is deposited in the state General Fund.
Revenue from the Sales Tax is deposited in the state General Fund and state dedicated funds. It is assumed
that the Sales Tax rate will be adjusted to completely offset the revenue loss from the income taxes on the
state General Fund. The bill will result in a fiscal impact to the extent that the Sales Tax rate and any other
adjustments cannot exactly generate the same amount of revenue as the elimination of the Individual Income
Tax and Corporate Income Tax. The fiscal impact could occur as a result of an estimation error in: (1) the
income tax loss for a time period, and (2) the Sales Tax adjustments to offset the loss of income tax revenues
HB 1345 1 for the period. The fiscal impact will begin in FY 2026.
Additional Information - Individual Income Tax Revenue Loss: The bill sets the Individual Income Tax rate
to 0% starting tax year 2026. The revenue loss from the repeal of Individual Income Tax will begin in FY
2026 (six months). It is estimated that the revenue loss from Individual Income Tax will be about $3.4 B in
FY 2026 and $8.5 B in FY 2027.
Corporate Adjusted Gross Income Tax Revenue Loss: The bill sets the Corporate Income Tax rate to 0%
starting July 1, 2026. The revenue loss from the repeal of Corporate Income Tax will begin in FY 2027. The
impact in FY 2027 will be about $1.2 B.
The revenue loss from the repeal of these taxes will continue to grow in future years depending on the growth
in the state economy. The revenue from Individual Income Taxes and Corporate Income Taxes is deposited
in the state General Fund.
Revenue Loss Offset from Sales Tax Adjustments: The Sales Tax is currently imposed at 7% of the gross
retail income from taxable transactions. Sales Tax is deposited in the state General Fund and state dedicated
funds. The provisions in the bill will require the Sales Tax rate to be adjusted to generate additional revenue
to be deposited in the state General Fund. The adjustments to the rate must be made to completely offset the
state General Fund loss from the repeal of income taxes. In FY 2024, the total Sales Tax collections were
about $10.9 B, with $10.4 B deposited into the state General Fund.
Explanation of Local Expenditures:
Explanation of Local Revenues: Local Income Taxes: Results from empirical literature on elasticity show
that a decrease in the Individual Income Tax rate would result in an increase in overall statewide taxable
income. This would result in an increase in LIT revenues starting in CY 2026. Since the certification process
for LIT revenues result in a lag of actual distributions of the revenues, the actual fiscal impact on LIT
distributions will not occur until CY 2028. LIT revenues are estimated to increase by an indeterminable, but
likely significant, amount.
State Agencies Affected: Department of State Revenue.
Local Agencies Affected: Local units.
Information Sources: Revenue Forecast Technical Committee, December 2024 Revenue Forecast,
https://www.in.gov/sba/budget-information/revenue-data/#tab-844794-1-Revenue_Forecasts; Long, James
E. “The Impact of Marginal Tax Rates on Taxable Income: Evidence from State Income Tax Differentials.”
Southern Economic Journal 65(4): 855. Bruce, Donald, John Deskins, and William Fox. (2005) On the
Extent, Growth, and Efficiency Consequences of State Business Tax Planning." Donald Bruce, John Deskins,
and William Fox. (2006). "On The Relative Distortions of State Sales, Corporate Income and Personal
Income Taxes." Gruber, Jonthan, and Joshua Rauh. (2005) "How Elastic is the Corporate Income Tax Base.
Bruce, Donald, John Deskins, and William Fox.
Fiscal Analyst: Randhir Jha, 317-232-9556.
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