Indiana legislators face some hefty fiscal decisions on how much they want to go along with the broad federal tax cuts that President Donald Trump pushed through Congress last summer.
An analysis from Gov. Mike Braun’s administration estimates that total state tax breaks on businesses and individuals could top $900 million over the next two years if the Legislature were to adopt all the tax changes included in what Republicans dubbed the “One Big Beautiful Bill.”
Republican legislators are poised to take up proposals on conforming the state tax code with federal rules after the legislative session resumes Jan. 5.
The federal changes include temporary deductions for individuals who receive tips and overtime wages along with the interest on loans for vehicles built in the U.S. Other adjustments give numerous tax breaks to businesses, including a broader deduction for some production facilities.
Chad Ranney, Braun’s state budget director, called conformity with the federal tax code “a provision-by-provision decision in conjunction with the Legislature.”
“There’s nothing that says you have to take all or nothing,” Ranney said. “We’ll figure out, working with the Legislature, what makes sense from a policy perspective, what makes sense from a fiscal perspective and, frankly, what gives Hoosiers the best bang for their buck.”
Details from conformity analysis
Indiana’s last major conformity update came in 2023, when Indiana adopted the Internal Revenue Code as of Jan. 1, 2023, bringing the state into line with pandemic-era relief measures such as the CARES Act and the American Rescue Plan.
The state analysis provided to the Indiana Capital Chronicle on Monday projects that taxpayers would save nearly $275 million over the next two years with the deduction for overtime wages.
The tax break on tips would total about $80 million during that time, while the vehicle loan deduction was estimated at $70 million.
The biggest of the business tax cuts amounts to an estimated nearly $380 million over the two-year period.
We have more priorities, urgent priorities that we need to tackle first before we implement any of these changes.Democratic Sen. Fady Qaddoura
But those savings mean revenue loss for the state budget.
The tax conformity debate will come in the wake of an improved forecast of state tax collections released last week. The new projections show that the state’s cash reserves could grow to nearly $5 billion by the middle of 2027 — more than double what was anticipated when the new state budget took effect in July.
Senate Appropriations Committee Chairman Ryan Mishler, R-Mishawaka, was noncommittal on what tax code changes legislators will take up.
“Ideally it’d be nice to be revenue neutral on some of that,” Mishler said. “You know, some of them are cost savings and then some would cost money. So I guess we just have to balance that out.”
Legislators would likely need to act quickly to enact those tax breaks for 2025 before individuals and businesses begin filing their tax returns — and amid worries of confusion over differences in what could count toward income subject to federal and state taxes.
It is possible that lawmakers could push through a conformity bill in the first few weeks of the legislative session that is now scheduled to conclude by the end of February.
The state’s Department of Revenue has been preparing “to quickly account for any changes the General Assembly may make pertaining to conformity,” Ranney said in an email to the Capital Chronicle.
“Once the General Assembly has made the decision on what to incorporate into Indiana law, DOR will issue guidance and instructions to taxpayers about filing to account for the changes,” Ranney said.
Arguments over priorities
Few states have so far adopted the federal tax changes despite the Trump administration urging them to do so, The Associated Press reported.
One worry with Indiana adopting all the federal changes is that it would further reduce the state’s tax base, said Neva Butkus, a senior analyst for the nonprofit Institute on Taxation and Economic Policy.
That could make the state more dependent on its 7% sales tax — among the highest in the country — that now draws in nearly half of the state’s revenue.
Butkus said the federal tax changes directed a disproportionate share of savings toward the wealthy. She also called the deductions on tip and overtime income “short sighted” and not equitable.
“Why should a child care worker making $30,000 and a bartender making $30,000 all of a sudden pay different amounts in taxes?” she said during a webinar put on by Prosperity Indiana last week.
Sen. Fady Qaddoura, the top Democrat on the Senate Tax and Fiscal Policy Committee, said he believed the Legislature should be cautious in adopting the federal tax changes.
Qaddoura cited concerns about federal Medicaid funding cuts included in Trump’s tax and spending bill threatening to increase state costs for the health insurance program for low-income families.
He argued that rather than enacting the federal tax breaks, the state should boost funding for programs such as child care vouchers that have long waiting lists and eliminate the state’s sales tax on residential and business utility bills.
“We have more priorities, urgent priorities that we need to tackle first before we implement any of these changes,” Qaddoura said. “We’re not obligated to comply with the entirety of what has been sent to us.”
Indiana Capital Chronicle is part of States Newsroom, a nonprofit news network supported by grants and a coalition of donors as a 501c(3) public charity. Indiana Capital Chronicle maintains editorial independence. Contact Editor Niki Kelly for questions: info@indianacapitalchronicle.com.