Prosperity in the Hoosier State Keeping Indiana on Track

Did You Know?

TAXES AND SPENDING Indiana has the 10th best business tax climate among the 50 states, but its corporate income tax ranks 24th.
Source: Tax Foundation

Despite relatively low levels of state and local taxation, Hoosiers are charged over 40 different taxes and fees.
Source: Indiana Department of Revenue

Hoosiers worked 103 days this year just to pay the sum of their local, state, and federal taxes.
Source: Tax Foundation

Known as the Crossroads of America the Hoosier State has a rich and diverse history. Originally a wilderness outpost, Indiana rapidly became an important manufacturing state due to its geographic location and Great Lakes access. Throughout the 20th century, Indiana grew to be an automotive, steel and pharmaceutical leader with strong ties to its agricultural core. With sound scal policy and management, Indiana has grown to be a leader in the Midwest and the country as a whole.

EDUCATION Indiana spends over $9,000 per child on K-12 public education.
Source: U.S. Census Bureau

68% of Indiana eighth graders are not proficient in reading.

Source: National Assessment of Educational Progress

Indiana is now one of the few states with a statewide scholarship program which allows thousands of families to send their child to the school of their choice.
Source: Indiana Department of Education

Indiana is now holding schools accountable with A through F grades and providing performance rewards for teachers.
Source: Indiana Department of Education

While our states fiscal situation is relatively stable compared to most states, especially in the Midwest, Indiana must continue to push responsible reforms to maintain our economic competitiveness.
This booklet aims to help do just that by explaining how economies prosper and what policies Indiana needs to adopt. Among the questions it will answer are: How can we keep taxes low and bring prosperity to our citizens? How can we improve education for our children? How can we help workers and improve Indianas economic success? By embracing the entrepreneurial spirit that made the state great, Hoosiers can ensure another era of prosperity for not just themselves, but future generations as well.

Indiana has led the way in supporting local and state control in education by requiring a review of national Common Core educational standards.
Source: Indiana Department of Education

LABOR Indiana has the 26th most burdensome occupational licensing laws among the 50 states.
Source: Institute for Justice

HOW DO WE COMPARE?
Economic Competition in the Midwest

WHAT DRIVES PROSPERITY?

Private Property and the Rule of Law

GDP, population, and private sector employment growth are well-accepted measures of a states prosperity. GDP growth represents the market value of all goods and services produced within a state. Population growth indicates how desirable a state is in which to live and do business. Private sector employment growth reveals how many jobs are being created in the economys backbone. Many factors affect all three measures, but taxes and government spending play a fundamental role in Indianas growth and its ability to recruit businesses and individuals to the state. Over the last decade, Indianas economy grew, but its growth lagged many other states. Although Indiana grew faster than many of its regional peers, the Midwest suffered a rough decade during the 2000s. Despite our states positive population and GDP growth, Indiana lost 10,300 private sector jobs from 2002 to 2012. While the situation has certainly improved over the past few years because of recent pro-growth reforms, more work needs to be done. But, what policies would lead Indiana into a new era of prosperity?
Real GDP Population Private Employment

Why are some states more prosperous than others? Factors such as size, location and natural resources are important yet uncontrollable. However, there are many instances in which one state clearly outperforms similar states. What explains the difference?

History tells us prosperity is driven by two important factors: the rule of law and private property rights.
Private property is not just your land or house; it includes everything you own, including cash and savings. The rule of law and private property rights assures citizens that they will keep the fruits of their labor. When allowed to make decisions over their own private property, people use it in the way they think is best. These factors interact to encourage trade, investment, and the creation of wealth. People rarely have complete control of their property because government always takes some of it in the form of taxes. Although it is necessary for government to provide services like police and re protection, it is important to remember that every dollar that government spends cannot be spent by an individual or a business. Comparing Indiana to its neighboring states and to the nation tells us where Indiana stands in terms of prosperity and the level of control it permits citizens over their property.
A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earnedthis is the sum of good government. Thomas Jefferson

ECONOMIC GROWTH BY STATE, 2002-2012

15% 10% 5% 2.2% 0% 9.9%

13.7% 11.2% 6.1% 7% 10.1% 5.2% .9% -.4% -1.7% -6.6% -5% 1.2% 1.1% .3%

-2.2% -5% -10% -15%

-10.2%

IL

IN

KY

MI

OH

WI

Source: U.S. Bureau of Economic Analysis, U.S. Census Bureau, U.S. Bureau of Labor Statistics

TAXES

Lower Taxes Lead to More Jobs

Tax Reform Sweeps the Hoosier State

TAXES

Taxes can adversely affect a states economy. States that have higher levels of taxation and government spending have lower levels of economic activity. How does Indianas tax policy compare with surrounding states? According to the Tax Foundation, Indiana is the 10th friendliest state to conduct business. Indianas ranking is driven by its low sales, property, corporate and income tax rates. In addition, Indiana has constitutional provisions limiting the growth of property taxes. However, Indianas corporate and individual income taxes are not competitive in attracting new residents and businesses to our state. Thats because seven states choose to not tax their residents income at all including Alaska, Florida, Nevada, South Dakota, Washington, Wyoming and Texas. Three of these states Nevada, South Dakota and Wyoming do not impose a corporate income tax, either. In fact, of the nine states that the Tax Foundation ranked as having a better business tax climate than Indiana, nine of them do not collect either an individual income, corporate income, or sales tax. Clearly Indiana should consider eliminating certain taxes completely to improve its economic competitiveness.

While Indianas tax rates are relatively low, the inclusion of nearly every major tax restricts us from joining the top 10 most competitive states. Our state government currently collects over 40 different taxes and fees including everything from occupational licensing fees to special vehicle taxes. On the bright side, state lawmakers in 2013 passed a significant tax cut package as part of our biennial budget. Included in this package was a 5% income tax cut for all Hoosier taxpayers, an immediate elimination of the state inheritance (death) tax, a 25% reduction in the state financial institutions tax, and a continued cut in the corporate income tax rate as well. Many are calling this the largest tax cut in Hoosier history. This type of pro-growth tax reform matters. Compared to the 10 states with the worst tax climates as ranked by the Tax Foundation, the 10 states with the best tax climates from 2002 to 2012 experienced: 68% faster economic growth 90% faster personal income growth 157% faster population growth 696% more private sector jobs

STATE BUSINESS TAX CLIMATE INDEX, 2014

50

47 44 44 39 36 33 29 2727 28 23 20 17 14 14 11 10 1011 5 15 30 33 43 43

40
31

30

24

Regardless of how you look at it, high taxes discourage individuals from living in a state or starting a business. High taxes are no reward for businesses and residents of our state.

20

10

10

9 7

Illinois

Indiana

Kentucky

Michigan

Ohio

Wisconsin

While Indiana is performing well on this front, there is more that can be done to take our state to the top.
6

Overall Ranking Sales

Corporate Income Property 1= Best

Individual Income Source: Tax Foundation

COMPLICATION IN THE STATE TAX CODE

One of the main sources of complexity in our states tax code is its numerous credits and industry-specific tax cuts. For instance, the Indiana Economic Development Corporation (IEDC) is an agency of Indianas state government responsible for incentivizing businesses to settle down and stay in the Hoosier State. While its mission certainly sounds nice, the means by which IEDC attempts to execute economic growth can actually harm Indianas economy. IEDC offers businesses a grand total of nine tax credits and exemptions for various activities like upgrading their facilities, relocating their headquarters, and job creation. All nine are government subsidies to business that shift the tax burden onto small businesses and make companies dependent on government handouts. Take the Economic Development for a Growing Economic Tax Credit for example. To be eligible for this break, a business must prove that not receiving the tax credit will result in the applicant not creating new jobs in Indiana. In effect, the government is incentivizing businesses to ask for a handout in times of desperation at taxpayers expense. Meanwhile, less politically connected businesses have to fully comply with the complex tax code. Indiana businesses should rightfully be demanding lower taxes from the state government. However, tax relief should not come in the form of complex credits and exemptions that pick winners and losers in the marketplace. Rather, tax relief should come from rate reductions for every business in the state. In this manner, all companies can scale up their economic activity from the money theyve saved, not just the politically connected ones.

GOVERNMENT SPENDING

Indianas spending and debt has skyrocketed over the past sixty years. Our state governments spending increased by 594% from 1960 to 2011 after adjusting for inflation. During the same time frame, state government debt increased by 613%. While population growth can account for part of the increase, it cannot fully explain the extreme rise in state spending. Indianas population grew by 40% from 1960 to 2011 well below the increase in government spending. As if our states spending sickness isnt bad enough, Indianas local governments also share the illness. As of 2011, combined state and local spending amounted to $52.7 billion. When divided by the number of state residents at the time, every man, woman, and child in Indiana would have to pay the state government $8,059 to fully fund its services. In these tough economic times, our state government should be doing more to reduce its spending burden on taxpayers. INDIANA STATE SPENDING AND DEBT, 1960-2011
Spending Debt

40 35 30 25 20 15 10 5

BILLIONS OF 2010 DOLLARS

2000

0 1960 1990 1980 1970 1965 1995 1985 1975

2005

Source: U.S. Census Bureau

2010

THE TRUE COST OF GOVERNMENT

Your Government Burden Visualized

THE IMPACT OF GOVERNMENT SPENDING

Some might assume that it is acceptable or even good that the government spends or borrows at high levels, but there are many reasons, in addition to high taxes, that make increased spending bad: Government spending is a burden on the economy. Citizens spend their money on improving their businesses and lives. They know what to do with their money better than politicians do. The total burden of government (federal and state) represents more than half of a familys income and has been growing larger, leaving families with less control over their earnings. Every dollar spent by government cannot be spent by individuals and businesses. Too much borrowing also causes problems. Borrowing allows politicians to spend money without having to tax current voters, obscuring the true cost of government. Borrowing by government crowds out private investment. Bonds aimed at luring businesses to the state hurt existing businesses and can invite corruption and cronyism. High government employment with big benets has negative implications for job growth. When government becomes a bigger employer, it competes with private businesses for employees. To make matters worse, those government jobs and their generous benefit packages are paid for by the very businesses that face more competition for employees, striking Indiana businesses with a one-two punch. Faced with this unfair competition for employees, it is obvious why businesses choose to relocate to states with better conditions.

Its hard to comprehend the heavy burden our federal, state, and local governments place on hard-working Hoosiers every year. Even fancy graphs and gures in the trillions of dollars can seem irrelevant to our everyday lives. To help visualize the sheer impact that the costs of governments have on the average person, this calendar shows the number of days a Indiana taxpayer works to pay his or her share of the cost of government. It includes the explicit spending of the government and also the hidden costs of state, local, and federal regulation.

INDIANA STATE & FEDERAL COST OF GOV., 2012

JANUARY FEBRUARY MARCH

APRIL

MAY

JUNE

JULY

AUGUST

SEPTEMBER

OCTOBER

NOVEMBER

DECEMBER

Federal Spending 88 days

Federal Regulation 69 days

State & Local Spending 40 days

Source: Americans for Tax Reform & Cost of Government Day: 2012 Report

Indiana residents have to work until July 17th every year to pay for the explicit and implicit costs of government spending and regulation. As you can see, the trouble doesnt come from the state government alone. Excessive federal spending on social programs like Medicaid and regulations on businesses like banks hamper prosperity not just in Indiana, but across the nation.

10

EDUCATION

Leading the Way on Education Reform

Spending is Not the Problem

EDUCATION

While government spending on public education has skyrocketed since the 1970s, students educational performance has largely remained at. Many of our children are leaving high school without the preparation they need to make it in an increasingly competitive, globalized economy. Parents need more choice and exibility to nd the best path for their childrens education. Consider these past achievement numbers for Hoosier children from the National Assessment of Educational Progress: 56% of fourth graders are not proficient in math (NAEP 2011) 66% of eighth graders are not proficient in math (NAEP 2011) 68% of fourth graders are not proficient in reading (NAEP 2011) 68% of eighth graders are not proficient in reading (NAEP 2011) 73% of fourth graders are not proficient in science (NAEP 2005) 71 % of eighth graders are not proficient in science (NAEP 2005) 74% of fourth graders are not proficient in writing (NAEP 2002) 70% of eighth graders are not proficient in writing (NAEP 2002) In the American Legislative Exchange Councils most recent report on education in the United States, Indiana earned an education policy grade of B+ while Hoosier students ranked 17th out of the 50 states for their scores on reading and math tests. While these rankings are certainly not the worst, Indiana still has much room for improvement. Market forces have been proved time and again to provide the best means to prosperity. Market forces at work in education would have the same effect. Whether it is school choice initiatives or paying teachers for performance, these market approaches to education can lead to stronger teachers and schools and most importantly stronger students.

People often say that if we could just spend more on education, then the problems with failing students and schools would be solved. However, the reality is much more complicated than that. After all, nearly half of Indianas general funds are already spent on K-12 education, as seen by the pie graph below. That number jumps to nearly two-thirds of the budget when including higher education and teacher pensions. Spending per student has also steadily increased. According to the U.S. Census Bureau, Indiana now spends $9,611 per student in K-12 public education. It is clear that if increased spending could alone accelerate academic performance, our schools would be performing like no others in the world.

INDIANA GENERAL FUND APPROPRIATIONS, 2013 Other 9% Child Services 4% Human Services 5% Corrections 5% Teacher Pensions 5% Medicaid 13% Higher Education 12% K-12 Education 47%

Source: Budget Agency - State of Indiana

11

12

EDUCATION

Choice Scholarship Program

EDUCATION

Common Core

Established in 2011, Indianas choice scholarship program provides a means for low and middle income families to send their children to the school that best meets their childs individual needs.

Whos Eligible?
Eligibility for the Indiana Choice Scholarship is based a few factors including family income, availability of scholarships and whether or not a child has attended at least one year in public school. Income: A family of four qualifying for the federal free and
reduced lunch program can receive a scholarship worth up to 90% of the tuition and fees of the school in which they are applying. Families of four that earn up to 150% of the free and reduced lunch program can get a scholarship worth 50% of the tuition rate. Families of four earning up to roughly $64,000 can receive some form of scholarship for their children. on how many children can receive a choice scholarship, giving thousands of Indiana students the opportunity to attend the school of their dreams.

On June 2, 2010, two Washington, D.C.-based organizations released a set of national education standards called Common Core for states to voluntarily adopt. Just two months later, the Indiana State Board of Education voted to adopt the new standards on August 3, 2010 with little input from parents, teachers, and the general public. For two years, the future of education in Indiana was put into question as concerned citizens started learning more about Common Core and questioning whether the new standards would be better than our states excellent existing ones. In fact, the Fordham Institute gave Indianas academic standards an A grade in a 50-state comparison, concluding that they are clearer, more thorough, and easier to read than the Common Core standards. So why, many Hoosiers asked, should we fix whats not broken? Gov. Pence and the Indiana General Assembly enacted legislation in May 2013 that calls for a full review of Common Core. Before proceeding any further, the Indiana Department of Education and Office of Management of Budget must compile reports comparing our states existing standards to Common Core and detailing its costs to taxpayers. Now, Hoosiers have the time to study the standards and ask some hard-hitting questions.

Availability: After the 2012-2013 school year, there are no caps

Student Status: In order for a student to receive a scholarship

they must have completed at least one year in public education, have previously received a scholarship from a certied scholarship granting organization, or have a sibling already receiving a scholarship.

Whos Beneting?
Families and Children: In its rst two years of existence, over
10,000 children have beneted from the choice scholarship program. Parents seeking a better education for their childrens needs now have the opportunity to do something about it. Today, that number stands to grow up to 20,000. ships to children to attend non-public schools. As stated earlier, it costs over $9,000 for the state to educate each child. For grades 1-8, Indiana Choice Scholarships are capped at around $4,500.

Taxpayers: The state actually saves money by providing scholar-

13

This temporary pause is a healthy rst step in ensuring that our children are receiving the best education possible, and Hoosiers should take this opportunity to get involved in shaping the future of learning in our great state.

14

OCCUPATIONAL LICENSING
A Driver of Unemployment

One obvious solution to increase Indianas economic competitiveness and attract more jobs to our state would be to reduce occupational licensing requirements. An occupational license is a government permission to work in a certain vocation. While almost nobody would disagree that high-risk professions like doctors and policemen should be certified, many states like Indiana also certify low-risk jobs like cosmetologists, fishermen, and taxidermists.

Indianas state government would work wonders for lower-income workers by eliminating licensing requirements for jobs that dont involve a great deal of danger or require high-level expertise. In fact, many of Indianas licensing requirements are simply nonsensical. Low-risk professionals like cosmetologists and makeup artists are required to dole out hundreds of dollars in fees and days of their time to receive permission to work.

Indiana has the 26th most burdensome licensing laws among the 50 states, according to the Institute for Justice.
The average licensed occupation in Indiana requires $147 in fees and 251 days of training to receive the state governments permission to work. These high barriers to entry in the market doubtlessly discourage many workers from entering the labor market, thus contributing to our states unemployment rate. As if raising unemployment isnt bad enough, the negative effects of occupational licensing bleed onto consumers as well. Since certification crowds many workers out of the market, prices often rise in licensed professions since there is less competition to keep them low.

By reviewing, reducing, or even eliminating some of these unnecessary requirements, our state could go a long way in aiding its workforce.
SELECTION OF OCCUPATIONAL LICENSING REQUIREMENTS IN INDIANA
Source: Institute for Justice OCCUPATION Earth Driller Cosmetologist Mobile Home Installer Makeup Artist Auctioneer Control Applicator
Vegetation Pesticide Handler

FEES $125 $199 $150 $99 $95 $45 $45 $100 $25 $15

DAYS OF TRAINING 1,095 350 366 163 19 0 0 0 0 0

EXAMS 1 1 0 2 1 2 2 0 0 0

Bill Collector Fisher Taxidermist

15

16

Indiana Can!
The most prosperous countries and states are those that let residents and businesses have the greatest control over their money.
For decades, New Zealand was a small agrarian nation dependent on trade with other nations of the British Commonwealth. In 1984, New Zealand embarked on a dramatic economic liberalization, removing vast amounts of business regulation, broadening the tax base and exercising fiscal restraint. New Zealand has become the most business-friendly nation according to the Organisation for Economic Cooperation and Development. With these changes, per capita GDP has risen dramatically. From 2002 to 2012, New Zealands per capita GDP grew four times faster than United States. Furthermore, in 1984 New Zealands government debt was 95% of GDP; by 2012 it had fallen to 42% of GDP.

What Can You Do?

Support initiatives that speak to and defend the taxpayers of Indiana. Let government officials know how you feel about Indianas taxes and government spending. Visit www.IndianaOnTrack.com. Join Americans for Prosperity Foundation and see how you can help.

Lower taxes and less government spending can aid in attracting new residents and businesses, which in turn leads to great creativity, innovation and prosperity.
Although it may seem easier to rely on government assistance than to work hard and struggle through the risks and volatility inherent in private enterprise, we must remember that without liberty, especially economic liberty, there is little prosperity.

We know the possibility of change exists, but it is you, the taxpayer, who decides what will happen. Will we allow Indiana to fall behind, or will we keep Indiana on track?

17

Sources for data include: 1. U.S. Bureau of Labor Statistics http://www.bls.gov 2. U.S. Census Bureau http://www.bls.gov 3. U.S. Bureau of Economic Analysis http://www.bea.gov 4. Tax Foundation http://www.taxfoundation.org 5. Americans for Tax Reform http://www.atr.org 6. American Legislative Exchange Council http://alec.org 7. State Budget Solutions http://www.statebudgetsolutions.org 8. Indiana State Budget Agency http://www.in.gov/sba/ 9. National Association of State Budget officers http://www.nasbo.org

18

Are you concerned about prosperity in Indiana? Do you know: Where Indiana ranks on growth rates of important prosperity indicators such as: Private Sector Employment Gross Domestic Product Population What Indianas tax climate is like? How Indiana measures in education performance? How Indiana can improve its labor climate? What drives prosperity?

Is Indiana Keeping Up?

Read this pamphlet to nd out what you can do to make sure Indiana becomes even more successful and prosperous in the years to come.

2013 Americans for Prosperity Foundation All Rights Reserved