Republicans say big tax cuts worked in Indiana — Pence aims to see them at work across America

Key Points
  • The Trump administration is pointing to Indiana as a model for its ambitious plan to reform the nation's tax code.
  • Vice President MIke Pence goes back home Friday to make the case.
Vice President Mike Pence
Brian Snyder | Reuters

The Trump administration is pointing to Indiana as a model for its ambitious plan to reform the nation's tax code, touting the Hoosier State's economic success as evidence that reducing rates can spur growth.

Vice President Mike Pence is visiting the state Friday and is expected to make the case for tax reform at a manufacturing incubator outside Indianapolis. As governor of Indiana, Pence signed into law the biggest tax cuts in the state's history — a $3.5 billion package that slashed state income taxes, lowered the corporate rate and eliminated the inheritance tax. Indiana's economy has since performed better than the national average, with GDP growth reaching more than 4 percent in 2014 before leveling off.

"I think that Gov. Pence is well-positioned to talk again on tax reform for the country because of his personal experience," Indiana Republican Party Chairman Kyle Hupfer said. "He's not going out and telling the American people, you know, something that might happen or could happen. He's going to be able to tell people what actually has happened in Indiana."

The state GOP said that President Donald Trump also will travel to Indiana next week. The administration is expected to release with Republican leadership an updated framework for its tax plan on Wednesday, according to two sources familiar with the timing.

The proposal will likely rely heavily on robust growth projections to offset the cost of dramatic tax cuts, a practice known as dynamic scoring that is hotly debated among economists. But Republicans argue that Indiana is proof that the numbers can work.

Pence campaigned for governor on an aggressive plan to cut taxes, which he argued would, in turn, unleash economic growth. In 2013, the year he took office, he reduced the state's flat income tax rate by 5 percent, from 3.4 percent to 3.23 percent. He followed up in 2014 with legislation that gradually lowered the corporate rate from 6.5 percent to 4.9 percent.

Republicans say that has helped drive an economic boom in Indiana that has outpaced the broader national recovery. The state unemployment rate in Indiana is just 3.5 percent, one of the lowest in the country and nearly a percentage point beneath the U.S. average.

"The objective of tax reform here in Indiana … has proved to be true," said Justin Stevens, Indiana state director for Americans for Prosperity, a group tied to the billionaire Koch brothers that were ardent backers of Pence's agenda.

But skeptics argue that the connection between Indiana's tax cuts and subsequent economic growth is thin. A 2015 paper by the Tax Policy Center found that cuts to top income tax rates have no significant impact on state economies, instead suggesting growth may be more closely linked to property tax revenues.

"That's not to say there aren't reasons to cut taxes," said Richard Auxier, a research associate at the Tax Policy Center. "But to argue there is an A-to-B relationship that taxes were cut and the economy boomed is not true and a little misleading."

In addition, critics say, the White House tax plan bears little resemblance to Pence's work in Indiana: Those cuts were primarily focused on households, while the White House proposal would provide bigger rate reductions to businesses.

As governor, Pence was also forced to balance the state's budget and maintained a deep pool of reserves. Independent analysis of the White House tax plan finds it would likely cost trillions of dollars. On Capitol Hill, Republicans also appear willing to lower taxes even if it means adding to the deficit.

"Instead of targeting relief to the middle class and really focusing on making our businesses more competitive, this is all about giving big breaks to the wealthiest Americans," Democratic Rep. Scott Peters of California said. "It's time to stop pretending that tax cuts for the wealthy somehow pay for themselves. They just don't."

Indiana is also a key political battleground for 2018. The state's Democratic senator, Joe Donnelly, is among the red-state lawmakers facing a tough re-election next year, and the Trump administration has been ramping up the pressure on him to support the Republican tax proposal.

Donnelly is slated to join Pence during his visit Friday. He has not endorsed the White House plan yet and is pushing his own bill to penalize companies that outsource jobs.

"I believe that any reform effort should include policies that will create new jobs, protect existing jobs, and benefit middle class and working families," Donnelly said in a statement. "That is what I've discussed with President Trump, and I'm pleased he has been supportive of my proposals."