Prosperity in the Hoosier StateKeeping Indiana on Track

Did You Know?TAXES AND SPENDING

• Indiana ranks 11th among the fifty states in Business Tax Climate, and 4th when you only consider states with an individual

income, corporate income and sales tax. Source: Tax Foundation

• Despite low levels of state and local taxation, Hoosiers as a whole will work over 100 days this year just to pay the sum of their local, state and federal taxes.

Source: Tax Foundation

• Around the country, many state and local governments are turning to tax and expenditure limits (TELs) to limit wasteful government spending.

EDUCATION

• Indiana is now one of the few states with a statewide scholarship program which allows low and middle income families to send their child to the school of their choice.

• While Indiana spends over $9,000 per student to educate children in the public school system, Hoosiers taxpayers would spend no more than $4,500 per student to send children to a private school alternative.

Source: National Assessment of Educational Progress and America’s Promise Alliance

• Indiana is now holding schools accountable and providing performance rewards for teachers.

• With these changes, in 2011, Indiana’s education system earned the grade of “B” up from “C+” just a year before.

Source: American Legislative Exchange Council

LABOR

• Indiana is now the first “Right-to-Work” state in over a decade and the first in the industrial Midwest.

• Right-to-Work states enjoy faster growing populations and higher job growth rates.

Source: U.S. Census Bureau & U.S. Bureau of Labor Statistics

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.

This pamphlet outlines ways that Indiana can remain competitive and create even greater prosperity for Hoosiers.

• 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 Indiana’s economic success?

This pamphlet will attempt to answer these questions and provide solutions for a future of prosperity and growth.

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With sound fiscal policy and management, Indiana has grown to be a leader in the Midwest and the country as a whole.

RECESSION IN THE MIDWEST

Population and GDP growth are well-accepted measures of a state’s prosperity. Population growth indicates how desirable it is to live and do business in a state. GDP, a useful indicator of a state’s size and strength, represents the market value of all goods and services produced within a state.

Many factors affect population and GDP growth, but taxes and government spending play a fundamental role in Indiana’s growth and its ability to recruit businesses and individuals to the state.

Over the last decade, the growth of Indiana’s economy was positive but lagged many other states. While Indiana grew faster than many of its regional peers, the Midwest suffered a rough decade during the 2000’s. Indiana, Michigan, Illinois and Ohio were four of the six slowest growth states.

Another way to measure a state’s economic situation is to look at population growth. A state’s population growth usually grows rela-tive to other states when it provides a welcoming environment for people to live, work and start businesses.

During the same time frame, Indiana’s population grew by 6.6%. Indiana grew faster than most of its regional peers, but again its growth was slow when compared to the national average of 9.71%.

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

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History tells us prosperity is driven by two important factors: the rule of law and private 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 earned—this is the sum of good government.” —Thomas Jefferson

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 work together to assure 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 fire 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.

REAL GDP GROWTH RATE, 2000-2010

Source: U.S. Bureau of Economic Analysis

Illinois Indiana Kentucky Michigan Ohio-11.25%

-7.50%

-3.75%

0%

3.75%

7.50%

11.25%

15.00%

8.21%

10.60% 12.70%

-7.08%

-0.70%

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What Drives Prosperity?

INDIANA TAXES Lower Taxes Lead to More Jobs

Taxes can adversely affect a state’s economy. States that have higher levels of taxation and government spending have lower levels of economic activity. How does Indiana’s tax policy compare with surrounding states?

This chart shows how Indiana compares to its regional and national peers. Overall, Indiana ranks as the 11th friendliest state for employers. Indiana’s ranking is driven by its strong perfor-mance in sales, property, corporate and income taxes. In addition, Indiana has constitutional provisions limiting the growth of prop-erty taxes. Corporate and individual income taxes, both of which Indiana collects, can be uncompetitive for residents and business-es. Seven states choose not tax their resident’s income include Alaska, Florida, Nevada, South Dakota, Washington, Wyoming and Texas. Three states, Nevada, South Dakota and Wyoming, do not impose a corporate income tax either. Of the ten states ranked friendlier to business than Indiana, nine of them do not collect an individual and/or corporate income tax.

While Indiana’s tax rates are relatively low, the inclusion of nearly every major tax restricts Indiana from entering the top 10 category. In fact, Indiana state government collects over 40 different taxes and fees. This includes everything from licensing fees to specials taxes you pay on your vehicle.

On the bright side, state lawmakers in early 2012 passed legislation that will eventually eliminate the Indiana inheritance (death) tax. This was good news to small businesses and family farmers who often suffered most under the inheritance tax. The inheritance tax punished family owned operations by targeting the wealth passed down to a deceased’s loved ones.

These comparisons on tax competitiveness are not meaningless.

Compared to the 10 states with the worst tax climates, the 10 states with the best tax climates from 2000 to 2010 experienced:

• 135% faster personal income growth• 445% more new jobs• 152% faster economic growth• 299% faster population growth

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

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

Illinois Indiana Kentucky Michigan Ohio0

12.5

25

37.5

50

Overall Ranking Corporate Taxes Individual Income

Sales Taxes Property Taxes Source: Tax Foundation

STA

TE

BU

SIN

ES

S T

AX

CL

IMA

TE

IN

DE

X, 2

012

18

49

44

30

3942

29

33

26

8

19

22

18

11

28

45

13

44

33

11 11

10

25

11

22

TAXES & ECONOMYHigh spending drives up taxes and harms the economy.

Consider the following:

• Taxes and regulations from federal, state and local governments eat up more than half of an average family’s income.

• When government attempts to create jobs by spending tax dollars, it is misallocating resources and destroying jobs the free market would otherwise create.

• Every local government bond approved is, in fact, a delayed tax increase.

• Indiana ranks 3rd best among others in state and local debt per capita at $196, according to the State Budget Solutions

Study of 2011.

• Government cannot create prosperity. Every dollar spent by government, every new government employee hired and every bond issued by government equates to a job lost or paycheck cut in the private sector.

• Government exists to protect rights and individuals’ economic opportunities. This promotes wealth creation in the private sector.

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 harmful to the economy:

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 family’s 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 benefits 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 gener-ous 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.

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THE TRUE COST OF GOVERNMENTIt’s not just state and local governments that can stifle prosperity—

the federal government consumes an even greater amount of the economy.

This calendar shows the number of days an average Hoosier 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 federal, state and local regulations.

Indiana taxpayers must work more than eight months of the year to pay for the cost of government. Little more than four months remain for living expenses like housing, food, transportation and clothing, and the just-as-important pursuit of their dreams.

TAX & EXPENDITURE LIMITS

One way Hoosier taxpayers can be protected is through a tax and expenditure limit (TEL). Tax and spending limits have been enacted at the local level for many years. Local governments imposed limits on property tax revenues throughout the 19th and 20th centuries. However, it is only recently that state and local governments have enacted TELs. Under these laws, the growth of state and local government revenue is often limited based upon population growth and inflation. Excess tax revenue collected by a government entity is returned to taxpayers in the form of a refund or lowering of an existing tax.

Indiana recently passed a “taxpayer refund” bill which returns excess state revenues to taxpayers once budget and reserve funds have been met. However, Indiana currently has no limit on the growth of government spending other than the constitutional requirement to balance the budget. So in essence, the taxpayer refund is only as good as the self-imposed budget restraint our state and local policymakers choose to adopt. If tax revenues are high, only a limitation on the growth of government spending could stop policymakers from excessively increasing government spending.

Coupled with appropriate budget stabilization funds that can as-sist in times of economic downturns, an Indiana TEL for state and local governments would limit the size of government and lead to greater prosperity for all Hoosiers.

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In 1992, Colorado was the first state to enact a TEL. Since that time, Colorado has returned over $3 billion to taxpayers. However, when state lawmakers in Colorado mandated through a constitutional amendment annual growth in education spend-ing, this created a big problem for Colorado taxpayers in times of an economic downturn.

INDIANA STATE & FEDERAL COST OF GOV., 2011

Federal Spending102 days

Regulations77 days

State Spending35 days

JANUARY FEBRUARY MARCH

APRIL MAY JUNE

JULY AUGUST SEPTEMBER

OCTOBER NOVEMBER DECEMBER

Source: Americans for Tax Reform

INDIANA EDUCATIONLeading the Way on Education Reform

While government spending on public education has skyrocketed since the 1970s, students’ educational performance has largely remained flat. 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 flexibility to find the best path for their children’s education.

Consider these past achievement numbers for Hoosier children from the National Assessment of Educational Progress.

• 58% of fourth graders are not proficient in math (NAEP 2009)

• 64% of eighth graders are not proficient in math (NAEP 2009)

• 66% of fourth graders are not proficient in reading (NAEP 2009)

• 68% of eighth graders are not proficient in reading (NAEP 2009)

• 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 Council’s most recent report on education in the United States, Indiana earned an education policy grade of B while Indiana’s students ranked 17th out of the 50 states in their scores on reading and math tests.

Free market forces have been proven time and again to provide the best means to prosperity. Free market forces at work in education would have the same effect. Whether it is school choice initiatives or paying teachers for performance, these free 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. Indeed, 50% of Indiana’s state budget is spent on K-12 education.

Spending per student has also steadily increased. According to the U.S. Census Bureau, Indiana now spends over $9,000 per student in public education. It is clear that if increased spending could alone accelerate academic performance, our schools would be excelling.

Spending too little on Education is not the Problem

FISCAL YEAR 2011 GENERAL FUND EXPENDITURES

Other 7%

Child Services 4%

Human Services 6%

Corrections 5%

Medicaid 10%

Higher Education 13%

Teacher Pensions 5%

K-12 Education 50%

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INDIANA’S CHOICE SCHOLARSHIP PROGRAM

Established in 2011, Indiana’s Choice Scholarship Program provides a means for low and middle income families to send their children to the school that best meets their child’s individual needs.

Who’s Eligible?Eligibility for the Indiana Choice Scholarship is based on a few factors including family income, availability of scholarships and whether a child has attended at least one year in public school.

• Income: A family of four qualifying for the federal free and re-duced lunch program can receive a scholarship worth up to 90 percent of the school in which they are applying. Families of four that earn up to 150 percent of the free and reduced lunch pro-gram can get a scholarship worth 50 percent of the tuition rate. This means families of four earning up to roughly $64,000 can receive some form of scholarship for their children.

• Availability: Participation in the Choice Scholarship Program is capped at 15,000 students for the 2012-2013 school year. In the years to come, there will be no limit on participation. So far, there are 270 non-public schools in Indiana that have qualified and are

participating in the program.

• Student Status: In order for a student to receive a scholarship they must have completed at least one year in public education or have previously received a scholarship from a certified scholar-ship granting organization.

Who’s Benefiting?• Families and Children: In its first year of existence, nearly 4,000

children have benefited from the Choice Scholarship Program. Parents seeking a better education for their children’s needs now have the opportunity to do something about it.

• Taxpayers: The state actually saves money by providing scholar-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 $4,500.

PAYING TEACHERS FOR MERIT NOT TENURE

In the free market, individuals get paid and rewarded based on performance. The education world should be treated no differently.

Most Hoosiers who work have some sort of performance evalua-tion process as part of their job. Evaluating teachers and paying them for performance is simply bringing the teaching profession in line with most other jobs in Indiana.

How evaluations are conducted, who performs them and how salaries are tied to the evaluation process is mostly up to the local school corporation to decide.

These are the four performance categories:

• Highly Effective• Effective• Improvement Necessary• Ineffective

Let’s be clear. Everyone wants to see students, teachers and schools succeed. But in order to do so, incentives like teacher merit pay can go a long way in helping.

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By paying teachers based on merit and not tenure, teachers will be rewarded for the hard work they perform and not for the number of years they have been working.

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INDIANA LABORFreedom Comes to the Workplace

Labor unions played an important historical role in improving the training and skill development of workers while ending abusive labor practices. In recent years, however, the value they provide for workers has even been called into question by liberal stalwarts like former U.S. Senator George McGovern, who has criticized unions for pursuing demands that can bankrupt companies and leave their workers out of jobs.

Since the Taft-Hartley Act of 1947, states have been able to write different laws regarding mandatory union membership. Cur-rently, there are 23 states that protect the freedom of individuals to work a job without being coerced into joining a union. Indiana recently joined that group changing from a state that maintains what are commonly called “union shop” laws, which gives unions the power to require that all employees pay union dues or lose their job, to a “Right-to-Work” state.

Does Right-to-Work Help or Hurt Indiana Workers?

Right-to-Work simply allows individuals to choose whether or not they want to join a union and pay union dues. Right-to-Work protects workers from being forced into a union in order to get or keep a job. Under Right-to-Work unions are still allowed to exist and collectively bargain for their members. The only difference is that their membership is by choice and no longer compulsory.

Do “union shop” rules benefit or harm workers and the overall population?

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According to state policymakers, there have already been dozens of companies looking to bring jobs to Indiana as a result of Right-to-Work’s passage.

POPULATION & JOB GROWTH IN STATES BY UNION LAW, 2000-2010

Sources: U.S. Bureau of Economic Analysis, U.S. Census Bureau

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

0.30%

-5.53%

15.50%

6.12%

Private Job Growth Population Growth

Forced unionization laws are not as conducive to economic growth as allowing people the economic freedom to join a union if they wish. States that allow this freedom experience greater growth as businesses choose to move operations to friendly environments.

Indiana has heard from more than forty companies saying that Indiana’s enactment of Right-to-Work will factor into their decision-making process for locating current and future proj-ects. New projects are projected to bring in thousands of new jobs and millions of dollars in investment to the Hoosier state.

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Right-to-Work State Union Shop State

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 Organisa-tion for Economic Cooperation and Development. With these changes, per capita GDP has risen dramatically. From 2000 to 2009, New Zealand’s per capita GDP grew at twice the rate of the United States! Furthermore, in 1984 New Zealand’s government debt was 95% of GDP; by 2009 it had fallen to 25% of GDP.

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.

• Support initiatives that speak to and defend the taxpayers of Indiana.

• Let government officials know how you feel about Indiana’s higher taxes and government spending.

• Visit www.americansforprosperityfoundation.org.

• Join Americans for Prosperity Foundation and see how you can help.

• 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 competitive?

Sources for data include:

1. U.S. Bureau of Labor Statistics http://www.bls.gov2. U.S. Census Bureau http://www.bls.gov3. U.S. Bureau of Economic Analysis http://www.bea.gov4. Small Business Survival Index http://www.sbecouncil.org5. Tax Foundation http://www.taxfoundation.org6. Americans for Tax Reform http://www.atr.org7. Pew Center on the States http://www.pewcenteronthestates.org8. American Legislative Exchange Council http://alec.org9. State Budget Solutions http://www.statebudgetsolutions.org 10. Indiana State Budget Agency http://www.in.gov/sba/ 17 18

Lower taxes and less government spending can aid in attracting new residents and businesses, which in turn leads to great creativity, innovation and prosperity.

What Can You Do?

Is Indiana Keeping Up?Are you concerned about prosperity in Indiana?

Do you know:

• Where Indiana ranks on growth rates of

important prosperity indicators such as:

• Private sector jobs• Gross Domestic Product

• Population

• What Indiana’s tax climate is like?

• How Indiana measures in education performance?

• How workplace freedom leads to jobs?

• What drives prosperity?

Read this pamphlet to find out what you can do to make sure Indiana becomes

even more successful and prosperous in the years to come.

“I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.”

—Thomas Jefferson

© 2012 Americans for Prosperity Foundation All Rights Reserved