Talent, Taxes and Indiana’s Economic Toolkit
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Back in February, Intel unveiled its intent to locate a $20 billion semiconductor manufacturing hub near Columbus, Ohio – the largest private-sector investment in state history. Company executive Keyvan Esfarjani later summarized Intel’s reasons for planting its flag in the Buckeye State: “It really comes down to three things: Land, infrastructure and, most importantly, talent,” he said. “Ohio meets all of that.” (Of course, $2.1 billion in state incentives didn’t hurt, either.)
In Indianapolis, state lawmakers took note of the Intel announcement in crafting Senate Bill 361. SB361 helps the Indiana Economic Development Corporation move faster on land acquisition and infrastructure improvements, and authorizes a $300 million deal-closing fund to help pursue advanced industry investments like Intel’s.
Less than a month after the bill was signed by Governor Holcomb, the IEDC negotiating land purchases in northern Boone County to put together 4,000-7,000 acres strategically located along I-65 between Indianapolis and Purdue University’s flagship research campus. No details have been disclosed, but the Boone County site could be a good candidate as the state’s first Innovation Development District (IDD) authorized by SB361.
IDDs are a new type of economic development zone that can be created by the IEDC to capture incremental growth in state and local (property) taxes to invest in land, infrastructure and other incentives to lure major projects or build communities of smaller, high-growth companies. The General Assembly recognized the need to upgrade the IEDC’s toolkit, despite concerns about local buy-in and another layer of tax increment financing authority added to the property tax base.
Beyond physical sites and financial incentives, what about talent – the top priority for Intel (and most other growing employers, according to survey after survey of corporate executives, site selectors and economic development professionals)?
The General Assembly also passed HB1002, which reduces Indiana’s individual income tax rate from 3.23% to 2.9% over seven years (which today would be the lowest flat rate of any state that levies an income tax). The most straightforward case for these cuts is returning part of the state’s historic surplus to the taxpayers who built it over the last two tumultuous years.
But they’ve also been touted as a way to bolster Indiana’s allure as an affordable place to live and work for new workers. If we listen to Americans (as interpreted by Census Housing Surveys from 2015-2021), primary reasons for residential moves were housing and community attributes (37%), personal/family issues (28%) and job-related changes (22%), with taxes on a “miscellaneous” list that adds up to 11%.
Reducing Indiana’s income tax could make a difference, but in cases where regional population growth may be influenced by significant differences in tax burden (Illinois to northwest Indiana, for example), we can already claim an advantage.
There are limits to cost as a talent strategy. We recognize this through programs like READI, which supports regional partnerships aimed at boosting population growth – the “community attributes” factor. Recent analysis by Ball State economist Michael Hicks (via the Brookings Institution) on Midwest cities identifies a strong connection between the quality of taxpayer-funded services, high-performing local schools, other public amenities and population growth, property values, employment and earnings.
One opportunity cost of HB1002 is foregone revenue that could have made a stronger impact on population growth by sustaining READI and other quality of life investments.
Indiana needs to expand our labor force; we also must elevate our educational attainment to prepare Hoosiers for jobs at Intel and other advanced industry employers. That means consistent, competitive spending on education, from pre-K through post-secondary and workforce programs.
HB1002 will reduce net tax collections about $200 million next year and $875 million in the next two-year budget cycle (2024 and 2025). Given the state’s strong fiscal position and healthy reserves, this doesn’t pose a near-term threat to spending commitments to education (though appropriations to higher ed have been essentially flatlined since 2020).
But the cumulative ‘cost’ of HB1002 climbs towards $6 billion by 2030. With K-12 support per student (a plurality of the state budget) growing 4% a year since 2019, it’s easy to envision a tough future debate between school funding and scheduled tax cuts (especially if elevated inflation erodes the impact of state spending on teacher salaries and other operating costs).
Success in today’s K-12 classrooms shapes Indiana’s talent pipeline feeding our future economy, so state policymakers should approach these tradeoffs with caution.
Indiana’s economy is growing, and unemployment has plummeted to a 50-year low. Success isn’t defined by landing increasingly-rare megadeals, but Intel is a useful proxy for the kind of high-tech, advanced industry opportunities we want to continue to recruit, retain and encourage.
The General Assembly certainly upgraded our business attraction toolkit through SB361. But the IEDC’s focus on Boone County also shows the importance of human capital; there’s an obvious reason for picking a location on the edge of the state’s most populous, fastest-growing metro within a half-hour drive of a major research university.
So the challenge of building a pro-growth economic climate continues next year and in future budget sessions, finding the right balance between a competitive tax climate and the revenue capacity to invest in other competitive priorities – education, infrastructure, and livable communities that appeal to new residents and employers seeking to put their skills and ingenuity to work.