Both the House and the Senate have now passed legislation addressing the inheritance tax. However, the bills take very different approaches in how they choose to deal with the egregious tax. The House bill (HB 1199) is simple and straightforward, slowly phasing the tax out over 10 years. The Senate bill (SB 293) is a little more complicated but makes a combination of meaningful improvements that offers more immediate relief for many.

These bills and their approaches are different but they are by no means incompatible. They could easily be combined to produce a ‘best of both’ bill – immediate relief, in the form of raised exemption thresholds and expanding the beneficiaries that are most favorably treated (as in the Senate bill) coupled with the permanence of a phase-out (as in the House bill). The easiest way to make this blend happen would be to replace the 50% rate reduction in SB 293 with a 50% credit, then proceed to phase the tax out over the following five years by increasing the credit an additional 10% each year thereafter. The hope is that would be a final product everyone can live with.

Bill # and Title: SB 293 – Inheritance Tax
Author: Sen. Jim Smith (R–Charlestown)
Summary: Reclassifies a spouse, widow or widower of a child of the transferor as a Class A transferee instead of a Class B transferee. Reclassifies a spouse, widow or widower of a stepchild of the transferor as a Class A transferee instead of a Class C transferee. Annually increases the inheritance tax exemption amounts through 2015. Reduces the inheritance tax rates by 50% beginning June 30, 2016.
Chamber Position: Support
Status: Passed the full Senate on Tuesday 50-0.

Update/Chamber Action: This bill addresses several negative aspects of Indiana’s inheritance tax. It updates who is included in the more favorably-treated category of inheritors (Class A beneficiaries) by redefining the group to encompass not just the children, but also the spouses of a child or stepchild. It also phases in significant increases in the ridiculously low threshold for the amounts that are excluded/exempted from the tax. And finally, starting in 2016, it cuts the rates in half. So the bill takes very meaningful steps to improve the tax, but it doesn’t go all the way and put Indiana on a course to completely rid our citizens of the onerous tax.

The Indiana Chamber, in its testimony at the hearing, acknowledged the very substantial steps that this bill provides in terms of lessening the detrimental impact of this tax and that it smartly addresses the standout problems. However, we took the opportunity to point out that while this bill provides more immediate relief than the House approach (see below), it falls short by not eliminating the tax altogether like the House version does via a scheduled (albeit slow) 10-year phase-out. We suggested that blending this bill’s more immediate improvements with the House bill’s ultimate elimination would represent the best amalgamation of policy choices. Our efforts during the second half of the session will be to promote the wisdom of combining the best provisions of the House and Senate bills as each is considered by the opposite chamber.

Bill # and Title:  HB 1199 – Inheritance Tax
Author: Rep. Eric Turner (R-Cicero)
Summary: Provides for a gradual, 10-year phase out of the inheritance tax, beginning July 1, 2013.
Chamber Position: Support
Status: Passed the full House 78-17.

Update/Chamber Action: The merits of doing away with this offensive tax are becoming more widely accepted as legislators consider its impact on small family businesses in their communities. This was evidenced by the bipartisan support it received as it easily passed out of the Ways and Means Committee. The Indiana Chamber is working hard to make sure everyone truly appreciates just how counter-productive the tax is, who is impacted, how they are impacted and why the state would be better off without it.

The Indiana Fiscal Policy Institute (IFPI) says in its September report that a combination of tax increases and spending cuts is "the politically obvious path … and likely …" but in reaction to such a suggestion, the budget makers and politicians are all saying otherwise.

Chris Ruhl, the governor’s director of the Office of Management and Budget, said, "A general tax increase on Hoosiers is a terrible and unnecessary idea and one the governor firmly opposes." Sen. Luke Kenley (R-Noblesville), chairman of the Senate Appropriations Committee, is reported as saying "… Hoosiers are already suffering … and it would not be fair to them for the state to raise their taxes, too." The leaders of both caucuses in the House were likewise dismissive. Speaker Pat Bauer (D-South Bend) simply said,  "We are not going to raise taxes" and Minority Leader Brian Bosma (R-Indianapolis), who could well be speaker if the Republicans gain a majority in the House, said, "Republicans pledge to enact a balanced state budget without a general tax increase."

So, increasing taxes doesn’t seem to be too obvious to those in charge. But do increases remain a possibility, regardless of across-the-board rejections? Well, maybe. Unfortunately, tax increases can take many forms. And what exactly is being ruled out when a politician says there will be no "general tax increase" is open for interpretation and qualification. Similarly, the constituent-friendly term "Hoosiers" rather than "taxpayers" may indicate they mean only individuals and the general taxes they collectively pay – or conversely, to exclude business entities and the taxes they pay.

Suffice it to say, these "no-new-tax" statements may not end up covering things like changes in how a business’ taxable income is defined, special application taxes, tax law changes that only impact a group of taxpayers, fees or other changes that raise revenue but do not affect broad categories of taxpayers. Yet, these actions are all effectively tax increases for somebody. Don’t be surprised if at some point down the road, the politicians qualify what they mean when they say they won’t raise taxes.  

Whatever happens from here (suggestions of tax increases aside), the IFPI is to be commended for nicely compiling the facts in appropriate context, presenting the issues and focusing attention on the realities of our fiscal situation. The steep decline in revenues is a problem and certain to make it very difficult to formulate a budget. But, the problem cannot be resolved by looking at the revenue side of the equation. Expenditures must be kept in line with revenues – whatever they may turn out to be. One reality that cannot be ignored: budget makers must look at education expenditures.

K-12 funding is by far the biggest piece of the pie and the only category where relatively small percentage reductions translate to significant savings. (Everything else has been cut to the bone or legitimately considered non discretionary.) As undesirable as it is, it should be acknowledged that the only way to balance the books is to find ways to reduce this biggest ticket item. How the problem is addressed will depend on how severe the situation is come next year.

Read the IFPI study here.

He is the only Tax Court judge Indiana has ever had. He decides all tax cases pretty much on his own (aside from the assistance of his able clerks). He holds court at various sites around the state. He runs a crossbreed between a trial court and an appellate court. He has formed the body of Indiana tax law on everything from property tax to financial institution tax. He has served Indiana well and his distinguished shoes will be hard to fill.

Thomas G. Fisher (aka J. Fisher) is probably best known for his St. John decision, which ushered Indiana into a long-overdue "market-based" property tax system. But the bulk of his work, while of great significance, received little public attention due to the nature of tax cases.

After nearly a quarter century, Fisher will hang up his robe (at least until be begins serving part-time as a senior status retired judge.) The Tax Court was created in 1986 with the intent of assuring consistency among tax cases that were previously divided among the multiple appellate court districts. A tax court allows for a jurist to become something of an expert in a particularly complicated subject area (and relieves the appellate court judges from having to deal with "tax cases.") Judge Fisher has over the years gained great respect from those on all sides of the over 800 tax controversies he has adjudicated. We thank him and wish him the best!

The Indiana Chamber will recognize Judge Fisher at its Indiana Tax Seminar on October 19. See event details.

Just before heading home for its August recess, the U.S. Senate passed a $26 billion mini-stimulus that it struggled with for months. And House leadership decided to call its members back from recess to act on the legislation, which has two main components: (1) $16.1 billion to extend increased Medicaid funding for states (what is referred to as FMAP or Federal Medical Assistance Percentages); and (2) another $10 billion said to be needed to prevent teacher layoffs.

The debate involved both fiscal prudence and the perceived benefit of these state subsidies, as well as the specifics of how to pay for them. Proponents say $9 billion is to be generated from a "provision that closes corporate tax breaks on income earned overseas." Proponents think this ends an incentive to "export jobs overseas." A different – and more accurate – description would be that this is nothing more than a tax increase for businesses that happen to employ workers both in the U.S. and overseas.

The debate took its own politically charged form in Indiana this week, as efforts were made to characterize Gov. Daniels as inconsistent on the FMAP funding issue. He and 42 other governors sought the funding in a joint letter from the National Governors Association, with some qualifying statements, back in February, but Gov. Daniels has consistently pointed out the detrimental effects of the federal government continuing to spend money it doesn’t have while putting this particular legislation in that category.

The federal package would provide an estimated total of $434 million to Indiana: $227 million for six months of additional FMAP funding (an extension of provisions in the American Recovery and Reinvestment Act, aka the stimulus bill) and another $207 million under the teacher funding element. A $227 million subsidy to our state finances would be helpful as the General Assembly prepares for what all agree will be a brutal budget session in 2011. And school districts no doubt would welcome the money as they grapple with their budgets. But, the situation seems to pit practicality against principle. Regardless of your philosophy or political affiliation, the question remains: Why shouldn’t Indiana citizens and businesses who pay federal taxes receive the benefit of money that the federal government insists on distributing?

We offered earlier today a look at some of the key provisions in the still-being-debated financial reform bill in Congress. Here’s a brief overview of some of the other components (full 1,300-plus-page bill here).

• Bank Capital Standards – Under an amendment adopted unanimously with little fanfare, banks with more than $250 billion in assets are forced to meet higher risk- and size-based capital standards. The Treasury and Fed oppose the measure authored by Sen. Susan Collins (R-Maine), warning it could make it harder for U.S. officials to negotiate global capital standards with foreign regulators.
• Mortgage Risk – Require firms that securitize mortgages and other loans to hold a portion of the risk on their own balance sheets, but under an amendment added on the floor also would direct regulators to establish a category of less-risky mortgage products – primarily fixed-rate, fully amortizing loans – that would be exempt from the risk-retention rule.
• Hedge Funds – Requires hedge funds that manage more than $100 million to register with the U.S. Securities and Exchange Commission (SEC) as investment advisors and disclose to the agency information about their trades and portfolios.
• Corporate Governance – Gives shareholders of public corporations a non-binding vote on executive pay and the SEC the authority to grant shareholders proxy access to nominate directors.
• Insurance – Creates a new Office of National Insurance within the Treasury to monitor the industry, recommending to the systemic risk council insurers what should be treated as systemically important, as well as coordinate international insurance issues. The office would produce a study and recommendations to Congress on ways to modernize insurance regulation, but it is explicitly not a new regulator.
• Credit Rating Agencies – Establishes a new self-regulatory organization for credit rating agencies designed to eliminate a conflict in the current system in which an institution pays for its rating and, at times, shops for the best rating it can get for the lowest price. The SEC will appoint members of the new regulatory body that will then assign credit-rating agencies to provide initial credit ratings of financial packages.
• Investment Advice – Several Democrats had hoped to tighten regulations for broker-dealers who give investment advice, but they weren’t given a floor vote on their amendment despite near constant lobbying from consumer groups. As it stands, this provision makes recommendations and directs the SEC to study the differences between fiduciary standards for investment advisers and broker-dealers.
   

(Part 1 of 2)

A sweeping financial reform package passed the U.S. Senate last week. With a version already passed in the House, now compromises must be worked out by a conference committee to be led by Senate Banking Committee Chairman Christopher Dodd (D-Conn.) and House Financial Services Committee Chairman Barney Frank (D- Mass.).  The indication is they would like to send a final bill to President Obama by July 4.

However, there remain significant points of contention to be negotiated between the House and Senate; perhaps most notably the Senate provisions forwarded by Sen. Blanche Lincoln (D-Ark.) that require banks to spin off their derivative trading to affiliate entities. Over the next few weeks, advocates will continue to promote their position on the several items at play and the final product is still in question.

Below are descriptions of the major components in the Senate bill (see the 1,300-plus page bill in its entirety):

• New Regulatory Authority – Gives federal regulators new authority to seize and break up large troubled financial firms without taxpayer bailouts in cases where the firm’s collapse could destabilize the financial system. Sets up a liquidation procedure run by the FDIC. Management could be removed, with shareholders and unsecured creditors bearing losses. Other provisions would make it harder for top executives at the failed firms to claim large compensation packages, and it would give the government power to limit payments for certain creditors of failed firms. The Treasury would supply funds to cover the upfront costs of winding down the failed firm.
• Consumer Agency – Creates a new Consumer Financial Protection Bureau within the Federal Reserve, with rulemaking and some enforcement power over banks and non-banks that offer consumer financial products or services such as credit cards, mortgages and other loans. The new watchdog would have authority to examine and enforce regulations for all mortgage-related businesses, large non-bank financial companies such as big payday lenders and consumer reporting companies, and for banks and credit unions with assets of more than $10 billion.
• Derivatives – Requires the vast majority of all derivatives trading be executed on a public exchange as opposed to between banks and their customers as many contracts are currently. Most controversially, the bill would adopt language written by Sen. Lincoln that would compel any large commercial banks that have access to the Federal Reserve’s discount window to spin off their derivatives trading business. The Fed, FDIC andTreasury, as well as the banking industry, have argued against this measure.
• Financial Stability Council – Establishes a new, nine-member Financial Stability Oversight Council, comprised of existing regulators, charged with monitoring and addressing system-wide risks to the nation’s financial stability. Among its duties, the council would recommend to the Fed stricter capital, leverage and other rules for large, complex financial firms that are judged to threaten the financial system. In extreme cases, would have the power to break up financial firms.
• Oversight Changes – Eliminates the Office of Thrift Supervision, but an attempt to strip the Fed of its oversight of thousands of community banks was reversed with an amendment. Would empower the Fed to supervise the largest, most complex financial companies to ensure that the government understands the risks and complexities of firms that could pose a risk to the broader economy.
• Federal Reserve Oversight – Calls for a one-time government audit of all of the Fed’s emergency lending programs from December 2007 onward, including facilities used to help deal with the collapse of Bear Stearns & Co. and the program to stabilize asset-backed securities markets. The Government Accountability Office would also review the Fed’s corporate governance, including whether there are conflicts of interest inherent in the current design of the Federal Reserve System.

Summary of remaining key components to be posted later today.

The fifth time was the charm for supporters of gaming in Ohio. Voters had rejected the approval of casinos in Ohio four times over the last couple decades, but apparently the Buckeye State’s fiscal concerns trumped the opposition as the referendum to allow land-based gambling operations in Cincinnati, Cleveland, Columbus and Toledo was approved with 53% of the vote in November’s election. Gaming in Ohio will certainly help that state with its revenue problems, but will just as certainly make Indiana’s fiscal picture worse by cutting into our gaming tax revenues.

Indiana currently receives about $250 million dollars a year from three riverboats that are within a short drive of Cincinnati. It is estimated that up to 38% of the riverboat patrons come from out of state. The Hollywood Casino in Lawrenceburg and Grand Victoria Casino & Resort in Rising Sun are just minutes from Cincinnati and could both be seriously impacted by a casino there. The Belterra Casino Resort & Spa in Vevay is a little further down the Ohio River, but likely would also feel the effects.

Additionally, the other casinos could draw away some of the traffic at the already greatly suffering Hoosier Park Racing & Casino in Anderson. All told, Indiana gaming tax revenues could drop by as much as $100 million. These likely future losses to Indiana follow the losses now being experienced at the Blue Chip Casino in Michigan City due to the opening of a new tribal casino last year just across the border in Michigan. In addition, Kentucky could well be the next state to siphon off revenues as the pressure mounts to allow slots at its horse tracks.

Bottom line: As more players enter the game, Indiana’s share of the winnings is sure to diminish.