Indiana House passes bill to stop taxing active-duty military income by 2027

For years, the Hoosier veteran and active duty military population has shrunk. Census data shows the number of Indiana residents who are serving or have served at home or stationed overseas decreased significantly between 2020 and 2010.

In an effort to address that decline, Indiana lawmakers passed House Bill 1034 Tuesday. The bill aims to reduce and, eventually, remove state taxes from active-duty military income. It would begin by exempting 25 percent of that income from taxes in 2023 and gradually increase each year. By 2027, it would become a full exemption for all income earned.

“I just believe it's good all the way around,” said Rep. Renee Pack (D-Indianapolis), who is also a U.S. Army veteran. “It's 100 percent the right thing to do, to recognize our veterans who are on active duty and to tell them ‘thank you, and we want you back in Indiana.”

HB 1034 received unanimous, bipartisan support in the House and now heads to the Senate.

Indiana currently offers an up to $5,000 deduction on military income taxes. The state also fully exempts income earned while actively deployed, but not while in training or reserve.

Indiana’s Legislative Services Agency estimates the state’s tax revenue would be reduced by over $20 million if HB 1034’s exemption is fully implemented.

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The bill’s author, Rep. Randall Frye (R-Greensburg), doesn’t dispute that estimate. But in committee, he argued that such an estimate misses a less-direct economic benefit that Indiana is already losing by taxing active-duty income while several other states don’t.

“Once you get into the military, it doesn't take you very long to get a buddy who's from a state that doesn't have an income tax. And don't take you very long after that to decide that you're from that state,” Frye said. “What we are doing is we're losing these individuals off of our population rolls, and later on, we may never get them back.”

That population loss is its own form of revenue loss, Frye and others say, because those relocated veterans could be adding to the state’s labor force, contributing to sales or property taxes and the state’s census counts, which determine federal appropriations.

Studies have suggested there is likely a link between active-duty income tax policy and state’s military populations. One from 2014 in the Contemporary Economic Policy journal found that states with active-duty income tax exemptions had 39 percent more service member residencies than those without.

Apart from potential population benefits, National Guard Sgt. Maj. Alan Thomas told lawmakers this tax exemption would also be a “morally correct” recognition of troops’ sacrifices.

“I've missed the birth of my first child. I've slept in armories,” Thomas said. “In terms of a tax, that tax is being paid daily for every soldier in the Indiana National Guard and every soldier that serves because we are constantly asked to do more.”

Adam is our labor and employment reporter. Contact him at arayes@wvpe.org or follow him on Twitter at @arayesIPB.

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