Indiana’s sales taxes rose by a penny this week. The increase was a necessary remedy to our property tax mess.  But, it is worth laying out its impact on our economy.  

In the first case, sales tax is paid by Hoosier residents, visitors to our fine state and by businesses.  By my estimates, Indiana households will pay roughly $640 million in additional sales taxes, businesses about $500 million and out of state visitors about $160 million.  A little tax exporting is always a good thing. 

The two effects economists might worry about with a tax hike are changes to consumption patterns and the location of economic activity.  How do we stand with the new tax rates?  

Across Indiana’s border states our new tax rates will be penny higher than in Kentucky and Michigan.  So, we might see some residents traveling to these two states to avoid the additional sales tax.  Though, my suspicion is that the extra penny cost will have no measurable effect.    

The tax rates in Ohio and Illinois vary by county with very large local option sales taxes.  By my last count only five counties adjacent to Indiana had lower total sales tax rates than 7 cents, and these were all very rural counties.  Again, I think we will see no measurable economic impact of the sales tax increase in terms of business or consumer location decisions.  The savings are in general not enough to warrant a long trip out of state.   

By my estimates, the average Indiana household will spend an additional $267 per year in sales taxes.  That average household is headed by a 48- ear-old, has 1.3 wage earners, 2.5 total persons and 1.9 cars.  Clearly, in Indiana, no one is average.  

The biggest expense for households will be in transportation costs as the sales tax hits gasoline and car parts.  The additional costs will be about $65 per household each year.  Additional big ticket costs include other fuels, meals consumed at restaurants, clothing, entertainment, and home furnishings.  Each of these will cost between $15 and $25 more per year.    

It is worth noting that this average Indiana household will also see a $507 reduction in property taxes.   

Indiana’s sales tax is structured to eliminate much of the regressivity of traditional taxes on consumption.  Since Indiana’s sales tax does not include services, food or prescription medicines, it is not clear that the poor pay a higher percentage of their income in sales taxes than will the average family.  That, of course, will vary tremendously by household.    

Sales taxes are part of the triumvirate of tax instruments, which also includes taxes on property and income.  Sales taxes are more stable over the boom and bust cycle, than are income taxes, but less so than property taxes.  This helps keep government spending down since instability in government finances breeds inefficiency.  In the end, the increase in sales tax is part of a package that cuts the expense of government.  That’s a rare treat.