Indiana will stop taxing all active-duty military income in 2024

Indiana will soon join the many states that don’t tax active-duty military income under a new law.

House Bill 1034 got unanimous bipartisan support as it passed the legislature and was signed by the governor Monday.

Indiana is expected to lose $20 million as the tax on active-duty income disappears in 2024, according to estimates by Indiana’s Legislative Services Agency. Losses are expected to grow in subsequent years.

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.

Legislators in both chambers and parties supported the change, saying the revenue loss was worth honoring the service of people like National Guard Sgt. Maj. Alan Thomas. He testified in support of the bill during a House committee hearing.

“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.”

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The bill’s author, Rep. Randall Frye (R-Greensburg), and other supporters argued during the legislative session that evidence suggests military recruits often change their residence to states that don’t have income tax and then permanently move to those states as veterans.

“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.”

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

Frye and others argue the loss of income tax revenue will be made up for by a general economic boost from a larger veteran population.

“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.”

Studies have suggested there is likely a link between active-duty income tax policy and states’ 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.

HB 1034 originally proposed a more gradual reduction of the active-duty income tax. It would have begun by exempting 25 percent of that income from taxes in 2023 and gradually increased each year. By 2027, it would have become a full exemption for all active-duty military income earned. But the bill was amended in the Senate to replace that timeline with an immediate, full exemption in 2024.

Adam is our labor and employment reporter. Contact him at [email protected] or follow him on Twitter at @arayesIPB.