The Tax Section was asked by the IndyBar Legislative Committee to share tax-related insight on the potential impact of HJR-3. The following letter was submitted to the Indiana Senate on behalf of the section by section member Derek Hamilton.
February 10, 2014
To: The Senate of the State of Indiana
My name is Derek C. Hamilton, and I write today as a member and representative of the Tax Section of the Indianapolis Bar Association, an organization of nearly 5,000 attorneys, judges and other legal professionals. We ask you to vote against HJR-3 because:
- HJR-3 may penalize opposite-sex married couples and provide a windfall to same-sex couples in federally recognized marriages.
- HJR-3 may undermine Indiana’s favorable tax climate for business owners.
- HJR-3 may create unnecessary red tape and added cost for Indiana businesses.
I am proud to have been an intern for this esteemed body. My internship experience and support from some of you were invaluable in helping me become a Governor's Fellow and a graduate of Stanford Law School. Having previously practiced as an attorney and now as a financial planner in Indianapolis focusing on the estate planning, wealth preservation and financial planning needs of business owners and other Hoosier individuals and families, I encourage you to consider the following reasons to vote against HJR-3.
1. HJR-3 would embed into the Indiana Constitution income tax discrimination against opposite-sex married couples and a windfall for same-sex couples in a federally recognized marriage.
Same-sex couples recognized as married for federal purposes may now file a joint federal income tax return. However, HJR-3 would bar such couples from filing a joint Indiana income tax return, thereby requiring each to file separately for Indiana income tax purposes even if they file jointly with the federal Internal Revenue Service (IRS).
In a number of instances, Indiana law permits a taxpayer filing a separate Indiana income tax return the same value of credit or deduction against Indiana income tax as a married couple filing jointly. For example, Indiana allows a separate filing taxpayer a credit up to $1,000 for contributions made to so-called 529 college savings plans. That credit is also available to married taxpayers filing jointly, but, even though the joint return is for two (2) persons, the same $1,000 limitation applies. Put simply, this credit alone can put an extra $1,000 in the pockets of an Indiana same-sex couple in a federally recognized marriage.
By requiring separate Indiana income tax returns for federally married same-sex couples, the State would effectively allow such couples to "double dip" on income tax credits and deductions, including:
- As mentioned above, the maximum $1000 credit for contributions to 529 college savings plans. IC 6-3-3-12.
- The maximum $2500 deduction for real estate taxes paid on an Indiana residence. IC 6-3-1-3.5(a)15(A).
- The maximum $3000 renter's deduction. IC 6-3-2-6.
- The maximum $1000 insulation deduction. IC 6-3-2-5.
- The maximum $1000 deduction for solar powered roof vents or fans IC 6-3-2-5.3.
Also, a same-sex couple in a federally recognized marriage stands to receive a greater combined Indiana unemployment compensation deduction, IC 6-3-2-10, and a greater Unified Tax Credit for the Elderly. IC 6-3-3-9.
In sum, HJR-3 could result in a windfall of thousands of dollars per year in Indiana tax benefits to a same-sex couple in a federally recognized marriage who would otherwise be compelled to file Indiana joint income tax returns. Conversely, HJR-3 effectively penalizes joint-filing opposite-sex married couples by withholding valuable tax benefits.
Lest it be believed such disparate treatment may readily be remedied by legislative action, consider that HJR-3, if incorporated into the Constitution, would likely supersede modification of Indiana statutes to deprive federally recognized same-sex spouses of such presumably unintended tax benefits. Recall that HJR-3 could constitutionally prohibit recognition of "a legal status identical or substantially similar to that of marriage for unmarried individuals", which presumably would void legislation limiting same-sex couples in federally recognized marriages to the same credits and deductions allowed opposite-sex married couples.
To rectify such discrimination against opposite-sex married couples, credits and deductions could perhaps be limited for all taxpayers filing a separate return, but this would effectively raise taxes for all Indiana taxpayers filing separately, not just those in federally recognized same-sex marriages.
2. HJR-3 may disadvantage same-sex couples – especially if one or both is a business owner.
An advantage for spouses filing a joint return for Indiana income tax is that they may net their combined income against their combined losses. Because HJR-3 would prohibit same-sex couples in a federally recognized marriage from filing a joint Indiana return, each federally recognized spouse would be limited to netting her personal income against her personal losses rather than netting combined income and losses as on the federal return. Personal income tax losses are not uncommon for business owners and may occur when expenses and deductible depreciation exceed income.
Consider the case of a federally recognized same-sex marriage in which one taxpayer is an employee receiving a $100,000 annual salary and the other is a business owner who has a $40,000 loss in a given year due to business expenses and allowable deductions. For federal purposes (not taking into account other exemptions and deductions), their joint adjusted gross income (AGI) for that year is $60,000 ($100,000 -$40,000). For Indiana purposes, however, the salaried taxpayer has $100,000 AGI while the business owner has $0 AGI and a net operating loss. It may be possible to use this net operating loss to offset Indiana income for prior or future years, but certain regulatory limitations, cash flow impact and time value of money make this less desirable than current-year netting.
Indiana is often touted as a business-friendly state. Indeed, the Indiana Economic Development Corporation website advertises Indiana's "best business environment" and "top tax climate" to those who would locate businesses in Indiana. Ironically, HJR-3 effectively impose a tax penalty on some taxpayers in a federally-recognized same-sex marriage, a penalty which may disproportionately impact those who are business owners.
3. HJR-3 would increase the time and expense of compliance with Indiana tax law for Indiana taxpayers and small businesses.
HJR-3 may boost the fortunes of accountants and software vendors but threatens additional cost and compliance burdens on Indiana taxpayers and businesses. Small businesses, in particular, are vulnerable.
Individual taxpayers in federally recognized same-sex marriages may incur additional cost and loss of productive time when preparing a joint return for federal income tax purposes and two (2) separate Indiana income tax returns. The hassle and cost is compounded for business owners who must make quarterly estimated tax payment since they must make the separate federal and state calculations, reports and payments an additional four (4) times per year. Accountants inform us that current tax accounting software is not designed to efficiently handle separate state and filing status, so special handling - and additional fees to clients for their efforts - may be warranted. Software vendors could update software to address Indiana's unique filing status constraints, but it is anticipated they may charge their Indiana clients additional fees to do so.
Likewise, Indiana businesses who employ federally recognized spouses may encounter additional compliance costs related to tracking disparate state and federal income tax withholding and exemptions for those employees. This is yet another compliance burden which redirects resources and time away from more productive pursuits and could be a disincentive for doing business in Indiana.
In closing, some of the issues and concerns expressed apply to Indiana's existing prohibition on the recognition of same-sex marriage codified at IC 31-11-1, but become more intractable if included in the Constitution. So long as that prohibition remains a statutory matter, the General Assembly, in concert with the Governor, maintains the latitude to amend the law as needed to adjust to the changing needs of Hoosiers and to remedy unintended consequences. The constitutional amendment contemplated by HJR-3, however, would preclude legislative freedom and ossify such prohibition and its unintended consequences into our laws. There are numerous reasons to oppose HJR-3, but for those reasons alone, on behalf of the Indianapolis Bar Association, I strongly encourage you to vote against HJR-3
Derek C. Hamilton, JD
On behalf of the Indianapolis Bar Association