The table below shows the tax payments by a family of four with an income of $50,000, for Indiana and our neighboring states.  This income is near the median income for a family of four.  The results show that Indiana has the lowest taxes in the region, in total 7.2% of income.  Illinois is next lowest at 8.6%.  Nationally, Indiana's tax burden ranks 39th highest among the states.

For individuals and families, Indiana appears to be a low-tax state.

Estimated Tax Payments by a Family of Four with $50,000 Income, Biggest City in Each State, 1999

Taxes on Businesses
Professor James Papke of Purdue University has a method he calls "AFTAX" of comparing business taxes among states.  For an average firm, the method calculates how state and local taxes affect the rate of return on investment--the profits earned annually as a percentage of the investment amount.  The higher are taxes on business, the lower is the after-tax rate of return.

Papke compared Indiana to surrounding states based on 1995 tax rates, and found Indiana with the lowest after-tax rate of return for an average business.  That means Indiana business taxes are higher than those in surrounding states.  The differences in rates of return were pretty small, though--11.9% in Indiana was the lowest, 12.5% in Michigan was the highest.  Papke took these differences as evidence of "convergence," meaning that state tax structures were becoming more similar.

For businesses, Indiana appears to have somewhat higher taxes than neighboring states.

Source: James A. Papke, "The Convergence of State-Local Business Tax Costs: Evidence of De Facto Collaboration." National Tax Association Proceedings, 88th Annual Conference, 1995 (1996): 195-206.

Taxes Overall
It's hard to compare tax rates across states, because tax institutions differ so much.  Sales tax rates can be compared--Indiana's is 5%, Kentucky's is 6%--but the goods and services that are taxable differ.  Income tax rates can be compared, but the exemptions and deductions available to taxpayers differ.  And it's hard even to compare corporate tax rates, since the ways taxable income or sales or value added are calculated are so different.

A solution to this problem is to collapse the whole thing into a couple of index numbers.  These numbers are called "fiscal capacity" and "tax effort."  

Fiscal capacity compares the size of the tax bases available for states to tax.  Tax bases include household and corporate income, retail sales, and the value of property.  The indexes are calculated by asking what revenue a standard tax structure would raise from each states' tax bases.  The method creates a nationwide standard tax structure, with a particular income tax rate, sales tax rate, and so forth.  This structure is then applied to the per-person tax bases in each state to see how much revenue would be raised.  The results are added up, divided by the national average, and multiplied by 100.  The resulting index shows the relative size of the tax bases available for each state to tax.

Using 1996 data, Robert Tannewald of the Boston Federal Reserve Bank found Indiana's fiscal capacity index to be 97.  This means that the national standard tax structure would produce 3% less revenue in Indiana than it produces in the average state.  Indiana's tax bases are slightly smaller than the national average.  The reasons are that Indiana's income per person is lower than the national average, and that the state's housing prices are lower, too, especially compared to the urban east and west coast.

A similar method is used to measure tax effort.  Tax Effort compares the combined tax rates of all the states using an index.  First, a national standard set of per person tax bases is developed--so much in retail sales, income, property wealth, and so forth.  Then, each state's tax rates are applied to this standard tax base.  Each taxes' revenue is added up, divided by the national average revenue, and multiplied by 100.  The resulting index shows the relative level of tax rates in each state.

Tannewald puts Indiana's tax effort index at 88.  This means that Indiana's tax rates raise 12% less revenue from a standard tax base than do national average tax rates.  Combined, Indiana's tax rates are 12% lower than the national average.  This ranks Indiana 40th highest among the 50 states plus D.C.

Overall, Indiana appears to be a low tax state.

Indiana's overall taxes are low, but this should not disguise the reasons why.  Indiana's business taxes appear to be slightly higher than average for the region, but the state's household taxes are a lot lower.  

Indiana's sales tax rate, at 5%, is the lowest in the region, partly because Indiana has no local sales taxes tacked on to the state rate.  Indiana's individual income tax rate, at 3.4%, is lower than most surrounding state rates, even considering the state's local income taxes.  Indiana's property taxes are lower on households, but probably not so low for businesses.  Indiana's corporate income taxes are probably a little higher than those in surrounding states.