Indiana passes new legislation impacting college affordability and military tax exemptions

The Indiana General Assembly recently passed three bills that have the potential to impact the workforce in the state. Two bills address college affordability while the third exempts active-duty military from paying individual state income tax. House Bill 1449 will automatically enroll eligible students in a state program that offers 100% tuition coverage at public colleges, and Senate Bill 167 mandates high school students to complete and submit the Free Application for Federal Student Aid (FAFSA) to increase students applying for financial aid. Meanwhile, House Bill 1034, now signed into law, exempts active-duty military from paying individual income taxes starting with fiscal year 2024.

House Bill 1449 aims to streamline enrollment into the state’s 21st Century Scholars Program by requiring the Commission for Higher Education to collaborate with the Department of Education to identify eligible students, notify them and their families about their ability to participate, and automatically enroll students.

Established in 1990, 21st Century Scholars Program offers 100% tuition coverage at public colleges and partial tuition coverage at private or independent colleges in Indiana for eligible students. Currently, students must enroll in the program while they are in 7th or 8th grade. According to a recent report by the Commission for Higher Education, 40% of high school graduates meet the program’s eligibility criteria, but only half of eligible students enroll.

H.B. 1449 represents an effort to increase awareness by strengthening outreach efforts and automatically enrolling eligible students. Students will still need to agree to participate in the program and will be able to opt out at any time.

This bill has passed the Indiana General Assembly with only one vote against it. It awaits final signature by Governor Holcomb, which is expected by May 8.

Senate Bill 167, now signed into law, mandates high school students to complete and submit the FAFSA in an effort to increase the number of students applying for federal financial aid and grow awareness of funding options for higher education opportunities. The bill includes two exemptions to this requirement:

• A parent of a student or an emancipated minor student may sign a waiver acknowledging their understanding of FAFSA and their decision to decline completing it.
• A high school principal or counselor may waive the requirement for a group of students if they are unable to reach the parents or guardians after at least two reasonable attempts by April 15 annually.

According to the National College Attainment Network’s (NACN) FAFSA Tracker, Indiana currently has a 43.6% FAFSA completion rate for this year, under the national average of 47.7%. These completion rates are not yet final; students have until June 30 to submit an application. NACN also estimates that about $3.6 billion in Pell Grants went unclaimed by 2022 high school graduates who did not complete a FAFSA application, $69.4 million of which may have been accessible to Indiana students. 

Indiana joins seven other states (Alabama, California, Illinois, Kansas, Louisiana, New Hampshire, and Texas) in adopting a universal FAFSA completion policy in recent years.

The FAFSA requirement will take effect starting with the 2023-2024 school year.

House Bill 1034, now signed into law, exempts active-duty military from paying individual income taxes starting with fiscal year 2024. Indiana becomes the twelfth state to fully exempt military income irrespective of residency status (in addition to the nine states that do not collect individual income tax). Although the state already exempted income earned while actively deployed (as do many other states), military members in training or reserve were only eligible for a deduction of up to $5,000 on military income taxes.

According to Indiana’s Legislative Services Agency, the state may see a $20 million reduction in tax revenue by 2025 by no longer taxing active duty military income. The agency also estimates Indiana counties may also see a $10.4 million reduction in local income tax collected in 2025. Supporters of the bill suggest the exemptions will help keep active-duty military members in the state and encourage others to relocate to Indiana in the future.  

This bill builds on a 2019 law that phased out taxes on military retirement benefits and surviving spouse benefits by 2022.

The bill received unanimous bipartisan support across Indiana’s House and Senate. The new exemptions take effect July 1, 2023.

This article was prepared by SSTI using Federal funds under award ED22HDQ3070129 from the Economic Development Administration, U.S. Department of Commerce. The statements, findings, conclusions, and recommendations are those of the author(s) and do not necessarily reflect the views of the Economic Development Administration or the U.S. Department of Commerce.