John Ketzenberger, president of the Indiana Fiscal Policy Institute, in the Indianapolis Star:
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Local and state governments use estimates to make timely tax distributions, but inevitably there is a reckoning required when the state adjusts the amount up or down. The glitch that caused the state to short the locals created a massive disruption.
It also may have created the opening necessary to revisit Indiana's local option income tax system. Certainly now is the time to reconsider how the taxes are collected and redistributed. But there are other considerations, too, since the number of local options has doubled in the last five years.
Among issues to consider:
The overall capacity of local option income taxes.
Are local governments turning to local option income taxes as an alternative to property taxes since tax caps were enacted?
How does the effective overall state income tax rate compare by county and what are the implications for varying rates? Hoosiers in some counties pay a 6 percent rate in state and local income taxes.
Do local option income taxes compare equitably to other forms of local taxation?
The Indiana Fiscal Policy Institute is in the midst of a study that hopefully provide answers. But it's not too soon to declare the system's complexity a real concern.
Many counties have adopted more than one local option income tax and they are earmarked for different purposes -- sometimes property tax relief, economic development, public safety or general operations. The system of collecting and then redistributing these taxes requires many estimates plugged into formulas. As we saw with the recent problem, a single mistake in a formula can result in massive distortions to the system.
Reducing this complexity is difficult, but a simpler system has two distinct advantages. Obviously, it will be easier to administer. More importantly, though, the public will be able to grasp how much it is paying in taxes and what that money is purchasing.
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http://www.indystar.com/apps/pbcs.dll/article?AID=2012204230303
