Use of local income taxes by Indiana counties has grown steadily over the decades, but there is still unused capacity of $2.4 billion in the system, a new report showed Monday,
The analysis released by the Indiana Fiscal Policy Institute and Indiana University Public Policy Institute hits as the 40-year anniversary of local income taxes in Indiana nears. In 2012, $1.5 billion in revenue from local income taxes was distributed to counties – equal to about 20 percent of total taxes.
The goal in 1973 when the first local income tax was introduced – the county adjusted gross income tax – was to reduce local property taxes. Local governments were allowed to “buy down” property tax rates by implementing income taxes.
“It was very successful in fulfilling its original mission – it has successfully lowered property taxes throughout the state of Indiana,” said John Ketzenberger, president of the Indiana Fiscal Policy Institute.
The report said counties that use at least half of the local income tax dollars for property tax relief have average property tax rates of $1.70 per $100 of assessed value. Counties that devote between 10 percent and 40 percent of their local income tax proceeds to property taxes have average property tax rates of $2.40 per $100 assessed value.
Since the initial local income tax was introduced, lawmakers have created six other versions – county option income tax, county economic development income tax, CEDIT homestead credits and three types of supplemental local option income taxes.
These taxes can be used for a variety of purposes, from job creation to public safety and more property tax relief.
The maximum local income tax rate possible statewide is between 3 percent and 3.5 percent, depending on the combination used by a county. Right now, the rates range statewide from 0.01 percent to 3.13 percent. Lake is the only county with no local income tax rate.
The state income tax rate is 3.4 percent, bringing the maximum possible rate to between 6.5 percent and 7 percent.
Locally, Allen County’s rate is 1 percent – the lowest in northeast Indiana along with Kosciusko County. The highest is 2.9 percent in Wabash County, where some homeowners there have seen their property tax bills drop to nothing.
As property tax caps continue to pressure local finances, local units of government can increase the local income tax rate to bring in more money, said Matt Nagle, with the IU Public Policy Institute.
An additional $2.4 billion in revenue could have been realized if all counties used the maximum rates. But Nagle also acknowledged that raising rates to the maximum would be politically untenable.
He also noted that income taxes continue to be less stable than property taxes when it comes to economic conditions.
The report notes a few topics the legislature should examine but makes no solid recommendations.
For instance, it talks about possibly consolidating the system into one overall local income tax rate for more transparency and possible savings in administration.
It also suggests implementing a better estimating system so local officials can better plan three to five years out regarding what revenue to expect.
