A report issued today by two policy institutes urges lawmakers to consider changes to the way Indiana's counties use local-option income taxes, including reducing the complexity of the state's rules and shortening a lag in payments to local governments.
The Indiana Fiscal Policy Institute and the Indiana University
Public Policy Institute also recommend a discussion about ways to give county authorities more flexibility in how they assess income taxes and use the revenue....
In Marion County, the rate paid by residents on their income is 1.62 percent -- on top of the state's 3.4 percent income tax rate. Among the 91 counties that assess local income taxes (Lake County is the only holdout), some -- particularly in northern Indiana -- have adopted rates closer to the roughly 3.5 percent maximum. Local income taxes make up nearly one-fifth of all tax revenue received by local governments in Indiana, making them the largest source after property taxes.
On the whole, the report says, counties raise $1.6 billion a year from a mix of up to seven categories of local income taxes, each governed by certain restrictions. If each county adopted the maximum rate available, said Matt Nagle, an IU senior policy analyst, counties could net nearly $2.5 billion more.
But he cautioned that counties likely would face political and taxpayer resistance to further tax increases. And income taxes offer a significant drawback experienced by counties in recent years: a lag in collections during recessions.
The 28-page report -- titled "40 years of local income taxes in Indiana: Trends, challenges and implications for the future" -- doesn't include hard recommendations but rather urges policy makers to consider several issues. One is the consolidation of the seven available local income tax rates into one, which could give counties more flexibility.
Counties receive local income taxes from residents, regardless of where they work, often creating an imbalance when workers commute across county lines. Nagle told reporters that a commuter tax, or some other way of sharing suburban counties' income tax revenue with nearby counties where residents work, "should be part of the discussion."
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