Indiana’s
tax revolution began 40 years ago when the General Assembly approved Gov. Otis
Bowen’s sweeping reforms.
One
aspect of that program, the local option income tax originally intended to “buy
down” property taxes, has come of age at a time when local governments from
Angola to Evansville grapple with tax-cap realities.
Budget
season is upon us and Indianapolis Mayor Greg Ballard’s $1 billion spending
plan demonstrates the inherent tensions in raising revenues, even though it
doesn’t increase the local income tax rate. The property tax revenue lost to
caps is driving the mayor’s proposal to drop the local homestead credit, but
it’s probably not long before a debate begins over the income tax rate, which
is 1.62 percent in Marion County.
That
will not be a simple or short debate in either the City-County Building or the
Statehouse. It’s one that must occur, however, and the sooner the better.
First,
a little history. The Bowen property tax reforms created the County Adjusted
Gross Income Tax. That move allowed counties to assess an additional income tax
and use the proceeds to reduce property taxes.
This
shift became the first of seven different local option income taxes eventually
allowed by the General Assembly. Some of the new taxes were used to pay for
additional property tax reduction, economic development, capital projects and
public safety.
The
local option income tax is assessed on top of the state’s 3.4 percent income
tax rate. So Marion County’s effective income tax rate is 5.02 percent. The
rates in other Central Indiana counties are: Boone, 4.4 percent; Hamilton, 4.4
percent; Hancock, 5.05 percent; Hendricks, 4.8 percent; Johnson, 4.4 percent;
Morgan 6.12 percent; and Shelby 4.65 percent.
While
local boards propose local income tax rates and they’re adopted by locally
elected officials, the General Assembly has maintained a tight rein on how much
income tax revenue the locals can raise and how they can spend it. Much of the
debate ahead will center on who gets to control future tax decisions.
“Fundamental
changes to property taxes have been accompanied by incremental changes to local
income taxes,” observed a November 2012 report by the Indiana Fiscal Policy
Institute and the Public Policy Institute.
The
report, available at www.indianafiscal.org,
added, “The result is a highly complex and interrelated tax system of seven
separate LOIT rates that must be individually forecast, administered, and used
by counties to set property levies.”
...
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