By Larry DeBoer in the Clark County News and Tribune:
Indiana has caps on property taxes. This year, the caps reduced property taxes by about $768 million, or 11 percent.
Indiana has local option income taxes that counties adopt to reduce property taxes some more. All counties now have local income taxes.
Common sense says that when a county adopts a tax-relief income tax on top of tax-reducing caps, taxes will be even lower.
Wrong again, common sense. Sometimes the combination of tax caps and local option income taxes can increase total tax bills and local government revenues. It’s the paradox of local option income taxes.
Here’s what happens. Property taxes are capped at 1 percent of gross assessed value for homeowners; 2 percent for other residential housing (such as rentals or vacation homes) and farmland; and 3 percent for business property. Gross assessed value is the estimated market value of most properties before deductions are subtracted.
Local governments set their tax rates at the end of the budget process. If the rate results in a tax bill higher than a property’s cap, a tax cap credit is applied to reduce the bill to the cap amount.
Here’s the key fact: The tax cap is the taxpayer’s last defense against high tax bills. All deductions and credits are subtracted before the tax cap credit is applied. This includes the credits from local option income taxes.
Indiana’s local option income taxes apply to Indiana taxable income, the same as the state income tax. When a county adopts this tax for property tax relief, the income tax rate increases, and then the property tax bill is reduced by a local option income tax credit. The income tax revenue replaces this lost property tax revenue for local governments.
Counties can distribute tax relief in three ways, or in combinations of the three. On average, across the state, if the local option income tax is adopted at 1 percent and the relief is offered only to homeowners, the homestead credit will be about 51 percent. If the county distributes the relief to all residential property, the credit averages 31 percent. If it goes to all property, the credit averages 17 percent.
...
See the full article here:
http://newsandtribune.com/columns/x134976106/DEBOER-The-paradox-of-the-local-option-income-tax
