Local income taxes expand over 30 years, potential exists for higher rates

By Lesley Weidenbener

INDIANAPOLIS – A new report about local income taxes in Indiana finds that they have been successful in holding down property taxes in some communities while bolstering budgets in others.

Matt Nagle, senior analyst at the Indiana University Public Policy Institute, talks about a new report detailing the impact of local income taxes over the past four decades. He was joined by John Ketzenberg, president of the Indiana Fiscal Policy Institute, which co-sponsored the resarch with the IU organization. Photo by Lesley Weidenbener, TheStatehouseFile.com

The report – published jointly by the Indiana Fiscal Policy Institute and the Indiana University Public Policy Institute – also shows that most communities still could raise their income tax rates significantly.

Counties currently collect less than half the revenue that would be available if local officials voted to increase income taxes to their maximum rates, the study found.

“Additional revenue dollars are possible for counties,” said the report. “In many cases, counties have room to raise existing rates and to adopt other rates. An additional $2.4 billion revenue could have been realized on 2013 distributions by all counties utilizing maximum rates.”

However, the study points out that raising rates to as high as 3.5 percent – the maximum in most situations – would be “politically and economically untenable.” Local rates are added to the state individual income tax rate of 3.4 percent.

The study is called “40 years of local income taxes in Indiana: Trends, challenges and implications for the future.” John Ketzenberger, president of the Indiana Fiscal Policy Institute, said the goal was to provide research that could be the base of future income tax discussions by state policy leaders.

And the report recommends a number of such discussions – including those about the balance of local and state control in setting income tax rates and the benefits of streamlining the existing seven income taxes into one rate. The report also recommended that state and local leaders work on ways to reduce the lag that exists between when local income taxes are collected and then distributed to local governments and the estimates used in the mean time.

But some of the most interesting parts of the study are those that compile data about the income tax system. Among its findings:

  • Only one county – Lake – has imposed no income tax rate. Among the remaining 91 counties, two– Jasper and Pulaski – have rates of more than 3 percent. Ten counties – Dearborn, Gibson, Jefferson, LaPorte, Pike, Porter, Spencer, Sullivan, Vermillion, and Warrick – have tax rates below 1 percent.
  • Counties that use at least half of their income tax dollars for property tax relief have property tax rates that average $1.70 per $100 of assessed value. Counties that devote between 10 percent and 40 percent of their income tax dollars for property tax relief have average rates of $2.40 per $100 in assessed value. That’s a difference of about $700 per year for the owner of a home assessed at $100,000.
  • Local income taxes have allowed local governments to diversify their revenues. Income tax receipts as a share of total local revenue have increased from 6 percent in 1987 to 19 percent this year.

See the full report at http://www.indianafiscal.org/pdf/LOIT.pdf.

Lesley Weidenbener is managing editor of TheStatehouseFile.com, a news website powered by Franklin College journalism students.

Correction: This is a corrected version of the story. Originally, the story incorrectly listed three counties with income tax rates of more than 3 percent. Morgan County’s rate is not more than 3 percent. The county’s total rate is 2.72 percent per $100 of assessed value. TheStatehouseFile.com regrets the error.
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