JUNE
2007

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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06-28-07

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Counties Must Decide: Property Taxes or Income Taxes?


The Indiana General Assembly has offered counties a choice: do you want to pay for local services with property taxes or with income taxes? Counties have until July 31 to decide for next year's budgets.

Actually, the choice is more complicated than that. The legislature created three new local income tax options. The first is a levy freeze income tax. Each year counties must decide whether the increase in the property tax levy for civil government operating expenses will be funded with an income tax instead. Civil governments include all units but schools. Operating expenses are mostly employee pay.

The county council makes this decision in most counties, but the County Option Income Tax (COIT) council decides in counties with the county option income tax. The COIT council is made up of the councils or boards of counties, cities and towns, with votes based on population. The county represents people who live outside cities or towns. In most of the big counties, a city has the majority of votes on the COIT council.

If the county adopts this income tax, the property tax operating levy for all civil governments is frozen for a year. The county's local income tax rate rises to cover the levy increase instead. In most counties, the rate increase will be one- or two-tenths of a percent. That income tax rate can never be reduced, so that year's levy increase will always be funded by the income tax. Each year the county makes a choice to use the property tax or another increase in the income tax for the next year's levy increase.

The county must adopt the income tax for two years the first time it is used. In the first year, the income tax rate is doubled, and the extra money is stored in a stabilization fund to guard against income tax revenue shortfalls.

In any one year, the levy freeze income tax won't deliver much property tax relief, perhaps 1 or 2 percent for the average taxpayer. If a county used this income tax for many years, though, its revenues could shift significantly from property to income taxes.

The second option is a property tax relief income tax. The county or COIT council can adopt an income tax rate of up to 1 percent and use the revenue to reduce property taxes. There are three ways to distribute the tax relief: to all taxpayers, to homeowners only, or to homeowners and rental housing owners. Counties can select any combination of these three.

If the tax relief is distributed to all taxpayers, most homeowners' income tax payments will rise more than their property tax payments will fall. Their total tax bill will increase. Most farmers, corporations and retired homeowners will pay less.

If the tax relief is distributed to homeowners only, most homeowners will see their total tax bill decrease. Most farmers and small businesses will see tax increases. Corporations won't be affected. The results are similar if landlords receive property tax relief, though fewer homeowners will see tax cuts.

The third option is a public safety income tax. The county or COIT council can adopt an income tax rate of up to one-quarter of 1 percent to fund police or fire protection, emergency medical services, corrections or other public safety functions. Counties, cities and towns split the money. Counties must adopt the levy freeze and tax relief income taxes before they can adopt the public safety income tax.

Marion and Lake Counties are treated differently. Marion must increase its levy freeze rate only 50 percent for its stabilization fund and needs only the freeze rate to be eligible for the public safety tax. Lake must adopt a 1 percent tax relief income tax in order to get any increase levy increases in 2008, and only the county council can make income tax decisions.

Many counties may not decide about the income tax options by July 31, so the taxes won't be in place in 2008. The state will provide added property tax relief for homeowners next year but not in 2009. Will counties take up the tax-relief task in 2009? They've got until July 31, 2008 to decide.

 

 

Writer: Larry DeBoer,
Editor: Olivia Maddox,