Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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Indiana Reforms Its Local Income Taxes

It started in 1973, when Governor Bowen pushed his property tax relief package through the Indiana General Assembly. Counties could adopt the county adjusted gross income tax (CAGIT) if they wanted more property tax relief than the new state program delivered. About a third of the counties adopted, most of them rural. Later CAGIT was changed to provide more revenue for budgets. Now 56 counties have CAGIT.

Then came the double-dip recession in 1979-82, and cities needed cash. In 1984 the General Assembly responded with the county option income tax (COIT) which could raise revenue for city, town and county budgets. The COIT decision was made by the new COIT Councils, which were dominated by city votes in the biggest counties. Twenty-eight counties adopted COIT.

EDIT came along in 1988. That's the economic development income tax. It raised money for counties, cities and towns to pay for infrastructure to promote business growth, or for other public facilities. Eventually the General Assembly allowed EDIT to be used for any purpose. Seventy-two counties have EDIT.

There it stood for 15 years, until the big tax reform of 2002. The legislature exempted business inventories from the property tax, phased-in over five years. Counties were allowed to adopt an additional EDIT to fund a homestead credit to protect homeowners from higher property tax bills. Thirty-six counties adopted the extra EDIT.

The start of annual assessment trending in 2007-08 helped cause a shift in property taxes towards homeowners. The General Assembly responded in 2007 with three new local option income taxes (LOITs). Counties could freeze the property tax levy and pay for added spending with an extra LOIT rate. They could adopt a LOIT to fund property tax credits for homesteads, rental housing or all property. They also could adopt a LOIT to pay for public safety spending. Technically, these new LOITs were CAGIT, COIT or EDIT rates, but for new purposes. Thirty-nine counties adopted one or more of the new LOITs.

And through the years special legislation allowed individual counties to use local income taxes for particular purposes. There are 17 counties with special income taxes in 2015.

Now all 92 counties have at least one local income tax. Total rates range from 0.2% to 3.13%. The median total rate is 1.46%, and there are 53 different total rates.

The appropriate response to all this, dear readers, is "Huh?"

But this year the General Assembly passed and the Governor signed House Enrolled Act 1485, which will reform Indiana's local income taxes. You can find the bill on the General Assembly's website, but look at the fiscal note for a readable explanation.

In 2017 the many local income taxes will be merged into one. The revenue from this local income tax can be used for three purposes. It can be used for budgets, distributed among the county, cities and towns and other units to support public services. It can be used for property tax relief, to fund property tax credits for various property owners. Or it can be used for special purposes, where this has been authorized by past special legislation.

It's definitely easier to explain than our existing system. But it will be a challenge for the State Budget Agency and Department of Local Government Finance to recreate existing revenue distributions and credits under the new system. The reform is not intended to change tax rates, and is not supposed to change revenue uses very much.

Counties will have more flexibility under the new system. If a county wants more for property tax relief and less for added services, or the reverse, now they might have to rescind one tax and enact another. The new system will let them change the distribution shares under their existing tax rate. There also are new options for providing property tax relief among categories of property.

From the taxpayer's point of view nothing much will change. Local income taxes still will be withheld from paychecks, and we'll still check for that dreaded local rate come tax time in April. But this is a big reform for local governments. With the new flexibility come 2017, many counties may consider changes in the way they use local income tax revenue.



Writer: Larry DeBoer
Editor: Keith Robinson