JULY
2016

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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07-28-16

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Indiana LIT


Hey look, a column about the great writers from Indiana: Stratton-Porter, Tarkington, Vonnegut. Well, no. Call me an uncultured economist, but LIT is a new acronym in Indiana local public policy local income taxes.

Not that local income taxes are new. Indiana invented its first local income tax way back in 1973. It was the county adjusted gross income tax, which we called CAGIT, and it allowed counties to adopt an income tax to reduce property taxes. Later, some of the CAGIT money was allowed for added spending. Then in 1984 we invented the county option income tax, or COIT, to add revenue to county, city and town budgets.

Then in 1988 came the county economic development income tax CEDIT to raise money for economic development projects. And then in 2002 an additional CEDIT rate was allowed for homeowner property tax relief. And then in 2007 three more local option income taxes (LOITs) were created, one to freeze property tax levies, one to reduce property tax bills and one to raise money for public safety spending. And, all along, the General Assembly was authorizing local income taxes for special projects in particular counties.

It was, to be generous, a bit difficult to explain. But now, as of July 1, 2016, we're scrapping the whole mess. No more CAGITs, COITs, CEDITs or LOITs. Now there will be just one local income tax rate. We're going to call it the LIT.

The reform was passed by the Indiana General Assembly in 2015 as House Bill 1485, and the new law is in Indiana Code 6-3.6. The reform does not change what taxpayers are paying or what local governments are doing with the revenue. It just simplifies our local income taxes so they are easier to understand and explain. It should allow counties the flexibility to set their income tax rate and revenue uses in the way that best meets the needs of local residents.

But is it really easier to explain? Let's give it a try.

Decisions about the LIT are made by the county council or by a combination of county, city and towns called the county income tax council. If the income tax council adopted a tax before the reform, it's still in charge. If not, the county council makes the decisions.

A LIT rate up to 1.25 percent can be adopted to reduce property taxes. The county can allocate the tax relief to homeowners, to other residential housing owners, to other residential housing and to farmland owners, or to business property owners, in any combination. The property taxpayers get a percentage credit to reduce their tax bills, and the LIT revenue replaces lost property taxes in local government budgets.

A LIT rate up to 2.5 percent (2.75 percent in Marion County) can be adopted for local government expenditures. That makes the maximum LIT rate 3.75 percent (4 percent in Marion). For counties that used to have CAGIT, revenue from 0.25 percent must be allocated to local governments including schools.

The rest of the expenditure amount is additional revenue, which can be used for public safety, economic development projects or general purposes (that amount is called "certified shares"). The revenue for each purpose is divided among the units of government using different formulas. Public safety revenue is divided among the county, cities and towns, and fire departments can receive revenue if the adopting body chooses. Economic development project revenue is divided among the county, cities and towns, but they have to adopt a capital improvement plan to get the money. Certified share revenue is divided among most non-school local governments. Counties can keep any special purpose income tax rates authorized by the General Assembly.

The state Department of Revenue will collect the LIT with state income taxes and then distribute the LIT revenue back to the counties. This is called the "certified distribution."

That's not so bad to explain. Of course, there are hundreds of details that matter for passing the taxes and allocating revenue, and for the transition to the new system. Let's leave those for another time.

For all I know, though, we'll end up pronouncing L-I-T as "light." In which case, turn off CAGIT, COIT, CEDIT and LOIT, and turn on the LIT.

 

 

Writer: Larry DeBoer
Editor: Keith Robinson