Almost 20 years ago, a northwest Indiana resident named Joe Gomeztagle pulled a string to untangle the state’s complex and inequitable property tax system. His quest resulted in a class-action lawsuit and a switch to market-based property assessments. It also created a far more transparent system.
Now, a new study suggests it’s time for a similar transparency makeover for the state’s Local Option Income Tax system. Decades of tweaking the balance of property tax and income tax revenue for support of local government services have resulted in a dizzying array of regulations, rates, affected taxpayers, authorizers and more. Simplifying the system could give local government more flexibility and taxpayers more information about how their local income tax rates compare to those in other communities.
The Indiana University Public Policy Institute and Indiana Fiscal Policy Institute teamed up to examine local income taxes, 40 years after the County Adjusted Gross Income Tax was created as part of Gov. Otis Bowen’s property tax relief package. Today, local government has the option to adopt any of seven local option income taxes, with revenue statewide amounting to $1.5 billion in 2012.
Allen County Auditor Tera Klutz and Adams County Auditor Bill Borne each served as an adviser on the study, which offered recommendations to improve the tax’s transparency, ease its administration and allow flexibility for local government.
I believe consolidating the current seven LOITs into one rate would, in fact, ease the complexity of the current process, Klutz said in an email. The combined rate should have a cap, and local units of government should be given flexibility on the use of the revenue collected from the combined rate.
She said the additional flexibility could keep the total local option income tax rate lower for some counties because local governments could allocate revenue as needed instead of being restricted to specific purposes for each separate income tax fund.
Klutz is right. The tools lawmakers have given local units of government to keep property taxes low are worthless if use of the alternative revenue is restricted. Changes in the economy and diverse community needs demand flexibility.
Klutz also emphasized a concern about budgeting uncertainty highlighted in the report, as well as the complexity.
Many local finance officers are frustrated with the inability to prepare accurate LOIT revenue estimates for their budgets as well as the lack of transparency in the state’s current process, she wrote.
The study took note of the nearly $208 million error uncovered by the Indiana Department of Revenue, caused by a software error that underreported the amount owed to counties as certified local option income tax revenue.
The report highlighted the point that problems with administration of local option income taxes created problems for local governments in covering costs and in keeping property tax rates from increasing significantly.
Klutz said the state can restore credibility with both local governments and taxpayers by continuing to work with local officials in finding ways to simplify the process and make it more understandable. Forty years along, it’s showing some of the troubling characteristics that ultimately required an overhaul of the state’s property tax system. Addressing them now could save taxpayers and local government units pain and frustration.