There is now an Option to avoid the “Use-It-Or-Lose-It” Law invoked by the State, But BEWARE

For years, local units that reduced property taxes have been penalized by a “use-it-or-lose-it” rule that results in permanent loss of future taxing authority if units reduce property tax levies. Recent legislation is an attempt to allow units to avoid the penalty, but the legislation falls far short of eliminating this counter-productive rule.

Why can’t a unit rely on the new legislation when it sets property tax levies and rates?

Under the new legislation, the Department of Local Government Finance may (not shall) waive the penalty in certain circumstances. The problem is, the waiver comes at least a year after the local unit makes the decision to reduce the levy. In the meantime, the unit must live under the cloud of the penalty, not knowing if its taxing authority will be reduced. Few units can justify such a risk.

What are the prerequisites under the new legislation to have the “use-it-or-lose-it” penalty waived?

The penalty can be waived only if the levy reduction was a result of the unit’s use of cash balances. The penalty may still be imposed if the levy reduction is achieved through efficiencies and other forms of budget reduction.

How is the “use-it-or-lose-it” penalty calculated?

The penalty is ½ of the unused levy. For example, if a unit has a maximum levy of $4,000,000 and imposes a $3,200,000 levy subject to the maximum, then $400,000 (1/2 of$800,000) would be deducted in calculating the maximum levy for the following year. Maximum levies are based in part on the prior year and so the $400,000 would be compounded over time.

How does a unit appeal the “use-it-or-lose-it” penalty?

The new legislation requires that a unit make a request to the DLGF to regain the unused levy. We recommend a unit contact the DLGF as soon as the unit receives its current year’s Budget Order.

04/17/10

If you have questions or would like further information, please contact us at: Coonrod@CoonrodCPA.com

This article is intended to provide information of general interest to local government officials in Indiana. The information is not guaranteed to be applicable or appropriate in particular circumstances. Local officials should consult competent professionals before acting on any information contained in this article. We are not attorneys. Advice of a legal nature should be sought only from qualified attorneys.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.