C.L. Coonrod & Company Article

Local income tax – is it distributed fairly?

How is local income tax distributed? Is it fair?

Most local officials think the income tax is distributed according to the amount taxpayers in their unit pay, or according to the taxes actually paid in their jurisdictions, or according to population. That is not the way it is done.

Generally, local option income tax is distributed in proportion to each unit’s property taxes. In other words, the more property tax you raise, the more income tax you receive. There are some exceptions, but generally population plays no role. Another unit in your county may be half your size, but they may receive more income tax.

The original formula actually created an incentive to raise property taxes as high as possible. Some units established cumulative funds and issued bonds partly to have a reason to raise property taxes and thereby receive more income tax revenue.

Recent legislation has corrected that unintended consequence. Generally, property taxes raised to pay debts incurred after June 30, 2005, are NOT counted when income tax distributions are made.

How can you increase your income tax revenue? Naturally, the best way is to promote economic development and jobs in your county. All the local income tax collected in your county is pooled, and your unit receives a share. Even if the jobs are not created in your taxing district, you still receive a share of the income tax.

However, the formula still allows a local unit to increase its share of the revenue in some circumstances. The most common are as follows:

1. Increase your unit’s property tax levy through a levy appeal. Here is a link to the form on the website of the Indiana Department of Local Government Finance:

http://www.in.gov/dlgf/structure/budget/appeal_forms.pdf

2. Establish a cumulative capital development fund above the minimum rate, or, for a township, a cumulative fire building and equipment fund. Here is another helpful link from the website of the Department of Local Government Finance

http://www.in.gov/dlgf/pubs/manuals/cities/Chp9.pdf

3. For a municipality, annex territory and receive an automatic increase in property tax levy in order to serve the new territory. (In the case of an annexation, in addition to the automatic increase, there is the prospect of a further property tax levy appeal as wall.)

Don’t overlook the fact that economic development in a neighboring county may also help you. Usually, people pay income taxes where they live, not where they work. If yours is a bedroom community, you would usually receive the income tax when your citizens work in other counties.

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.