The delay has been mostly due to confusion on my part as to what, how, and when of this option that Their Man Mitch so graciously left available to local government following his property tax reform initiative.
Never mind that such action has effectively hamstrung cities and counties around Indiana, while ensuring the state's budget is not only balanced but is able to show a surplus as well. But then that does look good on a resume if one’s political ambition is to descend on Washington, although I’m getting off point here.
So, to continue, not being satisfied neither with the explanations I’ve read in local newsprint nor heard from local politicos, I decided to go to
Having tried that approach there is still a modicum of confusion on my part, so I’m going to throw up what I’ve gleaned and open a discussion in the hope that clearer minds are out there to help clarify facts.
First of all my understanding is the LOIT option provides two primary benefits. The one being another 1% reduction in property tax that goes directly into the state's coiffures.
That fuels the first question: Does some portion of that one percent gain at the state level ever filter back down to the local level? If so, how & when?
The provision for a 0.25% Public Safety Tax looks to be self explanatory. These monies stay in the county to be used exclusively for funding additional police, fire & medical needs.
The third option is where I get confused. As I read the briefs this 1% option is billed as a Property Tax Replacement,” so now the question becomes: Does the word “replacement” mean that if a county adopts this option in conjunction with the above, they eliminate all property taxes and function on income tax revenue alone?
Or, does it indicate that adopting that option would merely result in yet another 1% reduction in one’s property taxes?
My position is if elimination of property taxes period is the goal and that is what the wording of the statute means we would be remiss in not taking advantage of the opportunity.
So now comes the argument that in doing so some will pay taxes and some won’t! To which I respond, “and your point is?”
Yet another source of confusion is the time frame in which a county must take action in order to reap the benefits of LOIT. I understand that there is a December 2008 deadline for adoption which brings forward these questions:
A) Must we adopt by this December or lose the option altogether?
OR
B) Must we adopt by this December in order to receive the funds for use in 2009?
OR
C) Does delaying until after the first of the year mean we won’t see them until 2010 or later?
There more questions to consider at the New Albany/Floyd County level, so Part 2 will be forthcoming.
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Note: I've perused many sources but my best understanding thus far has come from this site:
Indiana's Local Income Taxes
14 comments:
This is complicated, thereby ensuring few people other than tax professionals will understand it all. I found a good analysis of the LOIT option that the Lake county common council prepared to try and understand. nwi.com/tabs/multimedia/loit.pdf
I think the key information is the following (note that we're opting for Option 3):
In 2007, House Enrolled Act 1478 (Public Law 224) provided three more local income tax options.
The first would pay for the annual increase in civil government operating levies (that is, property taxes for government other than school corporations, for spending other than big capital projects). That part of the tax levy would be frozen. The maximum rate for this tax is 1%. The income tax rate is calculated so as to raise enough to pay for a particular year's levy increase, so the rate would be much lower than 1% in most counties at first. The tax must be adopted for two years initially, and the first year's rate is doubled, to establish a stabilization fund. This fund protects local units from revenue shortfalls which might occur because income tax revenue is less stable than property tax revenue. After the first two years, counties can decide each year whether to pay for the levy increase with the property tax or an added income tax rate. Once adopted, these income tax rates cannot be reduced or rescinded.
The second new option provides property tax relief by reducing existing property taxes. The maximum rate is 1%. This tax can be adopted at any rate between 0.05% and 1%, in 0.05% increments.
The third new option provides added revenue for public safety, including police, fire and emergency medical services, facilities or pensions. The maximum rate is 0.25% (0.5% in Marion County). To adopt this option a county must adopt one or both of property tax relief options, with a combined rate of at least 0.25%. The law passed in 2007 required that both property tax options be adopted, but the property tax reform of 2008 reduced this to one.
Clarification - the county is proposing to adopt option 3, which requires that we also adopt one of the property tax reduction options (options 1 and 2).
I'm going to have to vote Zen Option 2 cause I think I can understand it.
So Brandon,
To further clarify.
Setting aside the safety tax option, adopting either one of the other two will result in up 1% further reduction in our alegedly already reduced property tax bills.
And adopting both will result in a potential total 2% reduction in the aforementioned property tax bills.
Is that a correct conclusion?
It's situations like this that make the state look ever so hypocritical when critiquing the efficiency of local government.
Want real reform? Set it up so that we owe the state x number of dollars based on population so that each "citizen" around the state is responsible for an equal amount.
The rest, and how we go about getting it and spending it, would be up to us.
You could do away with a lot of Department of Local Government Finance activities and personnel, to the extent that they'd become a regulatory agency only, making sure that counties and municipalities followed a much simpler set of rules rather than deciding for us what our budget should be.
For the most part, the "reform" that's supposedly happening under Daniels and the most recent legislatures amounts to increasingly centralized control and more arbitrary, Draconian rules that have little to do with our circumstances down here.
The way it stands now, local authorities have very little control over revenue, tax rates, budgets, and the development incentives that would affect all of them. They are taking the brunt of the blame, however, even though those issues are decided by the state.
Until that changes, reform needs to be focused on Indianapolis rather than individual counties.
Wow, Jeff, you are advocating a fair tax? Imagine that. Seems like a local conservative has been pushing that for years, and he was demonized for it. His plan eliminated a majority of the IRS, as yours will eliminate local finance employees. I love it, and endorse it. Great idea.
Highwayman,
That's not quite it.
You have to remember that the state does things backwards. Rather than setting a rate and calculating revenue based on it, they set a budget (and therefore revenue needed) and then set a rate to achieve that revenue.
Let's say the state determines that our budget for the year should be $16 million. If all that money comes from property taxes, the state would look at the total assessed value of property in the area and calculate a rate, which when multiplied times that assessed value, would equal $16 million.
If part of that money comes from income taxes, the amount needed from property taxes is lowered but not necessarily in a direct percentage relationship.
If we need $16 million and increased income taxes bring in $2 million, the amount needed from property taxes would be $14 million. The state would then do the same process as before for the lesser amount, figuring out what property tax rate, when multiplied against total assessment, would generate $14 million.
If the increased income tax generated $1 million, then the property tax rate would be set to generate $15 million.
The increased income tax would somewhat offset the need for property tax revenue but the exact amount or rate percentage would change from year to year as property assessments and incomes fluctuate.
They are not saying if we raise the income tax rate one percent then we'll lower your property tax rate one percent. It's not that direct.
And, no Daniel, I'm not advocating the type of individual income tax that Sodrel has pushed. Calling it a fair tax is a misnomer. I'm advocating that the state's share of local produced revenue be based on population.
Your words Jeff:
"each "citizen" around the state is responsible for an equal amount."
I stand by my interpretation.
Jeff,
I'm a little confused by your tax idea, also.
Your "citizen" tax is for the operation of state government and programs, correct? The local governments raise their own? Basically speaking?
Daniel,
I put the word "citizen" in quotation marks in my original comment for a reason. Does the local municipality charge local citizen the exact same amount of money or does it make five people cough up all of it? It doesn't matter to the state as long the state gets the amount owed. The total owed per taxing district would be based on population rather than property assessments, income, consumption, etc.
What Sodrel has advocated is the total elimination of the federal income tax in favor of a federal sales tax. We can legitimately debate whether that's fair or not or even if his borrowed numbers are representative of reality but it's not germane to the discussion at hand as it's a radically different scenario.
IAH,
What I'm suggesting is that we determine which programs and/or services are state responsibility (and I'd generally argue for fewer), how much they cost, and what share each local taxing district owes as their share of that burden.
Local municipalities then be given a much freer hand to determine taxes and rates necessary to meet that burden and their own local budgets, which would be largely self-determined.
What happens now is that the state tells us what our budget is going to be. Setting that number has no direct relation to our own successes or failures in increasing property values, attracting business, etc. The Daniels administration has made clear that his people at the DLGF should not, under any circumstances, approve local budget increases of more than 2 to 3 percent.
Local governments are strapped. Under current circumstances, they'll continue to be strapped even if they do a spectacular job at economic development. Raised revenues 10% without additional taxes or requiring increased rates? Congratulations, you get a 2% budget adjustment that may not even cover increased costs. It's a no win situation.
Furthermore, state rules greatly restrict the incentives that local municipalities have to encourage a bigger pie and to whom they may be offered. Most of the tax programs are aimed at a business climate that matured and started declining decades ago rather than preparedness for the future. Locals can offer a manufacturer paying $8 an hour hefty tax breaks to do greenfield construction and purchase equipment.
What does the tech company that wants to reuse an existing building and has low equipment costs but pays $35 to $65K a year get? Not much, if anything.
You've mentioned that you're in favor of shaking things up. State rules keep that from happening much more so than they encourage it.
Regardless of whether they've invested well or squandered every penny, local governments are having their revenues slashed by a method of state government that punishes but never rewards, even when the outcomes are determined more by the state framework in which they are forced to occur rather than the influence of local actions.
It's a no win situation.
Excellent comment, Bluegill. It really is a no-win situation and a disincentive for good local governance.
We may have voted blue on election night, but the statehouse is full of conservative zombies who are incapable of considering an economic policy more complex than "low taxes."
As you've mentioned several times, B.W., if low taxes and interstates were truly the key to economic success, Indiana would be a national leader.
One would think the fact that we're not might provide some impetus to invest in or at least consider other factors but, then again, we reelected Daniels and have supposed opposition party members who make him look almost creative in comparison.
Jeff,
We are more on the same page than you seem to think. How much had state and local taxation changed before the most recent changes. Practically none. There was basically no local control then either. While Gov. Daniels(et al)may have a different goal in mind than where I would go, it has opened the door, at least a little, to change. It's got some people talking and thinking about local control.
Not sure about the population divisions. Will need to ponder but, initially, I can think of inequities.
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