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home : most recent : statewide implications August 17, 2017

7/28/2017 6:44:00 PM
COMMENTARY: Much to weigh as Vigo County communities ponder local income taxes

Mark Bennett, Tribune-Star

Researchers put Hoosier cities on a treadmill two years ago. They hooked wires and monitors to the towns, checked heart and breathing rates, ran blood tests, and measured cholesterol levels.

Metaphorically, that is. 

In reality, a report by the Indiana Fiscal Policy Institute rated “The Fiscal Health of Indiana's Larger Municipalities.” Basically, the research analyzed the economic physique of the state’s 18 most populous cities (except for Indianapolis). Like the checklist patients fill out on a doctor’s office visit, the institute delved into the towns’ tax revenue and rates, debt, budget balances, spending, employment, population, incomes, assessed value of property and more.

A life-altering event (for local governments, at least) drove the institute to craft a “Fiscal Health Index.” It assessed the cities’ fiscal well-being after the Indiana General Assembly imposed caps on property taxes in 2008. The caps saved property owners hundreds of millions of dollars annually, but also curtailed the tax revenue the cities relied upon to deliver services. The caps coincided with the onset of the “great recession,” which depleted Hoosiers’ jobs, savings and businesses.

The Fiscal Health Index served as the cities’ post-tax-caps physical.

Some communities looked ready to run a marathon. Others needed to exercise, quit smoking and cut out sugar. A few required rehab therapy. Terre Haute, which has had a general fund deficit since 2011, fell in the latter category, ranking last of the 18 cities.

Two years later, one of the remedies pushed by the Legislature is under consideration in Vigo County — a local income tax increase. Of course, the decisions on raising local income taxes fall to local officials, not the state legislators. Yet, the tax caps “are here to stay,” state Sen. Brandt Hershman, who co-authored the 2010 amendment that cemented the caps into the state constitution, said in a 2015 interview.

“The Legislature was forced to make some very tough decisions” in creating the tax-relief caps, Hershman told the Tribune-Star, “and we expect the same level of intestinal fortitude from local governments.”

Vigo County is considering increasing the local income tax from 1.25 percent to 2.25. The increase includes a 0.25 percent special-purpose tax to build a new jail (currently estimated at $62.5 million, not including financing), and that portion would end after 30 years. 

The remaining 0.75 percent would fund public safety — 0.1 percent for 911 dispatching, with the rest distributed among the city of Terre Haute, the county, and towns of West Terre Haute, Seelyville and Riley for police and fire, and other fire protection districts.

The proposal by the Vigo County commissioners must be approved by the County Council. (In most urban Indiana counties, decisions on local income taxes rest with the city councils, but Vigo arranged its structure differently.) The County Council will conduct a public hearing on the plan at 5 p.m. Aug. 7 in the Woodrow Wilson Middle School auditorium.

Similar public forums have unfolded in many other Indiana towns. The number of counties with public safety local income taxes, for example, has grown to 52 out of 92 total, which isn’t surprising, given that public safety typically comprises the bulk of local governments’ expenses. 

Among the 18 cities in the Fiscal Health Index study, 10 have public safety local income taxes (or LITs). Most counties’ public safety LITs were enacted when the state limited those rates to 0.25 percent. The Legislature loosened local income tax rules a year ago, said Larry DeBoer, a Purdue University economist and property tax expert.

As a result, counties can maintain a maximum LIT rate of 1.25 percent for property tax relief, along with a maximum LIT rate of 2.5 percent for local government expenditures including public safety.

Because most counties created public safety taxes under the previous system, the most common rate is 0.25 percent. Vigo’s 0.75 percent, if approved, would become the state’s second-highest public safety LIT, the Indiana State Budget Agency confirmed last week. Jennings County has a 1 percent rate, while Marion and Boone counties at 0.5 percent now rank second.

More counties could raise public safety rates above the old 0.25 percent, DeBoer predicted.

“I’m expecting that other counties will take advantage of the 2.5 percent expenditure maximum to raise their public safety rates over the coming years,” he said this week.

Residents and taxpayers will rightly want answers beforehand, of course. 

DeBoer, who speaks around the state on the topic, recommends citizens in those counties ask how the tax increase will affect each public safety department’s budget, whether it will increase the service provided or simply fill a hole in the overall budget, and why a public safety tax is being chosen rather than a more general “certified shares” local income tax.

Each community has its own unique problems. Vigo County’s proposed public safety LIT would benefit the budget of the city of Terre Haute, which has faced continued scrutiny over its general-fund deficit and the administration’s handling of revenue and expenses.

Meanwhile, the overall county local income tax rate of 1.25 percent currently ranks 46th highest in Indiana, middle of the pack, and remains as it was before the tax caps and recession hit and city property tax revenue shrank. Raising the tax to 2.25 percent overall means Terre Haute workers earning the median household income of $40,000 a year would pay an extra $400 annually.

Those residents, like those in other Indiana counties, need to know their added tax contributions would be used efficiently to improve the fiscal health of their community.

Related Stories:
• Vigo County seeks 1 percent bump in local income tax to help pay for new jail

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