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Income tax money and muddles increase in Indiana
By Larry DeBoer
Capital Comments
Indiana local governments got some good budget news early in September. The Department of Revenue announced that local income tax distributions are up for the first time in years. (You can see how much at their website - http://www.in.gov/dor/news- look for the Sept. 6 press release.)

The state collects local income taxes for local governments and then sends the revenue back to the counties to be divvied up among the local units. The problem is how much to send.

Until recently, the state based its distributions on predictions of how much a county would collect during the coming year. The budget agency would make this prediction based on the data it had, which was usually from the year before. The agency predicted the coming year’s receipts with the previous year’s data.

This worked fine for years. In 2000, though, income tax receipts started to drop. The stock market fell, which cut capital gains income. Then, in 2001, the recession increased unemployment, so there was less wage income to tax.

The drop in taxable income in 2000 showed up in 2001 income tax payments. The budget agency got the 2001 tax data in 2002 and used it to make the 2003 predictions for county income taxes. Predictions in 2003 were the first to reflect falling revenues. The 2001 and 2002 predictions had assumed that income was growing. In those years, too much money was paid to counties.

To balance the books, distributions in 2003, 2004 and 2005 were reduced or held steady for most counties. Local governments in Bartholomew County, for example, received $18.9 million from the county adjusted gross income tax in 2002. This was an overpayment, so distributions dropped the next three years, to $12.8 million by 2005. That’s a 32 percent drop.

Since the prediction-based method wasn’t working, in 2003 the Indiana General Assembly changed the way local distributions were calculated. This year, the amount that was actually collected by July 1, 2005, will be paid to local governments in 2006. In good times, this means that local units will get their revenue later than under the old method. Revenue in 2006 is based on 2005 collections, not predicted 2006 collections. But only revenue that is in-hand will be paid out, so there won’t be overpayments in bad times.

One reason that distributions are up in 2006 is that most counties have “repaid” their overpayments. Another reason is that taxable income has started to rise again. And a third reason is that the Department of Revenue made extraordinary efforts to process returns before the July 1 deadline. More returns mean more collections, so more can be distributed.

Bartholomew will be back up to $15.9 million in 2006, a 24 percent increase over 2005.

There’s more news for counties about local income taxes. One of the three income taxes that counties can adopt is the county economic development income tax, known as CEDIT or EDIT. It was originally intended to support capital projects, such as government office buildings or jails, or to pay for economic development projects, such as industrial parks.

Over the years, though, the definition of what was an economic development project got fuzzy. EDIT money was not supposed to be used for road maintenance. But wasn’t a new highway off-ramp an economic development project? Didn’t maintenance of the off-ramp qualify?

During its 2005 session, the General Assembly cut through this muddle by passing public law 118. It added a new sentence to the Indiana Code (in 6-3.5-7-13.1). Now EDIT money can be used “for any lawful purpose for which money in any of its other funds may be used.” For EDIT, anything goes.

One muddle ended. Another was created. The General Assembly also passed public law 214, which amended the same section of the code in a different way. Now, there are two versions of this section, and the second version doesn’t authorize the use of EDIT for all purposes.

The next time it meets, the legislature will try to fix this ambiguity with a technical corrections bill. Until then, the extra EDIT money that will be delivered to local governments can be used for any purpose.

Perhaps.

9/29/2005