Indiana counties wrestling with tax overpayment

City and county officials across Indiana are starting to wrestle with how they'll deal with the state's plan to recoup roughly $610 million it overpaid local governments for income taxes it expected to collect.

State officials blame the recession for throwing off tax revenue estimates that led to the extra money being paid to local governments over the past three years. Nearly all of Indiana's 92 counties will see money withheld from future tax distributions in order to settle the overpayment.

Howard County Treasurer Martha Lake said her county was overpaid $10.1 million and is looking at a decline of about 5 percent in local income tax revenue for next year under the state's plan to base distributions on 2011 tax collections.

State officials will use this year's collections as a base line and withhold additional money in coming years toward the counties' debt.

"This didn't happen overnight," Lake told the Kokomo Tribune. "It is their responsibility to get the money back. We hope the collections increase."

Bob Lain, assistant director of the Indiana State Budget Agency, said the repayment process is similar to one used in 2000, but the amount of that overpayment was much less.

"The current recession is not comparable to the one of several years ago," he said.

The current amount of indebtedness is an estimate and new figures will be provided to the counties, Lain said.

Bloomington City Controller Michael Trexler said that the city would likely see about $200,000 less than expected from its share of local income taxes, which are collected by the state and then distributed to county governments for disbursement among cities, towns, libraries and other local government units.

Trexler said the city received $7.4 million in local income tax revenue for 2011, and it included a similar amount in its 2012 budget planning.

The shortfall could be absorbed by cash reserves in the proposed 2012 budget, but Trexler said it still would be a significant cut.

"What happens with this kind of a hit is that it eats into the reserve," Trexler told The Herald-Times. "That reserve doesn't automatically replenish itself. It takes a lot of hard work to build up."

Some local officials, however, are questioning whether the state's overpayment figures are correct.

Grant County Auditor Roger Bainbridge said a state report showing a $3.2 million overpayment to his county strains credibility.

Bainbridge said would amount to nearly one-third of $11 million that was expected this year from Grant County's 2.25 percent income tax, the Chronicle-Tribune of Marion reported.

"Taking the state's word for something that is so incredulous is not in my nature," he said. "I want to make sure no one made a mistake."