Report backs simpler Indiana local tax system

A new report on Indiana's local income taxes urges state legislators to simplify a system that has seven types of taxes and a two-year lag before the money collected by the state is distributed to local governments.

The Indiana Fiscal Policy Institute report released Monday finds that the local income taxes have successfully lowered property taxes throughout the state since they were started in the 1970s, but that the system has steadily become more complicated, The Times of Munster and The Journal Gazette reported.

"One of the stress points is just the complexity," said Matt Nagle, an analyst at Indiana University's Public Policy Institute, a co-sponsor of the report. "Property tax caps were meant to introduce more simplicity, transparency and consistency and the conversation should be, 'Is there a way we can introduce that simplicity on the (local income tax) side as well?'"

Northwestern Indiana's Lake County is the only one of the state's 92 counties without a local income tax, which range from 0.1 percent to 3.13 percent.

The report found most local income taxes are used to reduce property taxes, though counties are increasingly using local income tax revenue for other expenses.

State lawmakers in recent years have allowed counties to also adopt local income taxes for purposes such as public safety, corrections facilities and economic development.

"Local income taxes are a central piece of local government budgets, but taxpayers should have a level of certainty and clarity in how these taxes are administered," said John Ketzenberger, president of the Indiana Fiscal Policy Institute, a nonpartisan research group.

The report said $1.5 billion in revenue from local income taxes was distributed in 2012 to counties, and that additional $2.4 billion could have been collected if all counties used the maximum rates of between 3 percent and 3.5 percent, depending on the combination used by a county.

Nagle acknowledged it wouldn't be politically possible for all counties to adopt maximum rates. He also said that income tax collections continue to be less stable than property taxes during economic downturns.