Next year, Indiana governments will mark the 40th anniversary of using local income taxes. LOITs have become increasingly important to city and county budgeting, and their current use to ease the burden of property taxes will only increase that importance.
The LOIT system has also become more complex, making it hard for taxpayers to understand what they're paying and where the money goes. So the Indiana Fiscal Policy Institute and the Indiana University Public Policy Institute have issued a report on the state of the system and suggested areas for policy discussions. The General Assembly should heed that suggestion.
Some of the suggested-at changes made in the report are obvious needs. Some are less so, and some are problematic. But it's never a bad idea for discussions that can clarify the issues for voters and taxpayers.
One obvious need to address is the two-year lag between when the state collects the taxes and when it distributes the funds to the counties. LOIT revenue as a share of local tax revenue has increased from 6 percent in 1987 to 19 percent this year, and the trend seems likely to continue upward. But that lag time makes it if quite difficult to actually budget the income tax revenue.
Another sensible suggestion is to change the system so local governments have more control over how much to raise and how to spend it. That will make local taxpayers pay more attention to local governments, which should make the governments more aware of constituent needs and wants. But the state has always given in to home rule grudgingly and in small increments. Don't expect that to change.
The whole thrust of the policy-discussion recommendations is to make the system simpler – more uniform, in other words – so officials and taxpayers alike can better understand it. Certainly some of that is called for. There are seven different kinds of LOITs, each with specific conditions for enacting the tax and using its proceeds. And the rates are widely different. Combined with the state income tax rate, effective income tax rates by county vary from 3.4 to 6.5 percent.
But care needs to be taken not to make the system too simple and uniform. A certain amount of complexity makes governments think long and hard about raising taxes, and it forces the increases to be justified and explained. If we make it too easy just to raise one big pot of money that can be spent on anything, guess what? That pot will just keep getting bigger, and the spending rules will become much more lax. Just look at the federal government, for goodness sake.