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Local income tax is local government candy for now and later

  • 5 min to read

Northwest Indiana residents may not be aware they are investing tens of millions of dollars this year in economic development.

They did so in the spring when they completed the ninth line on their Indiana income tax return, where they enter the county tax they must pay.

State law requires each county to earmark a portion of these taxes, imposed on the Region's residents and workers, to prime the pump of future economic growth.

Regional Development Authority President and CEO Bill Hanna, a proponent of expanding and improving the South Shore commuter rail line in the three counties, said the county economic development income tax, or CEDIT, "was designed to grow the economy."

"Your tax base grows and gives you more (tax) revenue. It is important to remember that our opportunities are much bigger than political boundaries."

And much of it is committed to pay a portion of the West Lake Corridor project to extend the South Shore commuter railroad's line nine miles south to Dyer from Hammond, and to build four new stations by 2022.

The varying income tax rates amount to about 30 cents of every dollar of county income taxes paid across all of Northwest Indiana — more than $64 million this year — to be devoted to economic development.

But the income tax money is not all committed to "tomorrowland." A Times survey of local government budgets indicates the money also goes to road and sidewalk repairs, salaries and routine supplies.

Local income tax dollars also are budgeted to improve today's quality of living — building major traffic arteries, renovating government buildings, modernizing downtown building facades and upgrading fire and police equipment the last four years.

The Indiana General Assembly created CEDIT in 1987 as the third version of a personal income tax it offered county officials as a more palatable alternative to support local government than property taxes, which had risen to painfully high rates during the inflationary early 1970s.

Legislators gave county officials the option to pass — or not pass — an income tax at a time and a tax rate of their choosing. Some adopted it immediately.

LaPorte County adopted two income taxes in 1986. The first, CAGIT, or, county adjusted gross income tax, goes directly into the county's general fund for a variety of needs, said LaPorte County Auditor Joie Winski.

The other portion, known as CEDIT, or county economic development income tax, is given partly to the county highway department, Winski said.

Others, like Porter County, waited to adopt CEDIT 15 years ago, when the County Council was concerned about losing property taxes following the Bethlehem Steel bankruptcy and the local government fiscal crisis that resulted, Porter County Auditor Vicki Urbanik said.

Lake County was the last to adopt any form, eventually opting for a CEDIT rate, public safety CAGIT and CAGIT devoted to property tax reduction.

Larry DeBoer, a Purdue University economics professor who specializes in Indiana's public finances, said, "CEDIT built a lot of industrial park infrastructure with that, but over time, the definition of economic development became broader and broader, and since there was no real oversight, the Legislature eventually just said it could be used for any legal purpose."

Indiana income taxes' circuitous route

The first version of income taxes in Indiana, adopted in 1973, and known as county adjusted gross income tax, or CAGIT, was popular with farmers, because it lowered their property taxes and didn't eat into much of their farm revenues since it was only imposed on personal income.

It later caught on in more urban counties as a way to relieve everyone's tax burden during economic downturns, when incomes drop but property values and taxes remain high.

"It's related more to the ability to pay. Even if your tax is based on property, you don't sell off a piece of your property to pay property tax. You pay it from your income, but you also cannot tax industry or business," DeBoer said.

The income tax idea was so in vogue, the General Assembly created a COIT, or county option income tax, in 1984, the CEDIT in 1987 and a number of other designer income taxes.

South Bend's St. Joseph County opted for a COIT tax, while downstate Adams County chose a COIT Public Safety tax. Some counties mixed and matched CEDIT and COIT, while others, like LaPorte County, went with CEDIT and CAGIT.

Their proliferation prompted legislators two years ago to cut through the alphabet soup of different abbreviations and rename all of them a local income tax, or LIT, although retaining the old rates and uses.

Each county's income tax journey different

LaPorte County adopted a .95 percent local income tax about three decades ago that is almost evenly split between use for economic development and all other essential services local government provides.

Porter County Councilman Dan Whitten said the County Council set Porter's initial CEDIT rate at 0.25 percent on residents' and workers' personal income before he was elected. He said the council later voted to increase it to 0.5 percent to support the county's contribution to the Regional Development Authority. "I voted against that," he said.

Urbanik, Porter County's auditor, said the increase to 0.5 percent took effect in 2005. She said Porter County still has among the lowest local income tax rates in the state.

Lake opted for a .25 percent CEDIT rate, a .25 percent public safety CAGIT rate and a 1 percent CAGIT devoted to property tax reduction.

Lake County was last holdout

A local income tax held no allure for the seven Lake County Council members and three-member Board of Commissioners, who considered it an unfair tax that would only fall on the backs of workers, while industry captains reaped large profits from their lower property tax bills.

Lake County became the final holdout in an otherwise ardently pro-income tax state, but even its leaders' resistance began to weaken a decade ago.

Business and industry, which once paid 2 out of every 3 property tax dollars in Lake County, won tax breaks in 2003 from state officials that reduced business, industrial and utility taxes by more than $125 million, while increasing residential taxes by $195 million, according to a decade-old Legislative Services study.

That left Lake homeowners howling over property tax bills that in some cases doubled, due to their picking up the slack from the now-decreased taxes paid by business and industry.

Lake officials offered them tax relief in 2005 by adopting a ceiling on homeowners' tax bills of 2 percent of a house's assessed value.

The Lake County Council attempted to pass a 1 percent income tax in 2007, but commissioners vetoed it.

The Legislature punished Lake County by freezing its total property tax levy at the 2007 levels — until it passed an income tax.

The General Assembly upped the tax-relief ante in 2010 by giving voters the opportunity to approve a referendum to cap property taxes at 1 percent of a home's assessed value, 2 percent for farms and rental housing, and 3 percent for business and industry. Voters adopted it by a landslide.

The cap fell heaviest on Lake County where its urban tax rates are among the highest in the state and local government was faced with the permanent loss of tens of millions of property tax dollars. Lake County officials became so desperate they borrowed $15 million in 2012 just to make their payroll.

Lake County leaders finally relented in 2013 and passed an income tax — the last of the 92 counties in the state to do so.

The council voted in, and commissioners declined to veto, a 1.5 percent tax on local residents and workers over the angry shouts of tax protesters.

The new income tax revenues, and recovery from the recent recession, have restored the finances of many of Lake's county and municipal governments, giving officials the chance to give the employees long-delayed pay raises.

County officials also are contributing $2.6 million this year to the South Shore expansion.

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Lake County reporter

Bill has reported in Lake County since 1972 after graduating from Indiana University. He has worked for The Times since 1997, covering the courts and local government during much of his tenure. Born and raised in New Albany, Ind., he is a native Hoosier.