Think tank recommends simplifying local income taxes

INDIANAPOLIS | A state budget think tank is urging Indiana lawmakers to consider streamlining and simplifying local income taxes.

A report issued Monday by the Indiana Fiscal Policy Institute calls for changes that could eliminate the two-year lag between tax collection and distribution, see the seven different local income taxes consolidated into a single tax and enable the rebalancing of local income taxes following passage of constitutional property tax caps.

"One of the stress points is just the complexity," said Matt Nagle, of the Indiana University 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?'"

Hoosiers living in every county except Lake County pay a county income tax on top of Indiana's 3.4 percent state income tax. Statewide, about $1.5 billion was collected in local income taxes in 2012. Despite Lake politicians swearing not to impose an income tax, more in county government are voicing support for it.

Northwest Indiana residents pay local income taxes of 0.5 percent in Porter County; 0.95 percent in LaPorte; 1 percent in Newton; and 3.114 percent in Jasper, the second-highest local rate in the state.

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

State lawmakers in recent years have allowed counties to impose local income taxes for public safety, corrections facilities and economic development, in addition to property tax relief.

"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.

Ketzenberger said the recommendations in the report are meant to start a statewide conversation on the issue among taxpayers, local officials and state legislators.