New Income Tax Capabilities Can Provide Property Tax Relief, Fund Levy Growth or Public Safety

Submitted by: Gary Malone, Executive Partner

House Enrolled Act 1478 authorized counties to impose additional rates of County Option Income Taxes (COIT) and County Adjusted Gross Income Taxes (CAGIT) for levy growth, property tax relief and public safety costs effective May 11, 2007.

The window to take action has been changed to April 1 through July 31, and the effective date for income tax changes moved from July 1 to October 1. Income tax rates are imposed by county councils in CAGIT counties and by community income tax councils in COIT counties. For this year only, Governor Daniels has extended this deadline by two months in light of the financial hardship placed on homeowners in certain areas of the state from the property tax shift caused by trending.

Funding Levy Growth

Up to 1% of increased income tax may be enacted to fund levy growth, although the actual rate will be determined jointly by the DLGF and the Department of Revenue. There are many complexities to setting the levy growth income tax rate and distributing revenues. Since the county cannot reduce or rescind the levy growth tax rate after adoption, your decision is permanent. If your county is considering increasing income tax for levy growth, you'll want to seek guidance to ensure your plan meets all the guidelines and achieves the result you were hoping for.

HEA 1478 freezes tax levies of all political subdivisions within counties choosing to fund levy growth with income tax. The freeze does not apply to funds not included in the maximum levy controls, such as debt service.

Funding Property Tax Relief

Counties may also enact income taxes for property tax relief, with the maximum allowable increase set at 1%. Tax relief may be in the form of replacement credits for all property owners, homestead credits, or replacement credits for residential property. Your choice in how to apply this property tax relief will need to consider the potential for Circuit Breaker Tax Credits.

There are special provisions in HEA 1478 regarding Lake County and property tax relief income tax. Lake County must take advantage of this provision by July 31, 2007 or wait another year for any increase in property tax levies.

Funding Public Safety

Counties imposing additional income taxes for both levy growth and property tax relief may also enact an income tax increase for public safety costs, including law enforcement and firefighting systems, ambulances, corrections facilities and pensions. Revenues from this form of income tax may not be used to reduce a county's or municipality's property tax levy, and this income tax increase may be rescinded. The law includes special provisions for Marion County regarding this tax.

If you have questions about increasing the income tax rate in your county, please contact us at footnotes@umbaugh.com.

In our next issue, we'll summarize requirements for new county control boards.

This article is the fourth in a series about recent changes to property taxes and revenue streams enacted in the 2007 Indiana General Assembly. We thank Buddy Downs and Karen Arland from Ice Miller LLP for their research and insights.