The Indiana Fiscal Policy Institute has released a new report on Indiana’s local income tax structure, which if relaxed, could shift hundreds of millions of dollars into local budgets, according to the report author.
The IFPI commissioned former Purdue University economist Larry DeBoer to examine the limits placed on local income taxes.
The institute says the state rules were implemented to protect against recession shortfalls following the Great Recession of 2008-09. State law requires a minimum balance above 15% of annual distributions.
DeBoer says if the rules are eased, more than $200 million in surplus balances could be shifted into local coffers.
“After the Great Recession, 59 counties ended 2010 with negative LIT balances,” said DeBoer. “The state had to cover the losses and freeze distributions until collections caught up and eventually settled on the 15% balance reserve as a precaution against the next economic crisis. After a decade of growth and expansion of LIT interrupted by the COVID recession, it’s time to ask how well this 15% limit is working.”
DeBoer says COVID caused a steep economic recession, but its impact on local income taxes was short-lived.
He says even against the threat of a deeper recession, he feels the 15% balance requirement on county LIT accounts has worked, “but perhaps it works too well.”
The full report on Indiana’s local income tax distributions can be downloaded by clicking here.