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Report: Counties Should Consider Raising Local Income Taxes

Legislators advanced a bill Tuesday that would allow people to keep a gun locked in a car on school property.

A new report from the Indiana Fiscal Policy Institute shows Local Option Income Taxes, or LOITs, may be underutilized as a source of funding city and county government.

The report says the state distributed more than $1.5 billion in LOIT revenue to 91 counties this year.  But Institute President John Ketzenberger says the distribution process takes two years from the time the state collects the money and distributes it to the counties — so it’s been slow to keep up with changes to Indiana’s property tax code.

Every county but Lake collects LOIT funds, and the report says the use of LOIT as a local funding source has likely contributed to keeping Indiana property taxes down over time.  But Ketzenberger says taxpayers could be forgiven for being confused about why they’re charged both a state and a local income tax — and why the tax rates in neighboring counties may differ wildly.

“Some counties have effective income tax rates approaching 6.5-percent and a county right next to it might be 4 percent,” Ketzenberger says. “You know, the way the system is structured and the complexity within it, you see a lot of movement in property taxes to make it easier to deal with and we think it‘s important to do the same thing with local option income taxes.”

The report concludes that while the collected revenue has bolstered the budgets of localities, policy adjustments are needed in the structure, collection and distribution, local control and transparency of LOIT funding. Ketzenberger says the bipartisan report is intended to give state lawmakers a framework for a possible remedy.

Read the full report here.

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