1

Purdue Cooperative Extension Service

Local Government in Carroll County and the New County Income Taxes

Larry DeBoer Department of Agricultural Economics

Purdue University November 2007

For more information: Local Government Information website. www.agecon.purdue.edu/crd/Localgov

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3

Administrative Rules and Procedures for the Three Local Option Income Taxes Three New Local Income Taxes

• To fund the annual increase in civil government operating levies, freezing the property tax levy

• To provide property tax relief o For property owners generally o For homeowners only o For homeowners and rental housing owners

• To fund county, city and town public safety expenditures • Adoption dates for all local income taxes: April 1 to July 31 (extended to

December 31 in 2007) • For newly adopted taxes or rates, tax withholding starts on October 1 (if adopted

by July 31) • Revenue collected and/or property taxes reduced in the following calendar year • Counted as part of property tax levy for distribution of other local income tax

revenue

Income Tax to Freeze Annual Civil Operating Levies • Department of Local Government Finance (DLGF)

o estimates the increase in a county’s non-debt service levies for all civil units

o Calculates the income tax rate needed to fund this increase, rounded up to next tenth percent

o Maximum rate is 1% o Notify county by July 1

• Carroll County’s rate was set at 0.3% for 2008 and 2009 • Carroll has CAGIT, so the county council decides whether to fund the increase

with income or property taxes each year. • Adopt by July 31 (December 31 in 2007), withholding starts Oct. 1 (later if

adopted after July 31), revenue distributed in the following year • If adopted, that year’s levy increase will always be funded with an income tax • The property tax levy is frozen for that year • The income tax rate cannot be decreased or rescinded • COIT Council can fund future levy increases with property or income tax • In the first year of adoption

o Civil operating levies are frozen for two years o Tax rates are set for two years to replace each year’s levy increase o First year’s income tax rate is doubled o Extra revenue used to start stabilization fund

4

• Stabilization Fund o Administered by county auditor o Receives half the revenue from first year and excess revenue above levy

increase in following years o Used if

Income tax revenue is less than levy increase Income tax revenue declines (not counting the second year)

Income Tax to Provide Property Tax Relief • County council decides

o Income tax rate, up to 1%, in 0.05% increments o How property tax relief is allocated

To all taxpayers To homeowners only, as local homestead credits To homeowners and owners of rental housing Any combination of the three

• Decision must be made by July 31 (December 31 in 2007), withholding starts on October 1 (later if adopted after July 31), property taxes reduced in following year

Income Tax for Public Safety Costs • County council decides

o Income tax rate, up to 0.25% o To add to budgets for public safety, broadly defined

Police, firefighting, ambulance services, emergency medical, probation, corrections, juvenile detention, jail, emergency communications

Operating costs, capital costs, pensions • Must adopt the tax freeze and tax relief income taxes to be eligible to adopt the

public safety income tax • Distributed to county, cities, towns • Adopt by July 31 (December 31 in 2007), withholding starts Oct. 1 (later if

adopted after July 31), revenue distributed in the following year

5

Some Questions to Consider Revenue adequacy: “Will the income tax provide the same revenue as the property tax?” This question is important for the first local income tax, the levy freeze income tax. If adopted this year, the non-school, non-debt service property tax levy increases in 2008 and 2009 will be funded with an income tax instead. DLGF has set each county’s levy freeze income tax rate for both 2008 and 2009. These rates must be used if the levy freeze income tax is adopted. Will the income tax raise enough revenue to fund the levy increase? Suggested analysis Estimate how much the DLGF rates will raise, by comparing this rate to the existing local income tax rate and revenue in your county. Project forward to 2008 and 2009 based on past trends. Estimate how much the non-school, non-debt service levy will increase in 2008 and 2009. Budget documents for 2008 could be used for this purpose. Compare the increase in 2008 to the revenue raised in 2008 from the new income tax rate. Compare the combined levy increases in 2008 and 2009 to the revenue raised in 2009 from the new income tax rate. If the income tax revenue exceeds the levy increases, revenue should be adequate. This analysis is done for Carroll County, 2007, on pages 8 through 13. Pages 8 through 12 show the civil operating funds that would be subject to the levy freeze. School funds are about two-thirds of the total levy, so the civil levy is a small share of the total, about 30%. DLGF set the Carroll levy freeze income tax rate at 0.3%. The table on page 13 shows that in 2007 an income tax rate of 0.07% would have been enough to fund the 2006-07 civil operating levy increase. Doubled in the first year, and rounded up to the tenth, gives a rate of 0.2%. DLGF’s rate appears to be somewhat high for Carroll. In 2007 the civil operating levy increase was about $226,000. A 0.2% income tax would raise about $660,000 in Carroll County. In 2007 a 0.2% income tax rate would have generated more revenue than needed to fund the civil operating levy increase. The remainder would establish a stabilization fund of about $440,000 by the end of the first year.

6

Revenue stability: “Will income tax revenues be less stable or predictable than property tax revenues?” This question is important for the first local income tax, the levy freeze income tax. Income taxes are less stable than property taxes. This is why the levy freeze income tax requires the accumulation of a stabilization fund, which can be used if income tax revenue falls short of the levy increase, or if income tax revenue declines from one year to the next. Counties have experience with declines in income tax revenue—most saw decreases in the 2003-2005 period. The state has changed the method it uses to distribute local income taxes, so such declines may not be frequent in future years. Still, the stabilization fund exists to support levy increases when income taxes fall short. Will the stabilization fund be big enough? Suggested analysis Calculate the size of the stabilization fund as suggested above, by subtracting the first year’s levy increase from the first year’s income tax collections. Calculate the largest single year decline in income tax revenue experienced by the county during the 2003-2005 period. Adjust this decline for the DLGF certified income tax rate (for example, if the DLGF certified rate is 0.5%, and the county rate was 1% during 2003-05, take half of the biggest decline during that period.) If this income tax decline occurs again, will the stabilization fund be large enough to cover it? If so, the stabilization fund protects local budgets from the greater instability of the income tax. (Note that the greater instability of the income tax has a cost to taxpayers: the added income tax rate needed to accumulate the stabilization fund. The amount of revenue in the fund is money that could have been used for added public services, or returned to taxpayers in lower taxes, if the income tax was as stable as the property tax.) This analysis is done for Carroll County, 2007, on page 13. The analysis assumes a levy freeze income tax rate of 0.2%. At that rate, by the end of 2007 Carroll County would have accumulated a stabilization fund of about $440,000. The biggest decline of income tax revenues in Carroll occurred in 2003. Adjusted to a 0.2% rate, the decline would have been almost $160,000. The stabilization fund is more than enough to cover the worst decline in Carroll income taxes experienced in this decade.

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(4,3

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Dat

a S

ourc

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epar

tmen

t of L

ocal

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inan

ce, w

ww

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ovem

ber

2007

13

CARROLL COUNTY, LEVY FREEZE AND STABILIZATION FUND CALCULATIONS, 2007

Income Tax Revenue at 1.37%, 2007 3,646,022 Revenue from 1%, 2007 3,314,565 Civil Operating Levy Increase, 2007 226,075 Inc Tax Rate for Levy Increase, 2007 0.07%Doubled, Rounded up for first year 0.20% *

Income tax revenue from 0.20% 662,913 Less Civil Operating Levy Increase, 06-07 226,075 Stabilization fund after first year 436,838

* The DLGF certified Carroll's rate at 0.3% for 2008 and 2009.

CARROLL COUNTY, LOCAL INCOME TAX REVENUE, 2000-2007Dollar

Revenue ChangeRate EDIT COIT Total at 0.2% at 0.2%

2000 1.10% 341,948 3,299,481 3,641,429 662,078 - 2001 1.10% 360,631 3,480,952 3,841,583 698,470 36,392 2002 1.10% 398,183 4,108,175 4,506,358 819,338 120,868 2003 1.10% 329,650 3,296,497 3,626,147 659,299 (160,038) 2004 1.10% 299,130 2,993,930 3,293,060 598,738 (60,561) 2005 1.10% 288,940 2,895,784 3,184,724 579,041 (19,697) 2006 1.10% 326,266 3,256,922 3,583,188 651,489 72,448 2007 1.10% 331,470 3,314,552 3,646,022 662,913 11,424

Source: Legislative Services Agency, Indiana Handbook of Taxes, Revenues and Appropriationswww.in.gov/legislative/publications/handbook.htmlCalculations by Larry DeBoer, Purdue University, November 2007

14

Tax incidence: “Which taxpayers pay more, which pay less if income taxes rise and property taxes fall?” This question is especially important for the second local income tax, the property tax relief income tax. This income tax replaces part of the property tax dollar for dollar. Some taxpayers will pay less in total taxes, and some will pay more as a result. Who pays more and who pays less depends on the taxpayers’ mix of taxable income and taxable property, and the method that the county chooses to distribute the property tax relief. Data that combines taxpayers’ property tax payments and income tax payments would be needed to decide the net effect of the tax change. Unfortunately, such data are scarce. How can counties estimate who will pay more and who will pay less if a property tax relief income tax is adopted? Suggested analysis Calculate how much revenue a 1% local income tax would raise (any percentage could be used; 1% makes the calculation a little simpler) Calculate the total net tax payments of the three groups of taxpayers who could receive tax relief: all property owners, owners of homesteads only, or homesteads and rental housing owners. Use the tax payments after all deductions and credits. For all property owners, include both real and personal property, agricultural, residential, commercial, industrial and utility property. For homesteads, include payments on homestead residential real property only. For homesteads and rental housing, include homesteads, rental residential property, and commercial rental apartments. Divide the 1% income tax revenue estimate by the tax payments of each group. This gives the percentage decline in property tax payments that a taxpayer in each group would receive, if the tax relief is distributed uniformly to that group. (Statewide, distributing relief to all taxpayers cuts property tax bills by about one-fifth; to homesteads only, by about one-half; and to homesteads and rental housing, by about one-third.) Take a sample of typical taxpayers in each group. Reduce their net tax bills by the percentages calculated above. The taxpayer will see a net tax reduction if his or her income tax increase is less than this property tax reduction. Divide the dollar property tax cut by 0.01 (divide by 1% or multiply by 100). Taxpayers with taxable incomes less than this amount will pay less in added income taxes than the property tax cut they receive. They will see net tax cuts. Taxpayers with taxable incomes greater than this amount will pay more in added income taxes than the property tax cut they receive. They will see net tax increases. Some typical results of this analysis

• Farmers own much taxable land, but often have relatively low taxable incomes. If the tax relief is distributed to all property, including farm land, farmers tend to pay less in combined property and income taxes. If the tax relief is distributed to homesteads or rental housing, farm land does not receive a tax cut, but farmers pay some extra income tax. Farmers tend to pay more.

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• Corporate businesses do not pay individual income taxes, so they do not pay the added local income taxes. When relief is distributed to all property, corporate property receives a tax break. Corporations pay less. When relief is distributed to homesteads or rental housing, corporations receive no tax break, and still pay no added income tax. They are unaffected.

• Small businesses (such as partnerships or S-corporations) pay the individual income tax. If the property tax relief is distributed to all property, small businesses will see a property tax cut. The suggested analysis can be used to estimate whether the property tax cut is enough to offset the income tax hike for a typical small business. If the property tax relief is distributed to homesteads only, small businesses do not receive a property tax cut, and so will pay more overall. If the tax relief also goes to rental housing owners, most small businesses will see overall tax increases.

• Renters do not own taxable property, and so do not receive a property tax break under any distribution formula. Renters with taxable income pay more in income taxes, and so pay more overall. However, if tax relief is distributed to rental housing owners, owning rental housing becomes more profitable. More such housing may be built, and the added availability of rental housing could reduce rents, or cause them to increase more slowly.

• Retired homestead owners own property. Some of their retirement income is tax exempt, so the reduced property taxes under each distribution formula are likely to exceed the added income tax payments. Retired homeowners are likely to benefit.

• Employed homestead owners own property and earn taxable income. The suggested analysis is most revealing for this group. An analysis for homestead owners in Carroll County is on page 16. A 1% local income tax raises almost $3.3 million in 2007. Total net tax bills after deductions and credits sum to $16.2 million. If the property tax relief is distributed to all property taxpayers, average tax bills would fall 20.5%. If the tax relief goes only to homestead owners, the average homestead owner tax bill would fall 54.0%. If the tax relief goes to homestead owners and landlords, the average tax bill would fall 34.0%. The average homestead owner in Carroll County has an estimated tax bill of $627, after all deductions and credits, including the end-of-year rebate. If tax relief is distributed to all taxpayers, this tax bill will fall by 20.5%, or $128. A homestead owner with a taxable income greater than $12,800 would pay more than this in added income taxes if the rate was 1%. Most Carroll homestead owners must have incomes above this amount, so most would pay more in total. If tax relief goes to homestead owners only, tax bills drop 54.0%, or $338. A taxpayer with a taxable income above $33,800 would pay more than this in added income taxes at 1%. The median household income in Carroll County was about $45,000 in 2004 (recall that taxable income does not include deductions). It’s possible more than half of homestead owners would pay more in total taxes if tax

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relief were distributed only to homeowners. A large number would pay less, however. Note that homeowners in places with higher tax rates in Carroll would receive bigger property tax cuts, so would more likely benefit with a net tax decrease. If tax relief goes to homestead owners and landlords, homeowners with taxable incomes greater than $21,300 would pay more in total taxes. That must include a majority of homeowners.

CARROLL COUNTY, ESTIMATED EFFECT OF PROPERTY TAX RELIEF ON HOMEOWNERS

Local Option Income Tax at 1%, 2007 3,314,565 Total Net Tax Bills, 2007 16,201,123 Homestead Tax Bills, 2007 6,140,295 Homestead & Rental Housing Tax Bills, 2007 9,750,070 1% Income Tax % of Total Tax Bills 20.5%1% Income Tax % of Homestead Tax Bills 54.0%1% Income Tax % of Hmstd & Rental Tax Bills 34.0%

Estimated Average Homestead Assessed Value, 2007 101,109 Estimated Average Homestead Tax Bill, 2007 (after rebate) 627 Tax Cut, Relief to All Taxpayers (20.5%) 128 Break-Even Taxable Income* 12,800 Tax Cut, Relief to Homesteads Only (54.0%) 338 Break-Even Taxable Income* 33,800 Tax Cut, Relief to Homesteads & Rental Housing (34.0%) 213 Break-Even Taxable Income* 21,300

*Taxable income, after deductions, which would pay added income taxes at 1%equal to the property tax cut received on the average home. Taxpayers withtaxable incomes see a net tax increase; those with lower incomes, a net tax decrease.

Calculations by Larry DeBoer, Purdue University, November 2007

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Economic development: “Will changing the tax mix affect business growth, location and investment in the county?” This question is especially important for the second local income tax, the property tax relief income tax. Statewide, nearly half of all property taxes are paid by businesses. Perhaps 15% of individual income taxes are paid by small businesses. So, replacing property taxes with income taxes provides a tax cut for businesses, if the tax relief is distributed to all property. Lower taxes make a county a more profitable place to do business. Some research shows that lower property taxes can contribute to added business growth. Will property tax relief distributed to businesses aid business growth in the county? Suggested analysis Compare the net tax rates paid by businesses in the county to the rates paid in surrounding counties. Multiply the property tax rate by one minus the PTRC rates for business (there’s a real property PTRC rate and a personal property PTRC rate). This is the net tax rate after the PTRC tax credit is applied. Calculate these rates for neighboring counties, and compare them to the county’s rates. Reduce the county’s rates by the percentage calculated in the previous section, when tax relief is distributed to all property owners. The statewide reduction is about one-fifth (20%). Any tax reduction is likely to benefit businesses. However, business tax relief might be particularly beneficial if the county’s rates are comparatively high, and the relief brings the county’s rates down to or below the rates of neighboring counties. Note that taxes are only one of the many characteristics of a county that businesses consider in their location or expansion decisions. Other factors include labor costs, transportation costs, utility costs, and the quality of public services, such as police and fire protection and education. Carroll County’s tax rates are compared to those in surrounding counties on page 18. Carroll’s net business real tax rates are considerably lower than those in Cass and Howard, and just higher than those in Clinton, Tippecanoe and White. The minimum net business tax rate is of interest: this is the lowest rate a business can pay if it locates in the county. Carroll’s minimum rate is second lowest in the region, slightly higher than White’s. A 20.5% reduction in this minimum rate—the reduction due to a 1% income tax distributed to all taxpayers, including businesses—would make Carroll’s rates the lowest among these five counties. Similar reductions in neighboring counties, however, would leave Carroll’s rates second or third highest in the region.

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CARROLL COUNTY, PROPERTY TAX AND CREDIT RATES, 2007PTRC PTRC Net Net

Gross Real Business Homestead Homeowner BusinessDistrict Tax District Name Tax Rate Property Personal Credit Rate Real Rate

001 ADAMS TWP 1.8660 30.0245 19.6708 12.0601 1.1483 1.3057002 BURLINGTON TOWNSHIP 1.8835 31.0751 20.6846 12.2877 1.1387 1.2982003 BURLINGTON (BURLINGTON) 2.3664 28.8037 16.4636 14.1277 1.4468 1.6848004 CARROLLTON TOWNSHIP 1.7804 31.9937 21.8823 12.1190 1.0640 1.2108005 CLAY TOWNSHIP 1.9059 28.1128 18.7514 10.6144 1.2247 1.3701006 DEER CREEK TOWNSHIP 2.5531 23.5682 14.4947 9.6763 1.7626 1.9514007 DELPHI (DEER CREEK) 4.1944 22.3413 8.8228 14.1888 2.7951 3.2573008 DEMOCRAT TOWNSHIP 1.8405 31.4167 21.1679 12.1807 1.1085 1.2623009 JACKSON TOWNSHIP 2.4797 23.9224 14.9237 9.6412 1.7046 1.8865010 CAMDEN (JACKSON) 3.5540 22.5868 10.4124 12.8185 2.3986 2.7513011 JEFFERSON TOWNSHIP 1.8554 29.9932 19.7833 11.8874 1.1445 1.2989012 YEOMAN (JEFFERSON) 2.1448 28.6894 17.1141 13.2310 1.3271 1.5295013 LIBERTY TOWNSHIP 2.4454 23.9778 15.1330 9.4832 1.6827 1.8590014 MADISON TOWNSHIP 2.3778 23.9281 15.5633 8.9626 1.6467 1.8088015 MONROE TOWNSHIP 1.9923 29.2962 19.5549 11.2299 1.2504 1.4086016 FLORA (MONROE) 3.1788 25.5550 12.2560 14.5611 2.0219 2.3665017 ROCK CREEK TOWNSHIP 2.6292 23.7006 14.0751 10.2828 1.7998 2.0061018 TIPPECANOE TOWNSHIP 2.3660 23.9459 15.6409 8.9008 1.6393 1.7994019 WASHINGTON TOWNSHIP 1.7651 32.0449 22.0720 11.9622 1.0560 1.1995

Median 2.3660 28.1128 16.4636 11.9622 1.4468 1.6848Maximum 4.1944 32.0449 22.0720 14.5611 2.7951 3.2573Minimum 1.7651 22.3413 8.8228 8.9008 1.0560 1.1995

Comparisons to Neighboring Counties.Gross Tax Rates Median Maximum MinimumCarroll 2.3660 4.1944 1.7651Cass 2.9929 4.5374 2.5140Clinton 2.0517 3.5759 1.8169Howard 2.5581 3.8151 2.0408Tippecanoe 2.1016 3.1550 1.9729White 2.0615 3.1115 1.7008

Net Homeowner Rate Median Maximum MinimumCarroll 1.4468 2.7951 1.0560Cass 2.1336 3.2132 1.5959Clinton 1.4111 2.4628 1.1771Howard 1.8906 2.8758 1.3995Tippecanoe 1.4338 2.1409 1.3173White 1.3853 2.0112 1.0665

Net Business Real Rate Median Maximum MinimumCarroll 1.6848 3.2573 1.1995Cass 2.4043 3.6458 1.8025Clinton 1.5641 2.8065 1.3020Howard 2.0342 3.1239 1.5417Tippecanoe 1.5551 2.3897 1.4415White 1.5211 2.2848 1.1865

Data Source: Department of Local Government Finance, www.in.gov/dlgf/rates/Calculations by Larry DeBoer, Purdue University, November 2007

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The Public Safety Income Tax This tax can be used to support added services in public safety, broadly defined. Public safety includes police, firefighting, ambulance services, emergency medical services, probation, corrections, juvenile detention, jails, emergency communications, and other services. The revenue can be used to cover operating costs, capital costs, and pensions. Should a county adopt a public safety income tax? Suggested questions Generally, do county residents agree that the benefit of improved public safety is worth the cost of added income taxes? Is public safety in need of improvement? Do residents think that the added revenue will be used to improve services? Does the county have a public safety obligation that must be financed, such as unfunded pensions or overcrowded jails? Would improved police and fire protection reduce property insurance rates? Would improved police and fire protection benefit existing businesses, and potential new businesses? Would improved emergency medical services lead to an improvement in public health?

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Data Sources Property tax rates for all counties. Department of Local Government Finance. http://www.in.gov/dlgf/rates/ Property tax levies by unit and fund, all counties. Department of Local Government Finance. http://www.in.gov/dlgf/rates/ Income tax rates and revenues for all counties. State Budget Agency. http://www.in.gov/sba/budget/ (scroll down to Revenue Data section) Income tax rates and revenues for all counties. Legislative Services Agency Handbook. http://www.in.gov/legislative/publications/handbook.html Additional information on Indiana local government. Larry DeBoer’s Local Government website. http://www.agecon.purdue.edu/crd/Localgov/index.htm