Memo Sent To City Council Concerning City of Evansville Local Income Tax Options And Homestead Tax Credits

Councilman McGinn Wanted Mr Claybourn To Summarize The Components Of Local Income Tax Options 

The City County Observer has obtained the following memo written by Josh Claybourn, City Attorney and sent members of the Evansville City Council regarding ways to increase the taxes on those governed. The case is made by Mr. Claybourn for a way to increase revenues by “revising property tax relief rates”.

This is code for making the taxpayers of Vanderburgh County pay more taxes. It is technically correct under the law but will not sound like a tax increase to your average person. This clearly is why we coined the word “SNEGAL” to describe that which is “sneaky but legal”. Please refer to today’s IS IT TRUE for more details.

Attached is the memo sent to City Council by Mr. Claybourn concerning City of Evansville Local Income Tax Options. Reference was made in this memo that  Councilman McGinn wanted Mr Claybourn to summarize the components  of Local Income Tax Options and the Local Homestead Tax credit in the upcoming Council meeting.  We couldn’t find that a detailed formal presentation was made to City Council by Mr. Claybourn concerning the contents of this memo in an open City Council meeting.  Oh, it’s our understanding that Council  has also taken 2% of our 8% Homestead Tax Credit for this year.   The content in this memo speaks for itself.

From: Joshua A. Claybourn, Esq.

Date: 7 September 2016

Re: City Of Evansville Local Income Tax Options

Subject: LIT Revenue Options

Council members,

Based on a request from several of you, I have attached a memorandum summarizing the components of the Local Income Tax (LIT) and outlining options for revising the rates. The LIT includes what was formerly known as the local homestead credit.

Dan McGinn had previously asked that I summarize some of this at the next council meeting which I am happy to do. In the interim, please do not hesitate to let me know if you have any questions.

Scope

Like all other Indiana municipalities, the City of Evansville finances its activities with money from eight major revenue sources: (1) property taxes, (2) user fees and service charges, (3) local income taxes, (4) revenue distributed from the state, (5) food and beverage taxes, (6) investment income, (7) miscellaneous income, and (8) proceeds from borrowing (bonds, etc.).

Property taxes and local income taxes (along with borrowing) are the biggest sources of revenue for city government. However, due to constitutional caps in property tax rates, many municipalities are increasingly turning to local income taxes. This memorandum focuses exclusively on local income taxes and options available in altering local income tax rates.

Local Income Taxes

Historically, Indiana local governments had several different types of “Local Option Income Taxes,” or “LOIT.” LOIT included the County Adjusted Gross Income Tax (“CAGIT”), the County Option Income Tax (“COIT”), and the County Economic Income Tax (“CEDIT”). The state also offered a Public Safety Local Option Income Tax that could be adopted by local government (“PSLOIT”). A county could not have both CAGIT and COIT at the same time – it had to choose one or the other, and Vanderburgh County chose the COIT, which meant Vanderburgh had both COIT and CEDIT rates. Each of these taxes had their own set of rules and rate limits.

This patchwork approach across the state led to a lot of confusion, so in order to help clarify and simplify things the state legislature passed HEA 1485-2015, which overhauled the old LOIT system starting January 1, 2017. Under the new system, all of the former local option income taxes are effectively combined into “LIT” or Local Income Taxes.

The collective municipal government within Vanderburgh County – the City of Evansville, County government, and Darmstadt – is the adopting body which sets LIT rates and it is known as the “Local Income Tax Council” or “LIT Council.” However, due to the city’s relative population size the city council drives decisions about the county-wide tax rates.

4811-5059-8968.v1

Specifically, out of the 100 votes of the LIT Council, city council casts 65.35 votes, the county council casts 33.87 votes, and Darmstadt casts 0.78 votes.

There are three components of LIT outlined below – expenditures, property tax relief, and a special rate. Collectively, Vanderburgh County’s LIT rate is 1.0% of the adjusted gross income of local taxpayers. However, this is deceiving because part of this revenue is collected under property tax relief (formerly the local homestead credit) and returned to property taxpayers. Therefore, ultimately, only 0.8713% is collected and retained by local government. Compared to other Indiana counties, Vanderburgh County’s LIT is relatively low.

 Expenditures: This is the primary income tax component with a maximum allowable rate of 2.5% of the adjusted gross income of local taxpayers. This “expenditure” component can be allocated among three sub-categories (adding up to no more than 2.5%) as decided by the LIT Council. Vanderburgh County’s expenditure component is currently 0.8713% and all of it is dedicated to certified shares.

o Certified shares :1 This money is to be divided among certain governmental units that have a property tax rate (e.g., the city, county, library, etc.) and money in this category may be used for virtually any lawful purpose that local government funds may be used. Vanderburgh County’s rate is 0.8713%. Most Indiana counties have a rate of 1.0%.

o Public safety:2 This money can be allocated to a wide variety of public safety uses. In general it is allocated among government units that provide public safety services. None of Vanderburgh County’s expenditure component is dedicated to this sub-category.

o Economic development:3 This money is to generally be divided among the county unit and the cities and towns in the county and may be used for virtually any lawful purpose that local government funds may be used. None of Vanderburgh County’s expenditure component is dedicated to this sub-category.

• ï‚·  Property Tax Relief: This component works as a tax on income that is then returned as relief to certain property owners. The maximum rate for this component is 1.25% of the adjusted gross income of local taxpayers and in Vanderburgh County it is 0.1287%. In Vanderburgh County it was previously called the “Local Homestead Tax Credit” and is addressed in greater detail below.
• ï‚·  Special Rate: This component is for any special rate that was adopted under the previous LOIT arrangement. For instance, some communities may have enacted a special rate to build a jail or airport. Evansville does not have a special rate.1 The formula for this component is outlined at Ind. Code § 6-3.6-6-12.
  2 “Public safety” is defined in Ind. Code § 6-3.6-2-8 and the formula is set forth in Ind. Code § 6-3.6-6-8. 3 The formula is set forth in Ind. Code §6-3.6.-6-9. Revenues in this sub-category must be used by the unit’s fiscal body for any of the purposes set forth in Ind. Code §6-3.6-10.

4811-5059-8968.v1

The deadline to change the allocation among these three components is June 30 annually. However, there is no deadline per se to change the rate itself. An ordinance adopted after August 31 and before November 1 of the current year takes effect on January 1 of the following year. An ordinance adopted after October 31 of the current year and before January 1 of the following year takes effect on October 1 of the following year.

Property Tax Relief

Previously the city could offer a credit to certain property owners. Although this credit could be provided to all property owners (residential, commercial, and industrial), in Vanderburgh County it has only been provided to residential property owners, hence the name “homestead credit.” 4

Historically the LIT Council has set a homestead credit rate of up to 8%, with the actual percentage calculated by the Department of Local Government Finance (“DLGF”) based on various factors that usually resulted in credit amounts between 6.0% and 7.5%. For 2016, the LIT Council set the homestead credit at an exact 8% of the property taxes. Only ten counties in Indiana provide such a credit and Vanderburgh’s is the highest.

With the state’s changes to local income taxes, beginning January 1, 2017, the homestead credit and any other type of property tax relief is folded into the property tax relief component of LIT. Although this component is called “property tax relief,” it actually reduces the city’s local income tax amount received and not property tax income. The property tax relief is an itemized reduction shown on eligible resident taxpayers’ county property tax bill. The more property tax relief the city provides, the less the city will have in income tax revenue.

4 The “Local Homestead Credit” is different and distinct from the “Homestead Deduction”. The homestead deduction reduces the amount of assessed value a taxpayer pays toward property taxes on a given parcel of property, while the local homestead credit reduces the local municipality’s local income tax revenue.

4811-5059-8968.v1

Currently Vanderburgh County has a property tax relief rate of 0.1287% of the adjusted gross income of local taxpayers which is estimated to generate $5,547,956. The maximum allowed by law is 1.25%. The revenue from this rate is returned to designated property owners.

Therefore, although the homestead credit is set at 8%, if the amount generated by the property tax relief rate is less than that, only that amount generated by the property tax relief rate will be credited. If the revenue generated by the property tax relief rate is more than the allocated homestead credit, the revenue above the amount of the homestead credit specified will be held in reserve and the LIT Council gets to determine how that money will be applied as a credit the next year.

In short, going forward, the property tax relief rate should be the focus and not the homestead credit. The LIT Council can effectively reduce the amount of money going to homestead credits by reducing the underlying property tax relief rate. Even if the homestead credit percentage could be changed today, if the underlying relief rate isn’t reduced, the county will end up taxing at the same rate and will have surplus credit/relief dollars to deal with. For that reason, DLGF suggests it would be easier to understand and more transparent to revise the property tax relief rate.

Sincerely,

Joshua A Clayborn. Esq.

City Attorney for The Evansville City Council