Indiana's Local Income Taxes  

Here's a table that summarizes the features of the three local income taxes.  You can click on the links in this table for more information, or scroll down to see this information.   Click here for printable PDF version of this table. There are other sources for information on Indiana's local income taxes.  Click here to see the links.  

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    Full Name
The county adjusted gross income tax is called CAGIT by just about everybody, and the county option income tax is called COIT by just about everybody.  The county economic development income tax is called EDIT by some, and CEDIT by others (usually pronounced "edit" or "seed-it", sometimes "ee-dit" or "said-it").  
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Year Passed
CAGIT was passed originally as part of Governor Otis Bowen's property tax control package in 1973.  As part of that package, the General Assembly also passed new property tax controls, created the state property tax replacement credits, and raised the sales tax from 2% to 4% in order to fund the replacement credits.  The school funding formula also was revised to increase the share of state funding over property taxes in school finance. CAGIT was revised prior to the 1979-80 reassessment, to avoid local government revenue windfalls associated with the large increase in assessed value that came with reassessment.CAGIT was revised again in 1986, to encourage more counties to adopt it.  More CAGIT revenue was made "spendable," and less was devoted to property tax relief, in order to encourage new adoptions.  In particular, the General Assembly allowed local governments to use some CAGIT revenue to replace revenue lost when the Federal Revenue Sharing program was eliminated.COIT and CEDIT have not been revised significantly since they were first adopted.
Back to the table.Indiana Code
It is extremely important to note that CAGIT has two code citations.  One is to the description of CAGIT itself (I.C.6-3.5-1.1), the other refers to the treatment of CAGIT adopting counties under the property tax controls (6-1.1-18.5.  CAGIT adopting counties face stricter limits on their maximum property tax levies in the year of adoption.  This means that adopting CAGIT reduces the amount of property tax that local units are allowed to raise.  While the CAGIT law shows one-quarter of CAGIT revenue as devoted to property tax relief, the added restrictions on the maximum property tax levy mean that more than half of CAGIT revenue actually is devoted to property tax relief. 

Back to the table.Adopting Body
The COIT council will not necessarily meet as a body in order to consider adopting COIT.  Instead, one of the county, city or town fiscal bodies (councils or boards) passes a resolution recommending adoption of a COIT ordinance.  Then, the county auditor must send this resolution to the other fiscal bodies for their consideration.  Vote are divided among the county, cities and towns within the county based on population, with the county receiving votes equal to the share of population living outside cities and towns (i.e., in unincorporated areas of the county).  Votes are carried out to two decimal places.  For example, if a city has 36.75% of the county's population, it has 36.75 votes on the COIT council.  If a majority of votes are cast for the COIT resolution, it is adopted for the whole county.In a large number of counties, one local unit has the majority of the population.  Experience has shown that COIT is difficult to pass in counties where a coalition of units is required to make a majority.
Back to the table.Rates
CAGIT can be adopted at 0.5%, 0.75% or 1.0% (though there are special exceptions for some counties).  Only 4 of 53 CAGIT counties use a rate less than 1%.  COIT can be levied at rates between 0.2% and 1.0%.  All counties with COIT use at rate of at least 0.5%, and almost half are at the maximum 1.0%.  CEDIT rates can vary between 0.1% and 0.5%.  There are counties at both ends of this range, but almost two-thirds of the CEDIT counties use 0.25%.  This rate is popular because it is the rate that can be used on top of CAGIT at 1%.The local income taxes can sometimes tax people who live outside the jurisdiction.  People who work in an adopting county but live in a non-adopting county pay income tax to the county where they work.  If they work in a CAGIT county, and live in one of the seven counties with no income tax of any kind, they pay in their county of work at a rate of 0.25%, no matter what CAGIT rate the county has adopted.  If they live in a non-adopting county and work in a COIT county, they pay in their county of work at a rate equal to one-quarter of the county's COIT rate.  If they live in a non-adopting county and work in an CEDIT county, they pay CEDIT in the county where they work at the same rate as county residents.As examples, suppose a taxpayer lives in a county with no local income tax, Clark County, perhaps.  Suppose the taxpayer works next door in Washington County, which has CAGIT at 1% and CEDIT at 0.25% (the most common combination of tax rates).  The Clark County taxpayers would pay CAGIT at a rate of 0.25%, and CEDIT at a rate of 0.25%, for a combined 0.5% rate.  The governments of Washington County would receive the money.  Were Clark County to adopt any of the three taxes at any rate, the taxpayer would stop paying in Washington County and start paying the resident rate in Clark.  Suppose a taxpayer lives in Porter County, which has no income tax, and commutes to St. Joseph County, which as COIT and EDIT.  St. Joe's CEDIT rate is 0.2%, so the Porter taxpayer would pay this rate too.  St. Joseph County has increased its COIT rate between 2000 and 2001, from 0.4% to 0.5%.  The change took place on July 1, 2000, so the rate for calendar year 2000 was 0.45%, the average of the two rates.  The Porter taxpayer would pay one-quarter of this rate, which is 0.1125%.  The total rate paid by the Porter taxpayer to St. Joseph County would be 0.3125%.Counties may adopt CEDIT on top of COIT or CAGIT, but may not have COIT and CAGIT at the same time.  The combined CEDIT and CAGIT rates cannot exceed 1.25%.  That's why there are so many counties with 1% CAGIT rates (usually adopted before CEDIT was invented) and 0.25% CEDIT rates.  The maximum COIT and CEDIT rate is 1%.  CEDIT can be adopted on its own.  Counties now have the option to eliminate property taxes on inventories.  This would create a tax shift to homeowners and other taxpayers that do not own many inventories.  This is because the tax rate must rise to raise a given amount of revenue from a smaller tax base (smaller because inventories are eliminated from the tax base).  Counties have to option to offset this tax shift for homeowners, by increasing the homestead credit.  The homestead credit is a percentage that is subtracted from homeowner tax bills once they are calculated.  There is a statewide 20% credit, funded with state revenues.  To fund the local added credit, Counties can increase CEDIT by up to 0.25% above the usual rate limits (that is, above 0.5% for CEDIT alone, above 1% for CEDIT plus COIT, or above 1.25% for CEDIT plus CAGIT).  

Back to the table.Effect on Local Government Budgets
CAGIT
Revenue form the first one-quarter of one percent of CAGIT revenue becomes "property tax replacement credits."  This revenue is divided among all local units, including school corporations, based on shares in the total property tax levy.  This revenue is subtracted directly from the property tax levy on budget form 4-B.  Revenue from the next one-quarter of one percent of CAGIT also reduces the property tax levy dollar for dollar, but the mechanism used to accomplish this is different.  The state's property tax controls impose a maximum property tax levy on local units.  Local units that adopt CAGIT see their maximum levy reduced, first by the total amount of revenue collected by that second quarter of one percent of CAGIT.  You can't see this on the budget form, there is no entry for the certified share portion of CAGIT revenue.  It's just that the maximum levy a unit is allowed to raise is less than it would have been without CAGIT.Revenue from the third one-quarter of one percent of CAGIT can be used to replace Federal General Revenue Sharing lost since 1986.  Between 1973 and 1986, the Federal Government sent aid directly to counties, cities, towns and townships.  This program was cancelled in the mid-80s.  To make up for this lost revenue, the General Assembly modified CAGIT.  This modification remains.  An amount up to the revenue equal to Revenue Sharing in 1986, up to the whole third quarter of one percent of CAGIT, can be added to local unit budgets.  The remainder reduces the maximum property tax levy, dollar for dollar.Revenue from the last quarter of one percent is used for a combination of added spending and property tax relief.  In the first year, half of the revenue is "spendable," half reduces the maximum levy.  After the first year, the share that is spendable increases.Increases in certified shares (revenue from all but the first quarter of one percent) after the first year are spendable.  The revenue can be added to budgets.  It does not have to be used for property tax relief.This division of the CAGIT rate into four parts applies only when CAGIT is adopted a one percent.  When CAGIT is adopted at one-half of one percent, the rules for the first two quarters apply.  At that rate, all of the CAGIT revenue must be used for property tax relief in the first year.  Increases in certified shares after the first year are spendable.  When CAGIT is adopted at three-quarters of one percent, only the rules for the first three quarters apply.  COIT
COIT's effect on local budgets is much simpler than CAGIT's.  All COIT revenue can be added to local budgets--it can all be spendable.  The COIT Council can, if it chooses, devote COIT revenue to reduce homeowner property taxes, by increasing the homestead credit.  The homestead credit is a state funded program that reduces homeowner property taxes by 10%.  COIT counties can increases this rate by a maximum of 8 percentage points, up to 18%.  Revenue to reduce property taxes is taken "off the top," with remaining revenue distributed to local units.CEDIT
All CEDIT revenue can be added to county, city or town budgets.  The revenue must be used for economic development projects, or public capital projects.  As an example of the former, CEDIT funds might be used for infrastructure at an industrial park.  As an example of the latter, CEDIT funds might be used to refurbish a courthouse or build a jail.  Units must have a capital improvement plan in place in order to receive the revenue.

Back to the table.Revenue Distribution
Local income tax revenue is collected by the state at the same time as state income tax revenue.  Taxpayers calculate their county income tax on the same form as their state income tax, and remit their tax with one check.  Withholding from paychecks includes both state and county income taxes.The State Budget Agency calculates the amount to be distributed to counties each year, based on estimates of revenue collections.  The Department of Revenue notifies counties of their revenues for the coming year around July 1.  The revenue that goes to counties from the state is called the "certified distribution." Estimating revenue collections has been tricky.  In 2003, for example, the Budget Agency must set certified distributions for calendar year 2004.  To do this, they use data from the State Department of Revenue on income tax collections in each county.  In 2003, the most recent data available will be from 2001.  Changes in revenue collections after 2001 will not be completely accounted for in the revenue distributions for 2004.This became a big problem for counties after the stock market crash that started in 2000.  Taxable incomes were reduced because taxpayers had much less capital gain income.  But revenue distributions for 2000 had been set in 1999, based on data from 1997.  Distributions in 2001 reflected data through 1998, and distributions in 2002 were based on data through 1999.  More was distributed than was collected for those years, because of this data lag.  It became apparent by 2003 that too much had been distributed.  So the Budget Agency had to cut distributions in 2003, by more than the drop in collections, to make up for the excess distributions of previous years.  It was said that counties had to "pay back" the excess distributions.  This "pay back" will not be a check sent by counties to the state, though.  Instead, it will mean that distributions will grow more slowly than collections for several years to come.CAGIT, the original local income tax, was invented to allow counties to deliver property tax relief in addition to the state programs created by the Bowen administration in 1973.  Property tax levies of all governments within a county were to be reduced proportionately.  This explains why the local income tax revenue is usually distributed among local units based on shares in the property tax levy.  This can be a sensitive issue among local units.  It means that local units sometimes see decreases in their local income tax revenues, because their shares in the property tax levy have fallen even as total income tax revenue has increased.  Property tax shares can increase suddenly if a local unit establishes a new cumulative fund, annexes new territory, or especially if the unit issues a bond and begins collecting property tax revenue for debt repayment.  That unit's share of local income tax revenue will increase; the shares of all other units will decline.CAGIT
The state delivers the certified distribution to the county.  This revenue is then divided among local units in a two step formula.  The property tax replacement credits--revenue from the first 0.25% CAGIT rate--are divided among all local units including school corporations based on their shares in the total property tax levy of all units.  If, for example, a school corporation collects $25 million in property taxes, and all units in the county collect $100 million, the school corporation will receive 25% of the property tax replacement credits.  The certified shares--revenue from the remaining CAGIT rate--are divided among all civil units (not including schools) based on shares in the non-school property tax levy.COIT
COIT revenue is also distributed to non-school civil units based on shares in the property tax levy.  If the COIT council has decided to allocate revenue for added homestead credits, this revenue is subtracted from the COIT certified distribution before the certified distributions are calculated.

CEDIT/EDIT
CEDIT revenue also can be distributed based on property tax shares, but only to the county, cities and towns.  If the adopting body chooses, however, CEDIT revenue can be distributed based on shares in total population, with the county's share equal to the population outside cities and towns (that is, in unincorporated areas of the county).

Back to the table. Distribution Dates
Distribution dates are the dates during the year when the State Department of Revenue delivers income tax revenue to the counties for distribution to local units.  CAGIT and CEDIT are distributed twice yearly, just before the due dates for property tax payments, in May and November.  COIT is distributed 12 times a year on the first of the month.  
Back to the table.Number of Counties
More counties have CEDIT than either of the other taxes, and most of the new adoptions in recent years have been CEDIT adoptions.  In 1995 42 counties had CEDIT, so there have been 18 new CEDIT adoptions in the past 7 years.  There has been only two new COIT adoptions since 1995.  Knox County newly adopted CAGIT in 1997, but rescinded it the next year, so the number of CAGIT counties has remained unchanged.Local income taxes can be rescinded, but such actions are rare.  Kosciusko rescinded CAGIT in 1982, LaPorte rescinded CAGIT in 1988, and Knox rescinded CAGIT in 1998.  Morgan rescinded CEDIT in 1995.  CAGIT has proved more popular with rural counties, COIT with urban counties.  Of the 23 smallest counties, with populations under 21,500, 17 have CAGIT and only 3 have COIT.  Of the 23 largest counties, with populations above 68,000, only 6 have CAGIT while 12 have COIT. 

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