Reasons Why Counties Adopt Local Income Taxes

Research results point to several reasons why counties have adopted local income taxes.  CAGIT was the first income tax available, and by 1980 39 mostly rural counties had adopted it.  It is possible that some of these counties would have adopted COIT, had it been available.  Kosciusko County rescinded CAGIT in 1981, and eventually adopted COIT.  This is difficult to do, however, because the initial COIT rate is only 0.2%.  Revenue is sacrificed, at first, when CAGIT is rescinded and COIT adopted. 

The politics of rural counties often are heavily influenced by agricultural interests.  Farmers dislike property taxes, since their share of the local property tax base is usually much larger than their share of local income.  The farm property tax bill is likely to fall more than the income tax bill will rise if CAGIT is adopted.  Agriculture usually favors CAGIT, and this may have encouraged many rural counties to adopt.

Urban counties, on the other hand, often have large amounts of commercial and industrial property, owned by people who live outside the county.  All the local income taxes are individual income taxes, meaning most corporate businesses do not pay them.  Individuals are voters; corporations are not.  A CAGIT property tax cut and income tax hike reduces the tax bills of corporate business, and raises the income tax bills of individuals.  This may have discouraged urban counties from adopting the tax.

Urban counties often have larger numbers of renters than rural counties do.  In no county in Indiana are a majority of its households renters, but urban counties often have a relatively large share of renters.  Renters pay income taxes directly, and do not pay property taxes directly.  Renters would likely oppose CAGIT, and where their numbers are larger, counties might be influenced by this opposition.  (Renters may benefit from a property tax cut.  It is possible that higher landlord profits will encourage more apartment construction.  This would eventually offer renters more choices at more reasonable rents.)

COIT adds revenue to local budgets with few restrictions.  Its rate can rise to a full one percent over up to eight years,and all of this money can be spent.  Much CAGIT revenue must be used to reduce property taxes.  All across the United States urban governments spend more per person than rural governments do.  The need or desire for more revenue for added programs and infrastructure has probably motivated many urban counties to adopt COIT.

EDIT is somewhat less prevalent among big counties than little counties.  19 of the 23 smallest counties have EDIT, while 11 of the 23 largest counties have EDIT.  This may be because the EDIT and COIT rates together cannot exceed one percent, while the EDIT and CAGIT rates can total 1.25%.  Rural counties with CAGIT at the maximum rate can still adopt EDIT; urban counties with COIT at the maximum rate cannot adopt EDIT.