Hot Topic: Local Income Taxes
CAGIT,
COIT, CEDIT, Whatzit?
So, you’re doing your Indiana state income taxes, and you get to the line that says “county income tax.” It refers you to a page of tax rates, where it says: “A county has a tax if it has tax rates next to its name on the chart.” You run your finger down the list hoping (could it be?) that your county doesn’t have a rate. But alas! There it is. You must pay the county income tax.
We know where the money comes from (you!). But how did your county get a county income tax, and where does the money go? Or, maybe your county is considering a local income tax. What are the issues? How is it tied to the so-called inventory tax? And maybe you've heard that local income tax money must be "paid back" to the state. Huh?
Indiana has three (count ‘em) local income taxes, called by their acronyms, CAGIT, COIT and CEDIT (or EDIT). In total, 85 of the 92 counties have at least one of these taxes. In 2003 Indiana local governments raised $932 million from local income taxes. That's down from $1,161 million in 2002.
CAGIT is the county adjusted gross income tax. 53 counties have it in 2003, at rates from 0.5% to 1.0%. The county council has the power to adopt CAGIT. A large part of CAGIT revenue must be devoted to property tax relief, but some can be used for added spending. All local units share in CAGIT revenue, including the county, townships, cities and towns, library districts and other special districts. School corporations get some, but only for property tax relief.
COIT is the county option income tax. 27 counties have it in 2003, at rates between 0.2% and 1.0%. It raises more revenue in total than the other two because many of the biggest counties have it. Something called the COIT council decides on whether to adopt COIT. It’s made up of the county council, city councils and town boards. Votes are divided based on population shares. Local governments can use COIT revenue for homeowner property tax relief, but mostly it’s used for new spending. All local units except schools share in the revenue. Counties can’t have CAGIT and COIT at the same time.
CEDIT or EDIT is the county economic development income tax. 60 counties have it in 2003, but it raises less than the other two because its maximum rate is only 0.5%. Either the county council or the COIT council can adopt CEDIT. Revenue goes only to the county, cities and towns, and must be used for economic development projects or public capital projects (like government office buildings or jails). Counties can adopt CEDIT along with CAGIT or COIT, or by itself.
As part of tax restructuring, counties are allowed to eliminate their property taxes on business inventories. This would shift taxes to other taxpayers, especially homeowners, so counties are allowed to increase a tax credit for homeowners to compensate. How to pay for this homestead credit? They can increase the tax rate on CEDIT.
Local income tax revenue dropped by more than $200 million in 2003. The recession and slow recovery have cut into income tax collections. But in addition, the state budget agency overestimated income tax collections for in 2001 and 2002. For a couple years they distributed more to the counties than was actually collected. The agency is now cutting revenue distributions to the counties in order to make up the shortfall, so local income tax revenues are likely to be down for another year or two.