Local Government Finances in Indiana
Units of Government
The Property Tax
The Income and Motor Vehicle Excise Taxes
State Distributed Revenue
Units of Government
Local governments provide a wide variety of services to Indiana residents. Some general purpose governments provide many services; some special district governments provide a single service. All are financed by some combination of taxes, other local revenues, and state aid.
The counties, townships and municipalities are general purpose governments that perform a variety of functions. Indiana’s 92 county governments repair and maintain roads, maintain civil and criminal courts, provide police protection, plan land use, provide health services, organize elections, collect solid waste, incarcerate prisoners, and provide welfare services, among other functions. Counties are organized "horizontally," meaning there are several independently elected officers. The county commissioners are elected to serve as the county executive. Most counties have three. The county council, usually with seven members, serves as the county legislature. Other elected county officials include the auditor, treasurer, recorder, court clerk, surveyor, sheriff, prosecutor, coroner and assessor. Marion County and the City of Indianapolis are governed under "Uni-gov", which has combined the functions of county and city governments to some extent.
The primary functions of Indiana’s 1008 townships are to oversee the provision of poor relief, assess property for property tax purposes, and provide fire protection. The township trustee is the executive of the township. The township board is elected as the township legislative body. Some larger townships have township assessors, who take on the property assessment duties.
The 584 cities and towns (known together as municipalities) include a majority of Indiana residents but only a relatively small part of Indiana's land area. Municipalities are charged with providing police and fire protection, parks and recreation services, planning and economic development services, and maintaining streets, among other functions. An elected mayor serves as the executive in cities. Cities also elect a clerk or clerk-treasurer. Towns are governed by a town council.
Other units of government are charged with delivering a single service. The school corporations provide elementary and secondary education. School boards are elected to oversee the operation of school corporations. The library districts maintain public libraries. Library board members are usually appointed by county, city and/or school corporation governments. Other special districts provide fire protection, solid waste management, sewage treatment, airport governance, public transportation management and other functions. They are usually governed by appointees of county or city governments.
The table shows how many local units of each
type there are in Indiana. In total, there are 2,355 local units of
|Local Government Units in Indiana|
Number in Indiana
|Solid Waste Management District||63|
|Other Special Districts||132|
Each year local governments write a budget, which is an estimate of available revenues and a plan for spending and service delivery for the coming fiscal year. Budgeting is usually done by fund. A fund is a subdivision of the budget which receives revenue from designated sources and supports spending for designated purposes. In most counties the general fund forms the largest share of the budget. The general fund receives revenues from a variety of sources, such as property and other taxes, state and Federal aid, charges, fees, fines and interest. General fund spending is designated for a wide variety of purposes, but usually includes the operating costs of most local services. Most employees wages and salaries are paid out of the general fund. Other funds usually have narrower purposes. There may be debt service funds that receive property tax revenue to pay interest and principal on bonds. There may be highway funds that receive state aid to be used for highway maintenance. Each fund must have a budget plan for the coming fiscal year.
The budget cycle is the annual series of events which are undertaken in order to write and approve a budget. Departments, agencies, offices and other sub-units of the local government prepare initial proposals on what they intend to spend in the coming year. Departments estimate expenditures on wages and benefits, supplies, equipment and the many other purchases which they make to deliver services.
The budget proposals of the many departments are consolidated into an overall budget. The departments' spending requests are summed to give a total spending level for each fund. Revenue forecasts are made for the coming fiscal year. The forecast of non-property tax revenue for the coming fiscal year is subtracted from the sum of department appropriations in each fund, and the remainder is the amount to be raised by the property tax.
The local government's legislative body must consider and approve the budget. Often the initial budget requests of the departments, when summed, produce a total spending amount and a total property tax levy which is more than the jurisdiction's legislature desires. Cuts must be made, or other revenues must be found.
In Indiana the state government has oversight powers over local government budgets. The Department of Local Government Finance (formerly the State Board of Tax Commissioners) checks the budget against state property tax controls. The state limits the annual growth of the tax revenue counties can collect. If the proposed tax levy exceeds the state ceiling, the local unit must find further budget cuts.
Where does the revenue come from to finance these budgets? Much of it comes from taxes. In Indiana, three major taxes provide most local government tax revenue: the property tax, the local income taxes, and the motor vehicle excise tax.
Property taxes are the main source of revenue for most local governments. Property taxes are imposed on two kinds of property, real property and personal property. Real property includes land and improvements on land (buildings, houses, factories and barns). Personal property is mostly business equipment and inventories.
Assessments of taxable
property are made by local assessors, applying rules provided by the Department
of Local Government Finance. Assessment methods vary by type of property. Non-farm land
and improvements (buildings) are valued at their predicted selling prices.
The value of agricultural land is based on soil quality. Machinery and equipment is valued at cost less
depreciation, and business inventories are valued at cost, less a valuation
adjustment. While personal property is assessed each year, real property is
assessed only when the legislature provides for changes in assessments by law.
The periodic adjustment of real property values is termed reassessment.
In 1998 the Indiana Supreme Court found Indiana's assessment rules to be
unconstitutional. The 2002 reassessment is being conducted under new
rules, which should satisfy the court.
The tax levy is the amount of revenue a local government will collect from the property tax. It is determined by the budget process described above. Once the levy is determined, the tax rate is calculated by dividing the levy by assessed value. The tax rate is measured as dollars per $100 assessed value, which is the same as a percentage. The property tax rate is set so that the budgeted tax levy will be raised from whatever assessed value happens to be. Each local governments' rate usually changes every year, and the rates differ among local governments. Taxpayers pay the sum of the rates in the jurisdictions in which they live, always a county, township and school corporation, often a city or town, library district and other special district.
Income and Motor Vehicle Excise Taxes
Most counties collect one or two of the local option income taxes. There are three local income taxes: the County Adjusted Gross Income Tax (CAGIT), the County Option Income Tax (COIT) and the County Economic Development Income Tax (CEDIT or EDIT). All three were created to provide property tax relief and to provide alternative sources of local government finance. State law does not permit CAGIT and COIT to be imposed simultaneously. As of 2001, 85 of Indiana’s 92 counties impose at least one of the local income taxes. Taxable income is the same for local option income tax purposes as it is for state income tax purposes. Local income taxes are collected by the State Department of Revenue together with the state income tax. They are subject to the same withholding and filing requirements.
All local units share in CAGIT revenue, though the school corporations' share can only be used for property tax relief. Other local units must use some CAGIT revenue to reduce property taxes, but the rest can be added to local budgets. The maximum CAGIT rate is 1%. COIT revenue goes to all local units except schools. All of it can be added to local budgets, though counties can use some for property tax relief for homeowners. The maximum COIT rate is 1%. Counties cannot must choose either CAGIT or COIT, they cannot collect both. CEDIT revenue goes to counties, cities and towns, and is intended for economic development projects or public capital projects (like courthouses or jails). The maximum CEDIT rate is 0.5%. CEDIT can be adopted along with CAGIT or COIT. The maximum combined CAGIT and CEDIT rate is 1.25%; the maximum combined COIT and CEDIT rate is 1.0%. In 2003 an added CEDIT rate may be collected to allow counties to phase out the property tax on inventories immediately, rather than wait for the 2007 statewide date.
The motor vehicle excise tax was invented in 1971 to replace the personal property tax on passenger cars, motorcycles, and small trucks. The tax rate varies by age and value-when-new of the vehicle. The county license branches collect this tax and, after subtracting an administrative fee, remit the remainder to local authorities.
All local governments share in the motor
vehicle excise tax--it is not a tax devoted to maintenance and construction of
roads. School corporations receive more than half of all motor vehicle
excise taxes collected each year.
Local governments receive revenue from a wide variety of state programs. Three sources of aid account for most of what local governments receive from the state. These sources are the state property tax replacement credits, the state highway, road and street aid, and the aid to local school corporations.
The biggest state aid program--so big it makes up about a fifth of the state's entire budget--is aid to local school corporations. Revenue is collected from state general funds, primarily the individual income, sales and corporate income taxes. Revenue is distributed to the 294 school corporations based on a complex formula. This formula is revised every two years, during the budget sessions of the General Assembly. One of its primary purposes is "equalization." Some school corporations have a large amount of assessed value per pupil, others have very little. Left to themselves, those with more wealth would spend more on education, and those with less would spend less. The school aid formula delivers more aid to school corporations with less assessed value per pupil, and less aid to school corporations with more assessed value per pupil. Spending still varies among school corporations, but not nearly as much as it would without this equalizing aid.
Property tax replacement credits (PTRC) are a state program designed to shift overall state and local taxation away from local property taxes, towards state sales and income taxes. The program was started by the 1973 legislature, and substantially revised during the 2002 tax restructuring. As of 2003 the payments are equal to 20% of the local property tax levied on real property, excluding levies for cumulative funds, debt service incurred after 1984, and some other levies. An additional 60% of school general fund levies are then replaced by state funds. Overall, PTRC reduced the statewide levy by about 14% in 2002. After restructuring, in 2003 this percentage is expected to be about 26%. The credits are funded by the state sales, income and other state tax revenues.
Motor fuel taxes and license fees are the primary source of funding for road repair, construction and maintenance in Indiana. Revenue from the gasoline tax, special fuels (diesel) tax, vehicle registration fees and other sources are pooled. The funds are distributed to state agencies such as the State Police and Bureau of Motor Vehicles, to the State Department of Transportation for maintenance and construction of state highways, and to counties, cities and towns for the maintenance and construction of local roads and streets.