The Indiana Department of Local Government Finance read with interest the story in last week’s Comet about a meeting of the Carroll County Council and a DLGF representative. The topic of discussion was the Local Option Income Tax rate adopted by the council for 2009 as deemed necessary to supplant revenue lost by state-imposed property tax reform.

The council adopted by ordinance a rate double that which was deemed necessary because state statute dictated the needed rate be doubled to create a “stabilization fund.” The county ordinance read that the rate would be reduced the second year.

During the review process, the council learned the state statute would not allow them to reduce the LOIT rate once it is established.

DLGF requested another story to explain to readers why the situation happened as it did. The following was submitted Tuesday to the Comet via E-mail from Mary Jane Michalak, Chief of Staff/Director of Communications for the DLGF.

“In 2008, Carroll County passed an ordinance to institute a “levy freeze” to provide property tax relief to county taxpayers. According to state law, once a levy freeze is passed, the county can never again grow its property tax levy. (Levy is another word for property tax revenue a unit of government can collect.) For instance, if a county has a property tax levy of $100,000 and passes the “levy freeze” LOIT, the county’s levy will be maintained by the Department of Local Government Finance at $100,000 in accordance with state law. However, the levy is supplemented by the local income taxes, which can be raised each year to adjust for what would be normal levy growth.

“The allowable level of taxation and use of revenues are highly structured by statute. Therefore, the county loses some flexibility when they pass a levy freeze option versus another type of local income tax. For instance, the county is required to pass specific income tax rates that are certified by the DLGF for the first two years of the levy freeze to establish a base of funding. The first year, the county is required to adopt a rate that is twice what would be needed to cover the difference between the levy and the growth. In the second year, the county is required to adopt a rate that would cover the only the difference between the levy and the growth. (see graphic for explanation.) However, after the first two years, the county regains some flexibility and can annually choose whether to increase an income tax or keep it the same and flat-line local spending. The statute does not permit the rate to ever be reduced or rescinded, even after year 2. However, if the county wishes to provide more relief to taxpayers for 2011 (the deadline has passed for 2010), they could reduce their legacy CEDIT or CAGIT rate or lower their levy below the freeze amount.

“It appears that Carroll County officials misunderstood the mechanics of the local income tax they were passing in 2008 and how the passage would limit their flexibility in the first two years. Unfortunately, the mistake in their passage of the local ordinance was not realized until this year. The Department is required to enforce statutes; therefore, the Department’s ability to allow local control is also limited to what statute allows.

“We acknowledge that upon receipt of the original ordinance in 2008, we did not identify that the county intended to reduce the rate in the second year. We apologize for the oversight and have put provisions in place to ensure this does not occur in other counties. Regardless of this oversight, the passage of the 0.2 rate was in accordance with statute and this rate cannot be reduced or repealed.”