Indianapolis-Marion County Considers Eliminating the Homestead Credit. Should we?

Fish Atop the Monroe County Courthouse

Today’s Indianapolis Star has a longish article on Mayor Ballard’s budget proposal for 2013:

In particular, what caught my eye was the mayor’s proposal to save $8.1 million by eliminating the homestead credit:

“The remaining money to close next year’s deficit would come from ending the homestead tax credit.

Doing away with it is estimated to save $8.1 million. That credit is different from the far more lucrative homestead deduction, which wouldn’t be touched.”

The homestead credit is a portion of local income taxes (County Option Income Taxes) that are held back and used to reduce the property taxes of homeowners. It is a local option to have the homestead credit, and not all counties have one. This is entirely different, as the article points out, from the homestead deduction, which substantially reduces the assessed value of owner-occupied properties.

In Monroe County, the homestead credit cost local units of government $1,346,093 (and conversely the credit saved local homeowners the same amount). The 2012 COIT Distribution Report for Monroe County from the Indiana Department of Local Government Finance (DLGF) shows this credit at the upper right-hand corner of the report.

In the past I have suggested that we may want to consider eliminating or phasing out this credit, should the budget situation become dire. Fortunately although budgets for local government are still stressed, we have not faced the likelihood of large-scale cuts in essential services. However, should this become a possibility, the homestead credit is one option that local government has to raise a bit of revenue. Of course, this would be perceived as a tax increase (from the taxpayer’s perspective, elimination of a credit is the same as an increase).

Surprisingly, although the homestead credit is a county-wide tax credit, it is actually up to the Bloomington City Council to modify or rescind the homestead credit. That is because the Indiana Code chapter that defines the homestead credit (IC 6-3.5-6-3) gives the responsibility for setting income tax rates and credits to the County Income Tax Council, which consists of the fiscal bodies of the county and all cities and towns inside the county (this means the County Council, the Bloomington City Council, and the Ellettsville and Stinesville Town Councils).

However, it assigns votes in the County Income Tax Council proportionally to the population in each of the areas represented by the fiscal bodies — in other words, the Bloomington City Council gets votes in proportion to the percentage of Monroe County’s population that is within the Bloomington city limits, the Ellettsville Town Council within the Ellettsville town limits, and the County Council the remaining votes (the population that is outside of the incorporated areas). Stinesville doesn’t have enough population to receive any votes. But in any case, the Bloomington City Council actually has a majority of the votes (greater than the share of the County and Ellettsville combined) — so essentially the City Council has complete say over the county income tax rates and any homestead credit.

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