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February 27, 2013

State revenue department moves to improve local tax distributions

INDIANAPOLIS — The Indiana Department of Revenue has requested nearly $10 million in additional funding to hire more staff and upgrade its technology to do a better job of tracking and distributing the more than $1.5 billion in income tax revenues owed to local governments each year.

The request, included in the House’s two-year budget plan, comes in response to past revelations that the department lost track of $526 million in corporate and income tax revenues, including $206 million owed to cities and counties.

But some legislators and local government officials fear the department’s proposed fixes may not go far enough. They’re pushing for additional remedies to make sure the dollars owed to local governments get there in a full and timely manner.  

Among the changes they’re advocating: A faster turnaround of the local option income tax revenues collected by the state, and a tracking system that relies more on employers that withhold income tax dollars from paychecks and less on the workers who may fail to report them.

“We want to make sure every dollar collected by the state goes back to local government where it’s owed,” said Goshen Mayor Allan Kauffman, a member of a task force created last year by the State Budget Agency to look at how the state collects and distributes local tax revenues.

Ninety-one of Indiana’s 92 counties have adopted at least one of the local option income tax rates, known as the LOITs, that were first approved by the state in 1974. Local communities have become increasingly dependent on the revenues, especially since property taxes were capped in 2008.

State Sen. Brandt Hershman, the Republican chairman of the Senate Tax and Fiscal Policy Committee, has authored a bill that came out of the work of the task force. It would require the state to provide more information about how it determines the LOIT dollars sent back to local governments, and it creates a mechanism for the state to release those LOIT dollars more quickly.  

One of the goals, Hershman said, is to “give local units of government a greater degree of confidence and a better understanding of the challenges we face.”

Hershman said the bill is a start toward correcting much larger issues in the Department of Revenue, which has been operating with what he called “an antiquated system” of technology that may cost up to $50 million to replace.

An independent audit of the department released last December blamed outdated technology and a “weak control environment” for the $526 million in tax errors made by the department in recent years.

Those errors included $206 million that had been earmarked to be distributed to Indiana counties, but never was. The money was discovered last April, four months after the department found $320 million in corporate tax collections that had been accumulating in an orphaned bank account since 2007. The same audit discovered additional errors with 55,000 taxpayer accounts and 2,880 tax refund requests that were never processed.

There’s new management in place at the department. But Kauffman said those revelations have undermined the confidence that local officials have in the state to accurately assess what local governments are owed in LOIT dollars.

Kauffman represented the Indiana Association of Cities and Towns on the task force that looked at how the state collected and distributed local taxes. The Indiana Association of Counties was represented by Allen County Auditor Tera Klutz. She agrees with his concerns.

“(Revenue department officials) must work with local governments to make the system work better,” she said.  “And there has to be more transparency on their part.”

Hershman’s bill doesn’t include language that Kauffman wanted to see. He wants the state revenue department to start tracking the actual dollars paid to the state each month by employers that withhold local income taxes from their employees, and to put that money into a separate account apart from the state’s general fund.

Using information supplied by employers would be a better system, he argues, than what currently exists. The state pulls that information off the personal income tax forms that taxpayers are supposed to file with the state each year.

The current system creates a long lag time between when the state collects the LOIT dollars and when it’s paid out to local governments. It also raises concerns about people, such undocumented workers, who don’t file a state tax return. The taxes those people have paid stay with the state.

The state revenue department contends that it would take both a change in the law and a massive upgrade in technology to put into place what Kauffman wants.

Bob Dittmer, spokesman for the department, said in an email that the department “would like to have the capability to cross check individual returns with employer submitted data, however that is simply beyond our current capability.”

He noted that the state is moving toward more electronic filing, both by individual taxpayers and employers and that with the increase in electronic filing, the state may be able to put a better tracking system in place.

“It is certainly a capability we want to develop going forward,” Dittmer said, “But not one that can be implemented without significant investment.”

Maureen Hayden covers the Statehouse for the CNHI newspapers in Indiana. She can be reached at maureen.hayden@indianamediagroup.com.

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