With about $750 million in local income tax reserves, study suggests rules could be relaxed
The state is holding roughly $750 million in local income tax (LIT) reserves, according to a report from the Indiana Fiscal Policy Institute. The study suggests a reduction of the surplus could lead to millions of dollars distributed to local communities.
Current state law requires a buffer of at least 15 percent in the local income tax reserve – state accounts that hold and distribute local income tax funds. The law was passed in 2016 as a way to protect from future recessions.
The deep, but brief pandemic recession gave researchers a chance to examine how well the rules protected the accounts.
Author of the study Larry DeBoer said even under extreme recession scenarios, only a small number of counties would run out of funds in their accounts.
"Essentially, the system that we designed to prevent negative balances is working too well, where we're preventing negative balances – or we would prevent negative balances – in recessions bordering on Great Depression scales," said DeBoer.
When it comes to state budget reserves, lawmakers have often said a roughly 12 percent balance requirement is fiscally prudent.
DeBoer said that example, combined with the data from this new report, could help make the case for relaxing the local balance requirement.
"We've developed a 10 to 12 percent idea for the state budget by looking at the history of state revenues and state spending," he said. "Makes sense, I think, to do the same thing since we now have the data for local spending and local budget."
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If the state were to reduce the balance requirement to 11 percent or 12 percent, DeBoer said it could allow a one-time distribution of more than $200 million to local governments.
State lawmakers would have to pass legislation to make the change.