Reminder for Possible Local Income Tax Increase in Bloomington, Rest of Monroe County – The B Square
Bloomington Mayor John Hamilton’s State of the City Address last Thursday included a proposal for increased revenue but was sparse in detail.
No amount has been provided for a possible increase in local income tax (LIT).
But over the next eight months or so, an increase to the current 1.345% income tax on Monroe County residents is likely to get a vote.
In the State of Indiana, local income taxes apply on a county-by-county basis. In counties like Monroe, where a city has the majority of the population, the political power to raise the tax rests primarily with the city.
In 2020, Bloomington City Council’s vote on a quarter-point increase in the LIT came in mid-September. The timing is affected in part by the details of state law. The quarter-point increase was half of what Hamilton announced on New Year’s Day that year, but it fell 4–5 before the city council.
Since the proposal lacked majority support, even within the city council, there was no need for the Monroe County Council or the Ellettsville City Council to consider the proposed increase.
A lot has changed in two years.
A difference this time around is that Hamilton is not leading with a proposed amount for an increase in the LIT to fund climate action initiatives, with a promise later to identify specific spending proposals for the additional revenue .
This year’s approach could be read as a response to a criticism heard two years ago: the mayor should have first identified the necessary programs, then calculated the cost of the programs, then based a request for an increase in the LIT on specific costs.
During Thursday’s speech, Hamilton pushed hard to establish the need for more revenue — to fund programs, from basic services, like public safety, to climate action.
What hasn’t changed in two years are some of the basics related to how local income taxes can be raised.
Current rates, describing increases
The current local income tax for residents of Monroe County is 1.3450%. Most of this rate is made up of two basic elements: certified shares (0.9482); and public safety (0.25).
The other 0.1468 is made up of components called “special use” and “property tax relief”. The first concerns services for minors. The second uses income tax to replace property tax for homesteads.
Raising the rate from 1.3450% to 1.8450% represents a difference of 0.5 percentage points. Sometimes this increase amount is described as a “0.5% increase”, but that is misleading at best. Strictly speaking, the rise from 1.3450 to 1.8450 represents an increase of around 37%.
Square B is intended to describe the simple arithmetic difference between two rates as the number of “points”. An increase from 1.3450% to 1.8450% corresponds to an increase of half a point. An increase from 1.3450% to 1.5950% is a quarter point increase.
The proposal to increase the LIT in 2020 related to a category that is not currently used for the Monroe County tax: economic development.
The Economic Development category is quite flexible in how revenues can be used. There is a catch-all category in law which says that a local unit of government may use LIT economic development for “any lawful purpose for which money from any of its other funds may be used”.
This is likely an argument that will be made for using the economic development category, as opposed to a category with a more restricted use, such as one specifically designed to fund the construction of new prisons. The upcoming renovation or replacement of the Monroe County Jail could cost tens of millions of dollars.
Revenue from an increase in the Economic Development SAI could be used to pay for a new prison.
Certified shares, most of the current LIT rate, are also flexible in their use.
The difference between increasing the certified stock rate and adding a new economic development rate includes the answer to this question: which government units receive a share of the revenue?
An increase in the Economic Development LIT would be split between Bloomington, Monroe County Government, Ellettsville and Stinesville.
An increase in the certified stock rate would be distributed not only to these four entities, but also to all individual townships, Bloomington Transit, the Monroe Fire Protection District and the Monroe County Public Library.
Limitations on econ dev LIT revenue?
Even though income from LIT’s economic development category can be spent on almost anything, it’s not free-for-all.
Under Indiana state law, expenditures made using LIT Economic Development revenue are supposed to follow a capital improvement plan. If this year’s proposed increase in LIT is for the economic development category, much of the political action could take the form of a debate over the components of the capital improvement plan required.
In 2020, Bloomington City Council approved the creation of a Sustainable Development Fund Advisory Committee (SDFAC), to help provide additional local oversight of spending made using the additional revenue from the LIT increase.
Even though the commission was set up, the city council reversed its action, immediately after the LIT increase failed on a 4-5 vote.
As part of the ordinance creating the SDFAC, a new irreversible fund was to be created for the additional revenue from the LIT, called the Sustainable Development Fund. SDFAC membership would have consisted of the mayor, three council members and three citizens.
The creation of such a commission was at least partly an effort to overcome political opposition to the increase in the LIT. Whether a new commission is proposed this time around could be seen as a measure of the extent of political opposition to the perceived LIT increase.
How does voting for LIT increases work?
In Monroe County, any increase in the LIT must be approved by the local Income Tax Board, which includes as voting members the nine-member City Council of Bloomington, the seven-member County Council of Monroe County and the five-member Ellettsville City Council.
The total 100 available votes are distributed in a way that is related to population.
For the city of Bloomington and Ellettsville, votes are assigned based on relative population in the county. For the Monroe County government, it is not the relative share of population (which would be 100%), but rather whatever remains after subtracting the shares of Bloomington and Ellettsville.
Bloomington’s share of the county’s population increased from 58.3 to 56.7 percent between the 2010 and 2020 censuses.
This kind of change would certainly have made no difference before 2020, when the votes of each government body were treated as a block. That is, before state law was changed in 2020, all of Bloomington’s 58 votes would be cast in favor or against any proposed LIT increase. This meant that a simple five-vote majority of council members could impose local income tax throughout the county.
After the state law changed, in time for the 2020 city council vote, the percentage of votes is now assigned to individual members of the relevant bodies.
Now each individual member of a governing body is allocated a proportionate share of the voting allocation to the group. To calculate a Bloomington City Council member’s share of the 100 votes, multiply one-ninth by Bloomington’s fraction of Monroe County’s population in the 2020 census. [1/9*(79,168/139,718)*100]. That’s 6.30 votes, rounded to the nearest hundredth.
Eight city council members still have enough voting power to enact a countywide LIT increase [6.30*8 = 50.4]. But the votes of seven Bloomington City Council members are not enough. If only seven members of the Bloomington City Council voted in favor of an increase in the LIT, then additional support would have to come from a member of the Ellettsville County Council or City Council.
This is the same situation as in 2020, before the census figures were released. In other words, the political power of the Bloomington City Council on the subject of the LIT has not diminished, due to the decrease in population.
How much money would an increase in the LIT generate?
the current rate of local income tax for public safety is 0.25%. Thus, the total amount of revenue generated by the public safety IAS can be used as a measure of the amount of revenue increase that a quarter point increase would produce.
State-based certified local income tax distributions for 2022a quarter-point increase would generate a county-wide total of $9,025,682 per year.
Based on the property tax footprint, Bloomington would see about $4.62 million per year out of a total of $9.03 million.
Within the economic development category of local income tax, there are two different options for revenue distribution. One is based on a land footprint. The other is based on population. Using a population-based approach would give Bloomington about 56% of revenue. Using the property tax footprint would give Bloomington slightly less than that.
Political considerations would likely prompt Bloomington to propose the property tax footprint as the basis for the distribution.