On Tuesday, everyone who lives in Allen County and has a job is getting a pay cut.
The increase in the Local Option Income Tax approved by the Fort Wayne City Council on June 25 takes effect Tuesday, raising the LOIT from 1 percent to 1.35 percent. The tax applies to Allen County residents, whether they work in Allen County or elsewhere; non-residents who work at county employers pay a lower, non-resident rate.
Granted, the difference will be small: Someone making $20 an hour would see the Allen County LOIT rise from $8 a week to $10.80 a week. But, those arguing against the tax increase this spring pointed out that workers in an economy struggling to recover were the least able to shoulder the burden.
Of course, much of the money the higher income tax generates will pay for a property tax cut, meaning someone with the right mix of income and property taxes might find the increase nearly a wash. Those with high incomes and expensive houses won't get the benefit of the property tax credit the income tax hike provides, because they're already benefiting from the tax caps in the state constitution holding the taxes on their home to 1 percent of the value.
Collectively, however, officials estimate the property-tax relief portion of the income tax will create $20.4 million in tax credits on property tax bills.
So how did the Fort Wayne City Council manage to raise taxes on everyone in the county, even those outside the city limits? Technically, it didn't – the Allen County Income Tax Council did.
The Allen County Income Tax Council is in some ways a myth, as it never meets. Instead, it is made up of the governments of the county and incorporated towns, and each year, Allen County Auditor Tera Klutz calculates, based on population, the number of votes that each body gets.
The city of Fort Wayne gets 71 votes out of the 100 available. Allen County government gets 21, New Haven gets 4 votes, Huntertown gets 1.35 and Leo-Cedarville gets 1 vote. Woodburn, Monroeville, Grabill and Zanesville each get less than 1 vote.
That's not the case in all of Indiana's 92 counties: In 27 counties – including Adams, Kosciusko and Steuben – the county government holds the majority on the tax council. In 16 counties – including DeKalb and Huntington – no single entity holds a majority, meaning coalitions must form to pass anything.
But in Allen County, when the Fort Wayne City Council voted to raise the LOIT, the measure automatically passed with at least 71 of 100 votes. Klutz then sent letters to each of the other bodies asking them to cast their own votes.
"They notified us June 26 and we forwarded it to all the other members (of the tax council)," Klutz said. "We're the hub."
The other members had 30 days to respond, and though at least some debated the issue, none actually responded and cast a vote.
Klutz said that since Fort Wayne has a majority and there was no question the measure would pass it is unclear whether she even had to ask the other members, but did anyway.
"I didn't want anyone to challenge it and say that technically they didn't get to vote," she said.
Once the 30 days for them to respond had passed, Klutz sent a certified letter to each body dated Aug. 2 showing that the measure had been approved. It shows Fort Wayne casting its 71 votes for the tax hike and each other body with "No action taken."
While the higher tax rate takes effect Tuesday, local governments receiving the money won't see their monthly distributions begin until Jan. 1. And while the state has sent Klutz estimates to give out, officials aren't certain how accurate those estimates will be, how they're figured or whether those distributions will later be corrected if the estimates were off.
"One of my issues with the Fiscal Policy Group (studying the income tax idea) was the timing of the cash," said Fort Wayne City Controller Pat Roller. "We're hoping they're going to be solid numbers."
But officials don't know, because other income taxes they receive, such as the County Economic Development Income Tax, are based on the amounts collected 18 months before. Given that lag, officials are unsure how the new amounts will be figured.
Roller said the issue is that income taxes are withheld from paychecks all year, but the state doesn't know how much of that money will be available until tax returns are filed in the spring. Some people get all of their withholdings back, because they didn't end up owing any taxes for the year; others have to pay more.
Bob Dittmer, spokesman for the Indiana Department of Revenue, said the new taxes will be handled just like the current LOIT and CEDIT taxes: Distributions will be based on estimates, and after about 18 months – when actual figures become available – adjustments will be made to bring payments in line.
Dittmer said that on Tuesday morning, the Department of Revenue will publish new withholding rates on its website. Thousands of people who handle payroll subscribe to the site, he said, so the instant it updates they are notified. The department will also send out a press release announcing the change.
"Everybody is really well practiced at this," Dittmer said. "It's really standard operating procedure. They know on the first we're publishing new rates and they're coming to us looking for them. In fact, some will call us at 8 o'clock Tuesday if it's not there."
The higher income tax means the city is yet another step down the road from depending almost entirely on property taxes, which stay essentially the same year after year regardless of the economy, to depending more on revenue that can have huge swings depending on whether times are good or bad.
Of the city's proposed $147 million budget for 2014, only two thirds is from property taxes. What will happen if the economy craters again?
"If that happens, obviously we're going to have to talk about services again and what the city can afford to deliver," Roller said. "But we're pretty conservative in these projections."