A commuter tax being proposed at the Statehouse would cause local towns, cities and county government to lose more than $12 million per year.

If you are one of more than 25,000 people who live in Johnson County and work in Indianapolis, the local income tax coming out of your paycheck could end up paying for police and firefighters in Marion County, while your hometown might have to consider reducing staff and services.

An Indianapolis legislator says your taxes should stay in Marion County because the daily swell of workers crossing into the city stretches public safety workers and wears out city roads. Marion County, where the vast majority of workers commute to in central Indiana, would receive $84 million more per year from commuters in the suburbs.

Greenwood Mayor Mark Myers, Franklin Mayor Joe McGuinness, state representatives and other suburban legislators are lining up to put a stop to the bill. The proposal is now before the House committee that reviews tax proposals, where members can decide whether to explore the idea or let it die without discussion.

Sixty-six counties would be in the same situation as Johnson County, facing tax losses ranging from about $50,000 in small Switzerland County in southeast Indiana to more than $35 million lost in Hamilton County. Hamilton, Hendricks, Johnson and Boone counties would be the top four biggest losers, followed by Porter County in northwest Indiana, which would face a $7.5 million loss.

The sudden loss in income taxes would severely cut funding to county, cities and towns, libraries, fire districts and schools. Johnson County residents paid about $33 million in income taxes in 2013, so the proposed change would cause the county to lose more than a third of its funding, which helps pay for government employees, police, firefighters, operating costs and equipment. Income taxes account for from about 20 to nearly 50 percent of the money cities and towns use to pay for those services each year.

Currently, the income tax taken out of your paycheck goes to the county where you live, not where you work. The proposal, which was authored by Rep. Cherrish Pryor, D-Indianapolis, would change the law to send some income tax to the county where you work and reduce the amount kept in the county where you live. About 167,000 residents in the surrounding counties commute into Marion County, compared with about 60,000 who live in Indianapolis but work in the suburbs, meaning all of the suburban counties would lose millions in taxes to Indianapolis.

Workers would be able to claim a credit for the amount they paid to their work county for the taxes they’d normally pay in their home county, so you’d pay the same amount of income tax even if the system changes. But that could mean you’ll pay both counties upfront and later get a refund from your home county, although it’s not clear at this time. Pryor wasn’t sure how workers would pay paycheck to paycheck and said the Indiana Department of Revenue would work out the exact method of how taxes are collected if the law is approved.

‘Everyone to pay’

Indianapolis and the Indy Chamber of Commerce have been pushing for the change in how income taxes are collected in order to help pay for police, firefighters, ambulances and roads in the capital city. City officials have argued that the large number of commuters requires the city to spend more for roads and emergency responders and that workers coming in from the suburbs aren’t paying for those services. That’s why Pryor, a former Indianapolis City-County Council member, decided to author the proposal.

“It’s important that the people in Marion County are adequately taken care of. And we have a lot of people that draw on our services. It’s important for everybody to pay,” Pryor said.

State lawmakers who represent Johnson County and local leaders strongly oppose the commuter tax because of the significant loss in tax income.

The plan being proposed at the Statehouse would get Indianapolis more money by pickpocketing the surrounding counties, said Sen. Brent Waltz, R-Greenwood. The commuter tax would cause money to flow into large cities, while deeply slashing the income of suburban counties and jeopardizing their ability to provide services to their residents, Waltz said. The proposal doesn’t have any way for suburban communities to make up the millions in lost revenue.

“I can’t imagine the commuters use $84 million worth of police and fire protection in accidents or being victims of crime per year,” Waltz said.  “If commuters are causing such great harm financially, then why does Marion County keep offering tax breaks to these companies attracting suburban workers, and those tax breaks total tens or hundreds of millions per year in lost taxes?”

‘Zero sum game’

Johnson County residents currently pay 1 percent of their earnings as income tax, which goes to local governments to help pay for services. Under the new proposal, commuters would have to pay a new tax in the county where they work, equal to half of whatever that county’s income tax rate is.

Since most commuters in Johnson County travel to Indianapolis, that would mean paying half of Marion County’s income tax rate of 1.77 percent. Commuters would be able to claim a credit for the total amount of taxes they pay in their work county, which would be deducted from the amount of taxes due in their county of residence.

For example, a Johnson County resident who earns $50,000 per year at a job in Indianapolis currently pays $500 per year in income tax to Johnson County. Under the new system, that worker would pay $442.50 to Marion County and then get a credit against the $500 paid in Johnson County. That means Johnson County would get to keep just $57.50 under the new system.

That system typically wouldn’t cost the worker anything extra but would simply take money from some counties and give it directly to another, Purdue University professor and state tax expert Larry DeBoer said. DeBoer doesn’t expect the proposal will get much support, since most counties will lose tax revenue compared with few who gain, he said.

“This is just a zero sum game, a direct transfer from the out-commuting counties to the in-commuting counties. So you can count the votes to see which legislators represent winners and which represent losers and have a pretty good idea what will happen,” DeBoer said.

Some commuters also could end up paying more overall under the new plan, if they work in a county that has an income tax rate more than double the county they live in, DeBoer said. Since they would pay more tax in their work county than they did before, the credit they could claim would wipe out all of the money their home county would normally collect, he said.

Income taxes help pay for more than 40 percent of the cost of salaries for city workers and operating costs in both Greenwood and Franklin. If those cities lost a third of their income tax, about $2 million each, services would need to be drastically cut, mayors said. Greenwood, for example, is trying to get state lawmakers to approve a local food and beverage tax to bring in more money so the city can hire more police and fire because current funding is already tight.

‘We dump millions back in’

Local lawmakers said they understand the challenge Indianapolis has to keep up with police and fire coverage but said commuters already pay taxes to cover services.

One of the main sources of income Marion County receives from commuters is from food and beverage tax, an extra 2 percent sales tax charged on meal purchases. Thousands of workers buy lunch or dinner in Marion County, while significantly fewer need assistance from police or firefighters on a daily basis, Rep. John Price, R-Greenwood, said.

“We dump millions back in. We eat up here all the time. You can look at the amount of crime that’s committed against people who work in these corporate offices downtown, and I don’t think that supports paying it. I don’t think it’s a lot of calls for service for them,” Price said.

Indianapolis may have to pay for commuters, but suburban counties suffer a large expense due to the amount of crime that flows out of Marion County, Waltz and Price said. Indianapolis residents who cross the county line and commit crimes are caught by local police, prosecuted by county attorneys and locked up or put on alternative programs such as probation in the county they’re convicted, which amounts to a large expense for Johnson County every year, they said. Marion County doesn’t pay anything for those expenses.

Property taxes on businesses are capped at a rate three times higher than residential properties, so Marion County gets significantly more tax money from the businesses that are attracting workers than the homes the workers live in in the suburbs, Franklin Mayor Joe McGuinness said. Cities and towns always want to attract business developments, partly because the higher taxes paid by a new factory or warehouse help subsidize the services needed by residents, such as police or parks, McGuinness said.

‘It’s first step’

The fairest solution might be to require businesses to pay more taxes, although that idea likely wouldn’t be popular with lawmakers either, Waltz said. Marion County residents shouldn’t have to pay more to support services needed because of commuters, while commuter counties shouldn’t have funding taken away because their residents cross county lines for work. Businesses attract the out-of-county workers, so it would seem to make sense for them to pay to support the local services, he said.

The commuter tax proposal has been sent to the House Ways and Means Committee, which is the first stop for any new tax ideas at the Statehouse. Pryor wasn’t sure whether her proposal would get a hearing in the committee, where members would consider the proposal and then vote on whether it would be brought before the entire House of Representatives for approval. Pryor said she hopes the committee will at least have an initial discussion on the topic.

“It’s a first step. I’m open to suggestions for ways to make the deal better. There is a need, and it’s an issue the General Assembly does really need to take a look at,” she said.

Rep. Woody Burton, R-Whiteland, doubts the proposal will even get a hearing due to the major financial impacts it would have on counties. If the idea did get approved in committee and came back for a vote, Burton and local legislators would work to quash it, he said.

“It’s not going to happen. We’ll fight that thing tooth and nail, and Marion County doesn’t have enough votes from around the state,” Burton said.

Pull Quote

“I can’t imagine the commuters use $84 million worth of police and fire protection in accidents or being victims of crime per year. If commuters are causing such great harm financially, then why does Marion County keep offering tax breaks to these companies attracting suburban workers, and those tax breaks total tens or hundreds of millions per year in lost taxes?”

Sen. Brent Waltz, R-Greenwood, on a proposed commuter tax