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 $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 (LOIT) 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.

Kauffman explained that Local Option Income Tax revenue from employers is funneled directly into the state’s general fund. The state then estimates what the local governments should get back. His concern is that the state doesn’t keep track of what is coming in, therefore may not be distributing everything it should back to the locals.

“They know the difference between their estimate and what they actually distributed,” Kauffman said of the current state system. “But what they don’t know is the difference between what they really received and their distribution. It’s just fraught with the possibility of error.”



Bill introduced

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.

“The budget surplus is surprisingly higher than we anticipated it would be,” Kauffman said. “Well, is it all just because the economy was so much better and they got more sales tax and state income tax? Or is it because there is unreconciled cash sitting in the general fund that should have gone back to counties?”



What happens to the money?

Allen County Auditor Tera Klutz, who sat on the task force with Kauffman, agrees.

“(Revenue department officials) must work with local governments,” she said, “to make the system work better 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. Or, Kauffman said, let the counties handle the local tax dollars.

“My opinion is if the state can’t figure it out, employers should send their money to the counties instead and let the counties hold the money until the state needs it to process tax returns,” Kauffman said. “But I’m not going to hold my breath for that to happen.”

Kauffman argues that 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 creates another obvious problem in his eyes.

“My question is, what if you don’t file a return?” he said. “... The bottom line is it’s still an estimate from the front end. Nowhere have (state officials) said that they will start keeping track of the money coming from Elkhart County ... and that it will all come back to us. The return is still based on individual tax returns. So, if you don’t file one, you know what happens to the money.”

Kauffman contends it simply stays in the state’s account.



Culver’s bill dies

State Rep. Wes Culver of Goshen introduced a bill this session that would have put an employer-based tracking system into place, but it didn’t get a hearing. He too is concerned that local governments could be short-changed by determining LOIT distributions from individual tax returns. Like Kauffman, Culver argues that not everybody who has worked over the course of a year files a state income tax return.

Culver spoke on the matter Saturday morning during the Goshen Chamber of Commerce Third House gathering. He explained that undocumented immigrants may not file a return and people who make less than $4,000 a year aren’t required to.

“So any of those people who paid our county tax here, and we employers mailed it to the state, we don’t get some of that back,” Culver said. “So the bill said you have to track it and send it all back.”

The state revenue department contends that it would take a change in the law to put into place what Culver and Kauffman want. Indiana code requires the department to use information pulled from individual tax returns to determine how much LOIT money goes back to local governments.

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.”

Kauffman questions if that investment will ever come.

“This could negatively impact the cash that the state sits on,” Kauffman said. “So, is there going to be a motivation for the state to fix this?”



Managing editor Michael Wanbaugh and Staff Writer John Kline contributed to this report.