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4/6/2012 8:02:00 AM
State's costly error is windfall for 91 counties

Maureen Hayden, Herald Bulletin CNHI Statehouse Bureau Chief

INDIANAPOLIS — Some city and county officials across Indiana may have been feeling some whiplash Thursday morning when they heard the state had shortchanged them $206 million in local tax revenues.

Less than a year ago, the state was telling cities and counties they’d been overpaid nearly three times that much and asking for he money back.

The circumstances that lead to those announcements are different, but the impact may be the same: state revenue and budget officials have taken a hit to their credibility.

On Thursday, state budget director Adam Horst announced that a computer programming error by the state revenue department had caused a $206 million mistake, shortchanging local governments about $13 million in tax revenues each month since January 2011.

It was the second time in four months that the state confessed to making a multimillion-dollar mistake. A similar programming problem, discovered in December, caused the state to lose track of $320 million in corporate tax collections over four years.

And last summer, state budget officials blamed the recession for throwing off tax revenue estimates that led to a $610 million overpayment to local governments that the state demanded be returned.

“There is a definite loss of confidence. There’s no getting around that,” said Matt Groeller, executive director of the Indiana Association of Cities and Towns.

Groeller found out about the latest glitch during a conference call at 5:30 a.m. Thursday; he was in Colorado with family on spring break.

The discovery of the error means a windfall of money for local governments, Groeller said. The $206 million in local tax revenues that were collected by the state and mistakenly swept into the state coffers will be paid back with interest.

But it doesn’t make amends. Groeller said he was glad to see the state was acting “swiftly to rectify the situation.” But he said the mistake has likely had a multiplier effect in many communities.

In addition to cuts made by some local governments to services and personnel, the underpayment may have also triggered losses either in property tax revenues or property tax relief because of Indiana’s complicated property tax system. Some local governments that were underpaid in income tax revenue may have pushed their property tax caps to the limit or beyond, Groeller said.

Groeller wasn’t the only one worried about the loss of confidence in the state’s ability to account for money it collects and distributes. Republican Gov. Mitch Daniels, who was out of the country Thursday, has ordered an independent third-party audit of the Indiana Department of Revenue.

The revenue department’s commissioner John Eckart has turned in his resignation and will be leaving soon; two department managers, Chief Information Officer Roy D. Gabriel and Chief Financial Officer Darrel Anderson, have already left.

Republican State Sen. Luke Kenley, the influential chairman of the Senate appropriations committee and member of the State Budget Committee, said he was alarmed when he heard the news Wednesday — a day before it was revealed publicly.

Kenley said local government leaders have reason to be unhappy. “We have a pretty substantial obligation to local governments to get this straightened out,” Kenley said.

Back in December, when state revenue officials had to admit they’d lost track of $304 million in corporate tax revenues, Democrats in the legislature pushed for independent audit. But Daniels and Republicans legislative leaders rejected that call.

On Thursday, House Speaker Brian Bosma and Senate President Pro Tempore David Long issued a joint statement saying that an independent audit “is in the best interest of all Hoosiers.”

House and Senate Democratic leaders, meanwhile issued their own statement saying, in essence, “we told you so.” And they took a swipe at Daniels’ reputation as a fiscal disciplinarian.

“It must be pointed out that Democrats in both the Indiana House and Senate asked for this kind of audit last fall, when this same administration ‘found’ $300 million in ‘lost’ corporate taxes,” said the statement released by House Leader Pat Bauer and Senate Democratic Leader Vi Simpson.

They added: “Rapidly, an administration that has tried to convince the public that it brought needed sound fiscal management to Indiana state government has become a shining example of ineptitude.”

State budget officials had initially downplayed the impact of the underpaid revenues on local communities.

But State Sen. Tim Lanane, a Democrat from Anderson, said the impact has been tangible. On Tuesday, the county council in Madison County, which is in his district, announced the layoffs of 11 county employees.

“When you break it down for the cities, towns and counties that are strapped financially, this is huge,” Lanane said. “Every one of them is looking for every dime they can.”

During the press conference Thursday announcing the discovery of the underpaid revenues to local governments, Horst said he learned there was a problem several weeks ago but didn’t know the financial scope of the error until Tuesday.

The underpayments were caused by a computer programming error in how the state accounts for local income taxes that are paid quarterly by some Hoosier residents.

Instead of separating the tax payments into separate categories for the state and local goverments, those payments were shifted to the state.

Horst said the lastest problem was discovered after state revenue officials launched an in-house investigation in December, after they’d found the problem with the corporate tax payments.

Related Stories:
• Indiana counties to reap windfall from state's costly error
• EDITORIAL: Another debacle in state budgeting
• EDITORIAL: Restoring confidence in Indiana Department of Revenue won't be easy
• OPINION: Accounting mistakes and local government reform

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