Questions remain with how state collects taxes and distributes funds

But in the wake of last week’s multi-million dollar computer programming error that shortchanged counties $206 million in local tax revenue, state officials have dramatically reduced the amount counties must repay to just $145 million.

Bob Lain, assistant director at the Indiana State Board of Accounts, said the same computing error that lead to the $206 million mistake also revealed the state had underestimated tax collection amounts in 2009 and 2010, which drastically inflated the amount counties owed.

Although county officials are condemning the error as an example of state incompetence, the unanticipated revenue coming into county coffers has also provided a reason to celebrate.

And the reduced debt counties now owe the state has given them an even bigger reason to smile.

“We’re breathing a sigh of relief,” said Ralph Duckwall, 2nd District councilman in Miami County. “We’re much happier now than we were last week.”

The news could get even better for Indiana counties.

David Bottorff, executive director of the Association of Indiana Counties, said the amount owed to the state by the counties will be reduced even further by the end of the year.

“The amount owed was overstated of what the state paid the counties,” he said. “A lot of counties that were told they owe money will be in the black or the amount will be significantly lower.”

‘Incredibly complex’

John Ketzenberger, president of the Indiana Fiscal Policy Institute, said the fluctuating amounts owed is the byproduct of the complicated system Indiana uses to collect and distribute local income taxes.

“The problem is that the local option income tax system is incredibly complex,” he said.

The elaborate method the state uses is aggravated further because of the sometimes two-year lag between when the state collects taxes and when it distributes them back to counties, he said.

Bottorff said the AIC is advocating changes in the process of how the state accounts for the funds collected and how it distributes those funds back to the counties. He said those changes will be implemented in 2013.

“The reports to the counties have to be more detailed,” he said. “There has to be a historical reference to what was withheld and what was distributed. The counties can’t even ask the proper questions.”

Ketzenberger agreed there needs to be a policy debate about how the state collects and distributes funds, noting the intricacies of the current system makes it susceptible to errors and miscalculations.

Besides systemic issues, Bottorff added some of the problems date back to 2008, when there was a downturn in the economy.

“There is a lack of data to support what the state contends the counties owed,” he said.

A reoccurring theme

Howard County Treasurer Martha Lake said this was not the first time there has been a problem with the distribution of tax revenues from the state.

She said 10 years ago the state showed Howard County’s Economic Development Income Tax collections were down by $127,000.

“I checked our records and the state then credited Howard County with $5 million,” she said.

Regarding the current discrepancy in tax revenues, Lake said county officials have been attempting to get information for two years.

“The state’s computer software was not doing what it should,” she said. “We never get a report of what was collected. There was no back-up figures. The state took the estimated revenues and divided by 12.”

Lake said the $610 million the state contended the counties owed was a big issue and that the 2011 and 2012 figures were incorrect.

Howard County was first informed last year it owed $11 million. That figure was reduced to $10 million at the start of the year and dropped to $4.8 million last week.

“It probably has never been a good figure,” Lake said. “We rely on the state. It needs to be tracked and the state has to take care of the money being collected.”

“I don’t know if [the state’s books have] ever been in balance,” she added. “The audit has to balance the books.”

Lake believes Indiana lawmakers were misled in January and tried to correct the problem.

“I think there has been mismanagement,” she said, “It wasn’t intentional.”

Lake said the Indiana Department of Revenue needs additional employees and up-to-date technology.

“An audit is not the solution,” she said. “There needs to be a legislative directive to make sure the records are accurate.”

One possible solution being discussed was to have each county collect the local income and EDIT taxes, Lake said.

County treasurers are required to balance their financial records on a daily basis, she said.

“[They] couldn’t have been balancing the books daily,” she said.

Besides the reduced debt counties owe the state, Bottorff said counties will receive $64 million in the first quarter of this year and another $16 million in May because of the $206 million computing error last week.

“I’ve been getting calls from the county treasurers asking if this amount is now correct,” he said. “Independent sources feel the numbers are close.”

Bottorff said the distribution of collected income taxes to the individual counties is additional revenue.

“We always tell them to set some aside in the rainy day fund,” he said. “This had a huge impact on local units of government. It impacted property tax caps, property tax relief, hiring freezes and higher insurance costs.”