The Recession May Be a Light Hit for LIT

The December state revenue forecast for Indiana projected that individual income tax revenue would be about $6 billion this year. But Indiana uses local income taxes too, and we know that the income tax revenues that local governments receive in 2021 will be just over $3 billion.

That’s not just a projection. The State Budget Agency tells counties in advance how much “LIT” revenue they will receive in the coming year. The figures are announced first by early August, and the final numbers are ready by December. The numbers are based on the local income tax collections from the previous state fiscal year. So, the amount of LIT revenue to be distributed to counties in calendar year 2021 is the amount of LIT revenue collected from July 1, 2019, to June 30, 2020.

That had to be modified this year, because the due date for income tax payments was extended to July 15. That also meant that the first LIT distribution figure wasn’t available until mid-September. The governor made this change with executive order 20-31.

The tax collection period in 2020 included the sharp COVID recession that started in March.  Yet LIT distributions for 2021 dropped in only five counties from their 2020 distributions. In Pulaski and Wayne, revenue fell because local income tax rates were cut. (That’s rare, but it happens.) In Elkhart, Jay and Tipton, rates stayed the same but tax collections fell anyway. Probably taxable income declined. Statewide, LIT revenue increased by 6.5 percent.

Why didn’t the recession have a bigger effect on 2020 LIT collections and 2021 LIT distributions? Anyone who pays the income tax will understand. April 2020 payments were based on W-2  forms from 2019. Taxes paid in 2020 were based on income earned in 2019, and that was a year of economic expansion.

So, if the recession reduced incomes in 2020, tax payments in 2021 will drop. The State Budget Agency will tabulate collections through June 30, 2021, to set distributions for 2022. That’s when the recession will hit local income tax revenue.

The decline in distributions in Elkhart County provides a hint about what could happen. Elkhart is the home of recreational vehicle manufacturing. Economists nationwide watch employment in Elkhart for clues about the future of the national economy. In September 2018, the New York Times reported that “As Elkhart, Ind., Goes, So Goes the Nation, and Elkhart Is Nervous.” The unemployment rate in Elkhart rose from 2.1 percent in April 2018 to 3.8 percent in July 2019—with a few ups and downs–before dropping again until this past March. That decline in jobs may have reduced incomes in 2019, reducing tax collections in 2020, reducing LIT distributions in 2021.

That happened during the Great Recession, too. Incomes fell in 2009, so tax collections fell in 2010, so distributions fell in 2011. Statewide, LIT distributions dropped 14 percent in 2011.

Distributions in 2022 will depend on incomes in 2020. We don’t have those numbers yet. But we do know personal income for Indiana for the first three quarters of 2020. That’s wages, interest, rent and profits for Indiana residents, estimated by the U.S. Department of Commerce. Compared to the first three quarters of 2019, in 2020 personal income increased by 6.6 percent.  That would be tied for the biggest rise in the past 20 years. That’s much different from the last recession. In 2009, income fell by 2.7 percent.

The difference was the CARES act, the $1,200 checks and (especially) the added unemployment benefits that Congress passed back in March. Government benefits to Indiana residents rose 35 percent in the first three quarters of 2020, while private income dropped 0.6 percent. Unemployment benefits are taxable, so that income will support local income tax collections.

Add to that the advantage Indiana has in this peculiar recession. It’s a recession of service industries. Usually recessions hit manufacturing. Indiana has a lot of manufacturing employment, and fewer service jobs, so our economy didn’t fall as hard as the economies of other states. Elkhart’s unemployment rate is already back down to 4.4 percent.

Local income tax revenues won’t be affected until 2022, and taxable income was supported by federal benefit payments. The recession may be a light hit for LIT.