Pandemic Effects on Local Income Tax

The accounting firm of C.L. Coonrod & Company has agreed to provide financial guidance & solutions to us related to shortfalls and temporary cash-flow issues on a weekly basis for the next several weeks.  Here is the fifth installment.

The COVID-19 Pandemic will have Surprising Effects on Local Income Tax (LIT) Supplemental Distributions.

LIT supplemental distributions are always somewhat surprising because they arrive as windfalls in May, and they are over and above the regular LIT certified distributions used to fund the base annual budget. Hence the name “supplemental.”

These supplemental distributions arise because state agencies hold back 15% of all LIT reported on tax returns, to serve as a cushion against future shortfalls.  Around the end of each year, by law, state officials must review these reserve accounts and pay out any excess over the required 15%. These excess payouts are called supplemental distributions.  By law, they are disbursed the following May. 

In recent years, incomes were growing, so the reserve accounts tended to overflow.  Most townships were receiving supplemental distributions every year in May.

Since the pandemic caused reduced tax collections beginning in March of this year, you might have expected there would be no supplemental distributions in May 2020. However, most townships received them anyway.  Why?  Because, the law required state officials reviewed the reserve accounts around the end of 2019, before the pandemic was known.  They found excesses, as usual, and paid them out in May of 2020, as the statues require.

What about next year?  We expect there will be another supplemental distribution to most Townships in May 2021.  That is because the taxes now being recorded in the reserve accounts result from 2019 tax returns filed and processed in 2020.  These 2019 returns will not reflect any impact of the pandemic, so the reserve accounts will tend to contain a normal excess when they are reviewed at the end of 2020.

The effect of the pandemic finally will be felt in May of 2022.  By that time, the 2020 returns will have been processed, reflecting the impact of the 2020 pandemic recession.  LIT supplemental distributions will be meager, and many townships will receive none at all. 

In summary: 
May 2020: a normal supplemental LIT distribution
May 2021: another normal supplemental LIT distribution
May 2022: a reduced supplemental LIT distribution, and for many townships no supplementary LIT distribution at all.

C.L. Coonrod & Company
3850 Priority Way South Dr, Indianapolis, IN 46240
(317) 844-4450
coonrod@coonrodcpa.com