SB 1 cut property taxes. But will local governments hike income taxes? How much you could pay

Indianapolis Star

29-04-2025

AI-assisted summary
Indiana's SEA 1 will provide property tax relief to homeowners and businesses, with businesses receiving the largest cuts.
Local governments can offset property tax revenue by increasing income taxes. That could mean some families pay over $1,000 more per year on income taxes.
Cities across Indiana are evaluating the impact of SB 1 and considering measures like hiring freezes and delays to infrastructure projects.
In northern Indiana, the Democratic mayor of South Bend called Senate Bill 1 a " sweeping anti-growth policy" that sabotages local governments.
In southern Indiana, the Republican mayor of Jeffersonville responded with cost-cutting measures including a hiring freeze on all but "essential and critical" roles and tighter restrictions on overtime and work-related travel.
And in Central Indiana, Noblesville's Republican mayor is contemplating new income taxes and delays to major infrastructure projects as he expects his city to miss out on tens of millions in property tax revenue over the next few years.
Much remains unclear as municipal leaders reckon with how much property tax revenue they stand to miss out on from the 345-page SB 1, an overhaul of local government finance signed into law by Indiana Gov. Mike Braun April 15. Tax revenues will still increase as property values keep rising, but by far less than local leaders had expected under the current system.
With lost revenues statewide at an estimated $1.4 billion from 2026 to 2028, local leaders say that years of belt-tightening will entail tough decisions about how to maintain crucial services like road maintenance, public education and emergency response systems.
Multiple experts say they expect most communities to increase income taxes come 2027, which could completely offset the property tax savings for the typical Indiana homeowner and wring out more money with no relief from the nearly 30% of Hoosiers who rent.
Many communities could tax a Hoosier family with an income near the median $80,000 over $1,000 more per year, according to Michael Hicks, a Ball State University economist who leads the university's Center for Business and Economic Research.
"The income tax increases are delayed a year, so we will have a year of tax cuts and service cuts before we start seeing schools, counties and cities scrambling to plug budget holes," Hicks told IndyStar.
The tax cuts, he added, "take an awful lot out of local government and expose an awful lot of taxpayers to potentially paying a much higher income tax."
How the new law helps homeowners, businesses
The new law will save most homeowners some money, mainly through tax credits of 10% on their property tax bill, with a $300 max credit. Wealthier homeowners will receive the full $300 while most homeowners whose assessed value falls below $300,000 will save less, aside from added relief for seniors, veterans and people with disabilities.
Republicans say they expect two-thirds of homeowners to pay a lower property tax bill in 2026 than they will this year.
Businesses will receive the most tax relief as the minimum threshold for filing taxes on business equipment, such as computers and machinery, rises from $80,000 to $2 million by 2027, meaning most Indiana businesses won't pay any property tax, according to Hicks. Cuts to taxes on depreciating business equipment bought after Jan. 1 will also drain money from local coffers over the next decade, Hicks said.
Crucially, the bill allows cities and towns to make up for lost revenue by imposing income taxes, which are currently applied at the county level. Most homeowners are likely to see their property tax savings offset by higher income taxes levied by local governments desperate to shore up their budgets, multiple public policy experts told IndyStar.
The governor and Republican legislators tout that the law will reduce the local income tax cap in each county from 3.75% to 2.9%.
Because most counties already impose a rate well below 2.9%, however, the new law is still likely to increase the income tax that most people pay, said Paul Helmke, a former three-term Republican mayor of Fort Wayne who now teaches public policy at Indiana University.
Under the current system in which local governments rely heavily on property taxes, only seven of the state's 92 counties have local income tax rates over 2.8%. Marion County's levy, for instance, is 2.02%, while Hamilton County's rate is 1.1%.
Dwindling property tax revenues will strain local leaders' ability to deliver high-quality services like a robust police department or well-maintained parks without somehow scraping together more revenue, Helmke said.
It's possible that local governments won't take the political risk of setting tax rates near the 2.9% cap, Helmke said, but the corresponding quality-of-life reductions could prove even more unpopular.
"For the elected officials, the challenge is going to be how to provide first-class services that people expect with these property tax changes," Helmke said. "For the city and the county, I think it means you're going to have to hike the income tax."
If local units in Hamilton County were to increase income taxes to the maximum rate, that would mean someone with a median county household income of just under $118,000 could pay an additional $1,800 in income taxes per year. Even just bumping the rate up to 1.4% — well beneath the limit allowed under law — would offset the max savings from the property tax credit.
"Since the (SB 1) tax cuts are the broadest and largest business tax cuts in state history," Hicks said, "most local governments will need to maximize most of that income tax."
Justin Ross, an IU economist specializing in state and local tax policy, said he would be surprised if most local governments don't tax near the maximum 2.9% rate in the next couple of years.
Otherwise, they sacrifice amenities like ample parks, strong schools and robust police and fire departments that give cities and towns the edge in the competition for new residents.
"Local governments, for good or for bad, are the closest to being like a business," Ross said. "Their property taxes are largely tied to their ability to make the place a desirable place to be."
Republican legislators aim to increase transparency by requiring local governments, starting in 2031, to vote annually on the income tax rates. Tax levies will no longer continue indefinitely but will be discussed and voted on during standalone public hearings.
"If local units of government choose to raise other taxes, like a local income tax," State Sen. Chris Garten, R-Charlestown, said in a statement, "those units will have to justify to their taxpayers why they need more hard-earned taxpayer money instead of first looking to make their operations more efficient."
How local governments are reacting so far
A consequence of local governments' shift from depending less on property taxes and more on income taxes will be greater difficulty forecasting revenues and planning long-term capital improvements, Accelerate Indiana Municipalities CEO Matt Greller told IndyStar.
"Property tax is very stable. You know what you're going to get for the most part. Every year, it doesn't fluctuate a whole lot," Greller said. "Income taxes can fluctuate a lot more."
Under the new property tax law, Marion County is forecast to miss out on roughly $77 million in property taxes from 2026 to 2028 while Hamilton County forgoes $133 million, according to a state fiscal report.
In Marion County and statewide, schools are poised to face the largest losses.
In 2024, nearly half of the roughly $1.6 billion in property taxes collected in Marion County went to schools. The consolidated city-county government of Indianapolis and Marion County received a third of the taxes, about $513 million, that year. Smaller disbursements went to township trustees' offices, libraries, hospitals and public transit.
Many local officials told IndyStar that the complexity of Indiana's property tax system means the looming changes are uncertain and require further analysis. But as towns and cities begin forming their 2026 budgets this summer, officials will act in anticipation of the millions of tax dollars they expect to miss out on in the coming years.
"The way we fund local government is shifting pretty significantly," Greller said, "and there's going to be a whole lot of nuances in order to figure out what it looks like now."
Officials with the Indianapolis mayor's office and the Marion County assessor's office declined interviews on how the bill may reduce services in the state's largest city. The same was true of leaders in Carmel and Westfield. All said they are still analyzing how the bill will affect their cities.
Noblesville Mayor Chris Jensen said extensive internal analyses show his city could receive about $36.5 million less than projected over the next four years. Those numbers far exceed Legislative Services Agency estimates — about $21 million for the city and school system combined — because the city is taking more factors into account than merely the tax credits, Jensen said.
With healthy cash reserves, the city is likely to manage the losses by pulling back on plans to boost its already "very lean" staffing levels, Jensen said. The lost revenue will also probably delay some of the 284 capital projects in Noblesville's 10-year plan. The mayor wasn't specific on which projects could be delayed, but Noblesville lists a number of road projects, such as improvements to State Road 37 and 38, as under design on its website.
"Even though we won't probably see the fiscal impact for another eight or so months until we get to 2026," Jensen said, "we'll certainly be budgeting based on those fiscal impacts here in the next 90 days."
Deb Whitfield, the Democratic mayor of Lawrence, said the law may benefit homeowners but places intense strain on local governments.
Lawrence city government could lose more than $1.2 million from 2026-2028, while the Lawrence school district stands to miss out on nearly $2.7 million. Starting this budget season, Whitfield said, she's intent on figuring out how to maintain high-quality public safety, schools and libraries with less money.
Whitfield said that for her and her fellow mayors, there are "going to be a lot of sleepless nights coming."