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Indiana cities and towns feeling the pinch from the General Assembly’s local property tax changes in last year’s session could see some relief under proposed legislation.
Two bills filed this week call for tweaks to Indiana’s local income tax structure, which has been a priority for numerous municipalities throughout the state that have voiced concerns about possible multimillion-dollar budget shortfalls and postponed infrastructure projects.
The proposed legislation would allow Indiana municipalities to collect more income taxes, in most cases, and would remove requirements that income tax rates be voted on each year.
The leader of Accelerate Indiana Municipalities, or AIM, which represents local governments throughout the state, said the two new bills are “moving in the right direction.”
“We’re really focused on the income tax going forward and we’re happy to see some of those modifications,” AIM CEO Matt Greller said Tuesday.
AIM held a series of press conferences in the fall to raise awareness of issues the group saw with the larger Republican priority property tax reform bill that passed the General Assembly last spring.
Greller said his members aren’t trying to “unring the bell” and ask for lawmakers to reverse property tax cuts. Instead, the group is looking for relief on the income tax side of the public finance equation.
Income tax details
The sweeping property tax law—which local officials frequently refer to as SEA 1 for its bill number in the 2025 session—is expected to lead to about $1.3 billion in property tax savings for Indiana homeowners over the next three years thanks to a 10% property tax credit for homeowners that is capped at $300.
To offset the property tax decrease, legislators significantly changed Indiana’s local income tax system starting in 2028. The law allows cities with more than 3,500 residents to adopt income tax rates of up to 1.2%. Previously, income taxes could be levied only countywide.
But lawmakers also voted to limit the total local income tax rate (with city, town and county rates combined) to 2.9%. That’s down from a previous county limit of 3.75%—and AIM says more than half of cities and towns in the state will actually get less money from income taxes than before the new law.
More worryingly is the provision that, starting in 2028, requires each municipality to vote each year on their income tax rate.
“The bonding and loan community has spoken pretty clearly that the annual adoption of local income tax has become a problem,” Greller said.
AIM’s desired changes are being carried in a bill by Rep. Alex Zimmerman, R-North Vernon. They include:
- Reducing the income tax rate limit for county governments from 1.2% to 0.7% and increasing the income tax rate limit for municipalities from 1.2% to 1.9%
- Removing the requirement for municipalities to approve income tax rates on an annual basis
- Giving municipalities with fewer than 3,500 people more say over income tax rates.
However Rep. Jeff Thompson, who chairs the House Ways and Means committee and was one of the architects of the tax law, has filed a separate bill addressing the matter.
Thompson’s House Bill 1259 includes language that makes municipalities revote on their income tax rate every four years as opposed to every year. Even that change will help with towns’ ability to secure bonds, Greller said.
If a city or town fails to adopt a new income tax rate, the rate will be set to the lowest amount possible for the municipality to cover its existing debt obligations.
For the balance between counties and towns—currently both can levy a 1.2% income tax—Thompson’s measure lets municipalities raise their income tax above 1.2% if the county unit keeps its below that mark. Greller said most counties are currently well below the 1.2% rate, but the proposed change would require county and city governments to work together like never before to make ends meet.
“All of these discussions are absolutely going to require all forms of local government to work more collaboratively than we have in history,” said Greller.
Thompson’s bill is scheduled to be heard at Wednesday’s Ways and Means Committee meeting.
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