In 2024, State Senator Jeff Thompson spearheaded legislation that shifts the tax income used to run our community services. 2024's SEA 1 began moving away from property taxes and the value that companies and corporations hold, pushing city and county leaders to generate funding through local income taxes (LIT) by 2028. It's leaving county commissioners and city officials with more questions than answers.
"Figuring the property tax piece is relatively straightforward," said Todd Barton, who noted SEA 1 won't lower residential property taxes because Montgomery County's particularly high property tax replacement credit (PTRC) for homeowners is going away in 2029. In place of alleviating higher property taxes effectively, "It's drastically lowering taxes on the bigger businesses," Barton said. That's "damaging for sure, but we can kind of see what those numbers look like and know what's going to happen. The tricky part is the income tax side."
County commissioners discussed this in their June 22 meeting because the deadline for the state's required Municipal Unit Strategic Taskforce (MUST) is approaching. The meeting requires each county to meet with city officials. "We have to make a decision," Barton said. But the "data is not great to make such a major decision on deciding the income tax rate," said Tom Klein. County leaders are waiting on modeling software from the Association of Indiana Counties to run scenarios that will aid in sound decision-making. Crawfordsville, like many other Hoosier cities and counties, hired a financial firm to help gather and analyze data. But, says Barton, "there's no way for us to break out the numbers for just city residents. So, at the end of the day, it's a guess."
For years, property tax has been the backbone of local revenue. If you own a house or a business, you know the bill: assessments go up, rates get tweaked, and you pay for schools, emergency and policing services, roads, libraries, and other county services through taxation that's tied to your land and buildings. Alongside that, PTRC softened the blow. After COVID, property assessments climbed with fair market property values, driving up assessments quickly. What could have been solved with a property tax cap was dismantled instead.
In June 22's county commissioner meeting, local officials addressed what the loss of the PTRC means: property tax bills will go up. At the same time, the state is pushing to fund local governments through local income taxes (LIT). There's a proposed county service rate of 1.2 percent that can be used for things like certified shares, public safety, economic development, EMS, jail, and the courts. On top of that, there's room for an additional rate—up to 0.4 percent—dedicated specifically to fire protection and EMS. Even as the state is requiring communities to rely on LIT, it's defining both how to do it, and pressuring counties to use only the state's estimates.
"The folks in the General Assembly want us to use Legislative Services' modeling, which didn't agree with what all of the independent financial firms were telling us. And there's still a lot of bad blood over that, because the legislators and the governor just say, 'Well, you just take ours and believe it,'" Barton and others sought advice from independent financial firms. Across the state, competing firms all corroborate the same finding: the Legislative Services' modeling is far off.
"This is so complex, you need a team of accountants sitting at the table diving through this to figure it out," said Barton.
Those unknowns worry local leaders because their choices now have immediate and long-term consequences. Legislators are talking about fixed caps on property tax rates for each type of local unit—county, school, city, township—with one number already out there: a forty-cent rate dedicated to fire and EMS, including debt and operations. They've floated the idea of a maximum overall rate for each district, and they've hinted at a "runway" of five or six years for counties that currently sit above the cap to work their way down. But they have not fully explained how all of those caps line up with the elimination of PTRC, how much flexibility local governments will have, or what happens if local services simply can't be funded under those limits.
The design of income tax itself introduces another structural problem for rural, manufacturing counties. Income tax follows people home. If someone works in Montgomery County but lives in Boone, Tippecanoe, or Hamilton County, their local income tax goes to their home county, not the county where they earn their paycheck. As commissioners noted, Montgomery County is effectively an economic development engine for surrounding counties, because we have the jobs but not enough housing. That's great for regional employment, but it's much less helpful when we're trying to fund roads, EMS, and county services with income tax.
In a place like Carmel, where incomes are higher and many residents both live and work in the same area, a given income tax rate yields a lot of revenue. A one-percent local income tax on six-figure salaries produces more dollars than the same rate on a factory worker making a far more modest wage. And, rural counties have more miles of road to maintain per person, industrial infrastructure, like Nucor and Temper-Pedic to support with fire services, and a significant share of their workforce commuting from outside the county. When the system tilts towards LIT, it hits rural counties and small towns hard.
Crawfordsville sits in a middle space. Because our county and city leaders work well together, the state encouraged them to hold the MUST meeting before other Hoosier counties—they held off due to lack of reliable data. In the meantime, assessed value in the city rose to $117 million this year, spreading the cost of local government across a broad tax base, helping offset some of the losses, noted Barton. Plus, Barton, Klein, and county leaders are taking the challenge seriously. It's a broken system now, Barton believes: "I don't know how you put it back together because every one piece affects all the other pieces."
"The scary part of this whole situation is that we won't see the profoundly negative effects for several years, and by then the folks who did it and took credit for all these things and patted themselves on the back, they'll be gone and we'll all be left trying to clean up this mess," said Barton.