Indiana lawmakers have introduced legislation that is supposed to clear up some of the fiscal uncertainties created by a law passed last year to limit local governments' taxing powers.
The lead sponsor of Senate Enrolled Act 1, state Sen. Travis Holdman, R-Markle,
Among other issues, the law raised questions about the security of outstanding
S&P Global Ratings released a report in September saying
The bill passed the House on an 82-1 vote Monday. It is set to go over to the state Senate this week, according to Matt Greller, CEO of Accelerate Indiana Municipalities, the advocacy group for the state's local governments.
Among many provisions, it would move the effective date for the local income tax changes in SEA 1 to 2029 from 2028.
Separately,
AIM called for the local income tax formula to be adjusted so that a portion of the county services rate is allocated to municipal services, keeping counties at their current capacity but raising cities' local income tax cap to 1.9%.
It also pushed for all municipalities with populations above 2,000 to be able to participate in countywide municipal services rates. And it called for the requirement to adopt local income tax rates annually to be removed.
AIM doesn't expect SB 238 to move, "but are hopeful that those concepts will be put into 1210, which will be the vehicle," Greller said. "We don't know how the rating agencies will view that language and whether that will be sufficient for them."
He said "we do appreciate the acknowledgement" that the rate structure of the bill last year was not adequate.
"We will continue to track developments under House Bill 1210, including any amendments or revisions introduced during the legislative process," Amy Hellmann, public project and infrastructure finance analyst at Moody's Ratings, said by email, adding that Moody's expects the state to fix the ambiguity created by SEA 1 around local income tax-backed bonds.
"In response to upcoming revenue changes created by SEA 1, many local governments are taking a wait and see approach by delaying capital projects, slowing development agreements, and tightening budgets until there is clearer visibility into their long-term revenue capacity," she said. "These actions represent prudent responses to a major structural change in local government funding."
S&P Global Ratings is monitoring multiple bills introduced during the Indiana legislature's current session for impacts on tax reform, including procedural clarifications, director John Sauter and associate director Savannah Gilmore said by email.
"We anticipate SEA1 to introduce credit pressure on some local governments, though the impact will vary, depending on factors such as existing property and income tax rates, tax base composition, and incomes generated locally relative to the rest of the country," they added, noting that changes will be phased in over several years and S&P is evaluating local governments on a case-by-case basis.
HB 1210 would also require municipalities to undergo a competitive process once every two years to select a municipal advisor.
It would adjust the local income tax provisions, so that if there are bonds or leases outstanding that are payable from the local income tax, the expenditure tax rate for the county must be at least the amount necessary to produce 1.25x the sum of the highest annual outstanding debt service, highest annual lease payments, and amount required under the agreements for the bonds or leases to be deposited in a sinking fund or other reserve until maturity.
The bill contains similar language for a scenario in which a municipality fails to readopt a local income tax rate, which must now be re-passed or adjusted annually. It says the expenditure tax rate for the municipality must cover 1.25x annual outstanding debt service, annual lease payments, or any amount required for them to be deposited in a sinking fund.
The bill also provides that if there is a decrease in revenue from a change in tax rates for tax increment financing districts — the legislation would adjust the base assessed value of each TIF district to neutralize the changing tax rates from the homestead deduction — then the local government finance department may cancel the change to protect bonds paid from the TIF increment.
At the same time, the bill would add the county option circuit breaker tax credit and local property tax credits to the list of credits that result in a reduction of property tax collections where those credits are applied.
And it would provide a real and personal property tax exemption for Indiana nonprofit senior living communities starting in 2027, among other changes.
"There are a lot of tax bills moving right now. There are at least three others that I'm watching," said Stephanie Wells, president of the Indiana Fiscal Policy Institute.
"There are property tax provisions in a couple of other bills… It's moving so quickly, it's hard at this point to get a full grasp of where it's going to end up," she said.
"We know a few things about SEA 1, if not amended," Wells added by email. "It is possible that there will be little or no growth in statewide net assessed value between 2025 and 2031. Also, it's likely that levies will continue to rise, and with little growth in net assessed value, tax rates will go up."
Most homeowners will see tax bills reduced below what they would have been without SEA 1 through the combination of the deduction and credit changes, and the rising tax rates, Wells said. The owners of more expensive homes will get larger tax breaks.
"The elimination of the LIT credits are a wild card, however," Wells said by email. "In counties with large credits, their loss could significantly raise homeowner taxes. Homeowners with homes valued at less than $103,000 likely will pay more than they would have under existing policies. It appears that about half of the 144 eligible cities or towns would not be able to match their existing LIT revenue at the maximum municipal rate of 1.2%."
Wells said "it will be interesting to see what's done with LIT after these changes are made," and how it impacts local units' ability to raise revenue.
"Will the changes actually allow for the local governments to raise sufficient revenues? We don't know yet," she said.
Greller said AIM's members are already seeing some impacts.
This year "is the first year that we're going to see the initial round of cuts," he said. "It's significant, but not anywhere near what it's going to be. Major projects, developments are being put on hold, due in large part to uncertainty about the fiscal makeup of a community going forward. We don't know what's next."
He estimated that at least 75 cities and towns will see significant losses unless the LIT structure is changed.
Local mayors are starting to speak out, particularly about the LIT impact. In a South Bend Tribune guest column, Mishawaka Mayor Dave Wood
A community forum in Elkhart County late last year on the impact of SEA 1 drew around 500 community members, the
Going forward, Greller said, "we're really worried about income-tax backed debt and how the market is going to view that. It's been a longtime component of our development strategy. I'm very fearful of significantly more reaction (from the rating agencies) in years to come."
If left as is, SEA 1 could make it much more challenging to get economic development projects done in Indiana, he said.
"I guess we've decided that property taxes are not the primary way to fund local government anymore; not only in Indiana, but we've seen that trend in other states," he said. "We're moving more towards an income tax-backed system with a lot more uncertainty, subject to a lot more ups and downs and harder to forecast."
Greller noted that the state has yet to provide any local income tax impact data.
"We have countywide data for local income tax, but not municipal-only data," he said. "So we cannot get a definitive number on what an income tax would generate within a city or town limit… Last I heard, we were not there. All the data that we have is just an estimate."
S&P's Sauter and Gilmore said that "as a practical matter, a primarily property tax revenue driven local budget can be more predicable than that of local income taxes, and less susceptible to volatility particularly in periods of economic strain."
SEA1 will likely slow, but not reverse, the pace of levy growth for local governments, they said.
"While the legislation authorizes expanded use of local income taxes that may in some cases help offset slowed property tax levy growth, this revenue... may not fully replace the stability and predictability of property taxes," they said.
Of the shifting tax structure from property taxes to income taxes, Wells said, "That is a real thing."
She added, "There's a very
