S&P Global Ratings on Tuesday warned that Indiana's property tax reform law, Senate Enrolled Act 1, creates uncertainty for local income tax-backed debt.
The law, which
In the report, S&P said that because the law changes how local income taxes are levied and distributed — shifting from shared countywide levies to local ones; changing rate limits and revising how they can be used; and requiring recertification of local income taxes on an annual basis — it has created uncertainty around outstanding local income tax-backed debt.
The rating agency said the law's fundamental provisions could have a negative impact on priority lien credit quality for some local governments.
As the transition from county levies to local levies narrows local tax bases, some municipalities may see revenue losses, and new rate limits on local levies will prevent them from offsetting that lost revenue.
"These factors could lead to weakened economy and coverage scores for some local governments, which could have negative rating implications," S&P said.
"We do expect that municipalities under the new framework will have smaller tax bases," said John Sauter, associate director at S&P and a co-author of the report. "And in some cases, we think this could result in less revenue compared to what was received… up until the changes take place in 2028."
Indiana local governments with priority lien debt ratings based on local income tax pledges that are currently rated by S&P are all investment grade and on stable or positive outlooks.
"For us, it is unclear which portions of a new municipality or county local income tax under the new law would fall under the security pledge and be allocated to existing debt, and then subsequently, how different would this new amount be relative to current amounts?" Sauter said.
S&P is not currently taking any rating action, and is waiting to see how the law takes shape leading up to the implementation of key provisions in January 2028.
"We think it is possible that state lawmakers may revise the law through trailer bills, which would not be an unusual thing to do," Sauter said. "Or that additional clarity on the implementation and the intent could come through state agencies."
Stephanie Wells, president of the Indiana Fiscal Policy Institute, called the S&P report "important" but stressed the two and a half year runway before certain provisions take effect.
"A substantive change to tax law needs to be done thoughtfully and stakeholders need sufficient time to educate lawmakers on how proposed changes will impact them," she said by email. "Any discussion around future tax changes would optimally begin earlier in the legislative session, or even in an interim study committee."
In a Sept. 16 credit brief on Indiana school districts, S&P said that the property tax reform law could lead to operating challenges and introduce credit pressure for Indiana's K-12 schools. But it noted that districts will have time to adjust.
In a separate credit brief on Indiana municipalities and counties, the rating agency said the law could soften local governments' revenue growth and create budgetary headaches. It noted many have built up strong reserves, which should help blunt the near-term impact of the law, but said it will be watching how the law affects local governments' financial position and credit quality.
As for local income tax-backed debt, "we will continue to monitor future legislative sessions and any communications from the state, if there are any, if we take any future rating actions," Sauter said. "Those would come at a time that we deem appropriate.
"At this point, we believe it's too soon to assess how these changes will influence our ratings," he said.
