Indiana Governor Mike Braun signed Senate Enrolled Act 1 (SEA 1) into law last month, introducing a number of changes to the state’s property tax and local income tax system. Most of these changes will take effect July 1, 2027, to enable the new rates to be effective January 1, 2028, subject to certain exceptions. Barnes & Thornburg LLP is closely reviewing the provisions of SEA 1 and will continue to provide additional guidance on how this new legislation affects our municipal clients. This alert summarizes the major changes to local income taxes (LIT) and provides a timeline of those changes:

Summary of Major Changes

Expiration of Existing Expenditure Rate: All expenditure LIT rates imposed in a county under IC 6-3.6-6 expire on December 31, 2027, unless the adopting body (the fiscal body of the county) adopts an ordinance to renew the expenditure tax rate beginning on January 1, 2028. The ordinance renewing the expenditure tax rate must be adopted by October 1, 2027.

Entirely New Structure: The existing structure with component rates and additional revenue being allocated to public safety, economic development and certified shares is being replaced with an entirely new structure with a maximum expenditure rate of 2.9%. More details on the new structure are available below.

Annual Renewal Starting in 2031: Beginning after December 31, 2030, expenditure tax rates expire on December 31 of each year unless renewed by an ordinance of the adopting body by October 1 of each year.

Change in Adopting Body: Local income tax councils are eliminated effective July 1, 2027 and the fiscal body of the county will become the adopting body for the county.

Municipal Tax Rate: Cities and towns with at least 3,500 residents will be able to adopt their own local income tax rate beginning January 1, 2028.

October 1 Deadlines (starting 2027): Adopting bodies must adopt an ordinance by October 1 to adopt, increase, decrease, or rescind a LIT tax, or to grant, increase, decrease, rescind, or change a distribution or allocation. These ordinances take effect on the immediately following January 1. If the ordinances are adopted after October 1, they take effect on the second succeeding January 1 (i.e., an ordinance adopted October 2, 2027, takes effect January 1, 2029); provided, however, ordinances to impose a tax rate under IC 6-3.6-6-2(b)(3) or (4), must be adopted on or before October 1 of a calendar year.

Timeline

Beginning May 10, 2025, through and including July 1, 2027, a unit may not pledge to the payment of bonds, leases or obligations, LIT received under IC 6-3.6 in an amount that exceeds twenty-five percent (25%) of the taxing units certified distribution under IC 6-3.6.

Effective for 2026 and 2027: A county fiscal body may adopt a local income tax to reduce the property tax liability for homesteads (terminates on December 31, 2027)

Effective July 1, 2027:

• Following tax rates/allocations repealed:
  • Allocation of Additional Revenue to Public Safety (IC 6-3.6-6-8)
  • Allocation of Additional Revenue to Economic Development (IC 6-3.6-6-9)
  • Allocation of Additional Revenue to Certified Shares (IC 6-3.6-6-10, 11, 12, 14 and 15)
  • Distribution for Property Tax Relief Credit (IC 6-3.6-6-20)
• Local Income Tax Councils are eliminated and the fiscal body of the county becomes the adopting body for all county expenditure tax rates

Effective December 31, 2027: Property tax relief credit expires (IC 6-3.6-5)

Effective January 1, 2028:

• Following tax rates/allocations repealed:
  • PSAP (IC 6-3.6-6-2.5)
  • Acute Care Hospital (IC 6-3.6-6-2.6)
  • Correctional Facilities and Rehabilitation Facilities (IC 6-3.6-6-2.7)
  • Emergency Medical Servies (IC 6-3.6-6-2.8)
  • Courtroom Costs (IC 6-3.6-6-2.9)
• New expenditure rate structure is effective (details below)

After December 31, 2030, the expenditure tax rate expires on December 31 of each year unless the adopting body adopts an ordinance to readopt the tax rate.

New LIT Expenditure Rates (Effective January 1, 2028)

An entirely new LIT structure will be replacing the existing LIT structure with rates effective January 1, 2028. The new rate structure along with the corresponding maximum rate, the adopting body, details of each component are described below. 

The total expenditure rate may not exceed 2.9%. The total rates for County Services, Fire Protection and EMS, and Nonmunicipal Civil Taxing Unit may not exceed 1.7%. After December 31, 2030, all expenditure rates expire on December 31 of each year unless renewed by ordinance of the adopting body by October 1 of each year. All population requirements are determined by the most recent federal census.

County Services Rate (IC 6-3.6-6-2(b)(1))

1. Rate: not to exceed 1.2%
2. Adopting Body: fiscal body of county
3. Taxpayer: all individuals residing in the county (including any municipality within the county)
4. Distribution: retained by county
5. Uses of Revenue: general purpose revenue for any purpose of the county, including PSAP, economic development, acute care hospitals, correctional facilities and rehabilitation facilities, county judicial staff expenses, and homestead property tax replacement credits (expires on December 31, 2027).

Fire Protection and EMS Rate (IC 6-3.6-6-2(b)(2))

1. Rate: not to exceed 0.4%
2. Adopting Body: fiscal body of county
3. Taxpayer: all individuals residing in the county (including any municipality within the county)
4. Distribution: revenue shall be distributed by the county to each fire protection district, fire protection territory, and municipal fire department within the county. At the discretion of the fiscal body of the county, the county may distribute this revenue to township fire departments, volunteer fire departments and EMS providers that apply for distribution. The allocation for each provider is determined by a formula based on service population and square miles of service territory for each provider.
5. Uses of Revenue: fire protection and emergency medical services

Nonmunicipal Civil Taxing Unit Rate (IC 6-3.6-6-2(b)(3))

1. Rate: not to exceed 0.2%
2. Adopting Body: fiscal body of county
3. Taxpayer: all individuals residing in the county (including any municipality within the county)
4. Types: nonmunicipal civil taxing unit means townships, libraries, and other civil tax units that imposed an ad valorem property tax levy preceding the distribution year and those civil taxing units whose budgets require binding review by another local unit. It does not include counties, cities, towns, schools, or fire protection districts. It does not include a solid waste management district or a joint solid waste management district unless a majority of the members of the county fiscal bodies of the counties within the district adopts a resolution approving the distribution.
5. Distribution: the fiscal body of the county may adopt a tax rate for each type of nonmunicipal civil taxing unit not to exceed 0.05% per type. Each type is allocated on a pro rata per capita basis. Each nonmunicipal civil taxing unit wanting a distribution must adopt a resolution by July 1 of the year preceding the year of distribution. The county must distribute revenue to each nonmunicipal civil taxing unit that requested distribution. If
   1. One (1) or more, but not all, nonmunicipal civil taxing units request a distribution, then the fiscal body of the county may either distribute the total amount of revenue to (a) only those that requested a distribution or (b) all of the nonmunicipal civil taxing units.
   2. If no nonmunicipal civil taxing unit requests a distribution, then the county may retain the revenue and use it as general purpose revenue.
6. Uses of Revenue: general purpose revenue

Small Cities and Towns Rate (IC 6-3.6-6-2(b)(4))

1. Rate: not to exceed 1.2%
2. Adopting Body: fiscal body of county
3. Taxpayer: all individuals within the county except for individuals residing in a municipality that is eligible to adopt the municipal tax rate under IC 6-3.6-6-22 (cities and towns with at least 3,500 residents)
4. Eligible City or Town: means cities or towns
   1. with population less than 3,500; or
   2. with population of at least 3,500, but that have made an election to be treated as a city or town with a population less than 3,500.
5. Distribution: if the fiscal body of the county imposes a County Services rate of 1.2%, then the fiscal body of the county may elect to retain up to 75% of the revenue under this subsection. Each eligible city or town wanting a distribution must adopt a resolution by July 1 of the year preceding the year of distribution. The revenue not retained by the county must be distributed to each eligible city or town that requested distribution. Revenue is distributed to eligible cities and towns based upon the population of the applicable city or town compared to all of the eligible cities and towns receiving a distribution. If:
   1. One (1) or more, but not all, eligible cities and towns request a distribution, then the fiscal body of the county may either distribute the total amount of revenue to (a) only those that requested a distribution or (b) all of the eligible cities and towns.
   2. If no eligible city or town requests a distribution, then the county may retain the revenue and use it as general purpose revenue.
6. Uses of Revenue: general purpose revenue for any purpose of the unit, including public safety and economic development

Municipal Tax Rate (Cities and Towns with 3,500 residents or more) (IC 6-3.6-6-22)

1. Rate: not to exceed 1.2%
2. Adopting Body: fiscal body of applicable city or town
3. Taxpayer: all individuals residing in the applicable city or town
4. Distribution: to the applicable city or town that imposed the tax
5. Uses of Revenue: general purpose revenue for any purpose of the city or town

Not all LIT changes are included in this summary. There are certain exceptions and rules for Marion County, Hancock County, Grant County, Lake County, Porter County, LaPorte County, and political subdivisions located within such counties. For more information, please contact the Barnes & Thornburg attorney with whom you work.