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Budget-writing season has been especially difficult this year in many Indiana cities, towns and counties as elected officials grapple with the effects of a new law that overhauled the tax systems that fund local governments.

The changes—passed by the GOP-controlled Legislature and signed into law by Republican Gov. Mike Braun—will reduce the property tax bills most Hoosiers pay on their house through a series of changes that will roll out over the next few years. But that also reduces the tax revenue available for local officials to spend on salaries, services and infrastructure.

The law—which local officials refer to as SEA 1 for its bill number in the 2025 session—also includes significant changes to local government income tax structures, provisions added in the session’s final days with little debate.

Little is known about just how all the changes will play out, which has left local officials wringing their hands as they try to pass budgets that reflect the reality of reduced revenue but still adequately fund operations.

“It’s the uncertainty that really kind of creates the problem,” said Plainfield Town Manager Andrew Klinger. “If we had a good handle [on] what the change was, and we just adjust to it, that’s not that hard. It’s not knowing year over year for the next several years what those changes are going to mean for us in terms of our revenues and how we need to adjust operationally.”

Amid the uncertainty, some local leaders are changing the way they think about development in a post-SEA 1 world. With the new measure de-emphasizing property and business taxes, some towns are eyeing housing density and population growth as the best ways to generate the taxes they say they need to build thriving communities.

What does SEA 1 do?

A Republican legislative priority, SEA 1 was signed into law by Braun in April. The measure touches on a range of local government budget issues, from property and income tax structures to revenue-sharing for charter schools.

At the heart of the law is a 10% property tax credit for homeowners that is capped at $300, plus additional tax credits for veterans and seniors. The provisions are expected to save homeowners $1.3 billion over the next three years—money that won’t be going to local governments and schools.

In part to help cities and towns make up for property tax revenue losses, lawmakers voted to allow 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 income tax rate that could be collected in a county (with city, town and county rates combined) to 2.9%. That’s down from a previous county limit of 3.75%—and could render moot the option for some cities and towns to levy their own tax rates.

Accelerate Indiana Municipalities CEO Matt Greller estimated that the lower overall cap on income taxes means about 65% of Hoosier municipalities will receive less income tax revenue than they did before the change.

So while the property tax changes headlined the new law, some Indiana mayors are more concerned with the income tax side of the equation.

“I felt like there was the thought when they added the income taxes, ‘Oh this is a way for municipalities and counties to make up for lost revenue on the property tax side.’ But actually, the profound changes to income tax are some of the most worrisome components of SEA 1,” said South Bend Mayor James Mueller.

Municipalities can impose income taxes starting in 2028. Then, starting in 2031, city and town councils must vote each year to reapprove the income tax rate.

The bill is a boon for most businesses, as it raises the threshold for filing taxes on business equipment from $80,000 to $2 million. That means businesses with equipment worth less than $2 million won’t have to pay taxes on it at all.

And the bill does away with the floor for taxable property as it depreciates in value. That means owners of older equipment will no longer be subject to a minimum tax.

The law also allows charter schools to receive a share of the local property tax revenue that previously went only to traditional public schools.

Budget-season blues

City and town leaders say they’ve approached their 2026 budget-writing sessions with caution as they adjust to the changes.

For 2026 alone, Carmel is facing a $10 million projected funding reduction compared with pre-SEA 1 projections. Other towns in central Indiana are facing similar challenges, with Noblesville expecting $8 million less than projected earlier, Fishers expecting $3 million less, Westfield looking at a $2 million gap and Plainfield facing a $1.3 million decrease.

Indianapolis councilors recently approved a budget that was $10.5 million lower than pre-SEA 1 projections, while South Bend saw about a $1 million reduction.

To cope with the decreased revenue, many cities and towns are making across-the-board cuts in non-public safety budgets while approving generally flat funding for police and fire agencies. Mueller echoed other mayors who spoke with IBJ in saying the goal is to scale back in the near term but to wait until the changes are fully implemented in 2028 to consider more serious cuts.

“It doesn’t make sense for us to start cutting into muscle and bone right now when there’s still the potential for the Legislature to come back and make changes,” Mueller said. “They may wait a year … because as we get closer to that deadline, we are going to have to start making even tougher and tougher choices.”

In Carmel, first-term Mayor Sue Finkam said the funding decline is a chance for her administration to “double down” on ongoing efforts to create a more efficient city government. That includes consolidating equipment and vehicle purchases across departments to save on bulk orders, reviewing all contracts, and combining and eliminating a handful of positions.

Other proposed cost-cutting measures, like holding some city meetings during the day instead of the evenings, have met resistance from the Carmel City Council.

But even as local officials wait to make the most dramatic cuts, they say Hoosiers will be impacted by tough choices they’re already making.

For example, Hamilton County is shelving plans for a $5 million domestic violence shelter. In Westfield, Mayor Scott Willis unveiled a long-term $180 million infrastructure plan last year; now, a large portion of that will go on the back burner.

“We’re going to be in this period of uncertainty,” said Greller with Accelerate Indiana Municipalities. “What you’re seeing now, I think, will be the prevailing approach—one of caution, one of restraints and making sure that everything is where it needs to be before you make those kinds of investments.”

Although many towns are waiting to see how the next few years play out, some are beginning to shift their thinking on how they prioritize growth.

For years, cities have viewed business development as key to keeping a stable budget since Indiana’s property tax caps favor residential property. Under provisions approved about 15 years ago during former Gov. Mitch Daniels’ administration, a homeowner’s property tax bill can be no more than 1% of the property’s assessed value, unless an increase is approved by voters in a referendum. For the owners of apartments and farmland, that rate is 2%; for commercial property, it’s 3%.

However, the new law lowers property taxes across the board, with both homeowners and businesses paying less. And an under-the-radar provision of the tax law that figures to loom large in coming years is the reduced floor for taxes on business equipment.

Businesses are taxed for equipment they purchase, and that tax value decreases as the equipment depreciates. Before the new law, there was a 30% tax floor on such equipment, but SEA 1 does away with that floor, costing local governments a sizable base.

The changes mean it makes more sense for local leaders to emphasize attracting residents to their communities who will pay more income taxes, rather than incentivizing commercial and industrial projects.

“It’s going to have a huge philosophical shift,” said Willis, Westfield’s mayor. “It’s about creating a place that people want to live in, not necessarily work in. My residents can drive to downtown Indy or Kokomo on the manufacturing side or wherever they want to go in Carmel, but as long as they’re laying their head on their pillows in Westfield at the end of the day, that’s what you’re going to be targeting.”

Klinger, the Plainfield town manager, said new housing projects that draw in high earners, like Henke Development’s build at the Deer Creek Golf Course on State Road 39, should be the town’s focus.

“That million-square-foot building that would go out by the airport distribution center maybe isn’t as important anymore as higher-end housing projects,” Klinger said.

That “philosophical shift” still leaves municipalities with budgetary tension. To attract residents, cities typically invest in quality-of-place projects like public parks and art and offer credits for housing projects.

Yet those are the types of discretionary funds that municipalities are trimming amid the new law’s uncertainty.

Klinger sees that cycle perpetuating a “winners and losers” dichotomy in which wealthier areas with already strong amenities continue to attract new residents, while communities without amenities aren’t able to invest in them.

“If you’re a community that hasn’t taken the time or put resources into building those amenities, you’re going to be hard-pressed to attract that type of buyer,” Klinger said. “So I think you’re going to continue to see winners and losers in terms of new development that comes into the state.”

Some communities, including Carmel, are staying the course on their growth strategies. Finkam said office space and corporate headquarters are valuable assets that can still be taxed at the 3% cap, a practice Carmel already thrives on.

SEA 1 “does incentivize more office buildings, and it also incentivizes more focus on [income taxes], however that’s been Carmel’s sweet spot—developing high-quality places to attract talent. So in that regard, we’re going to do more of the same,” Finkam said.

For areas focusing on attracting more residents, housing availability and density are important factors, as well.

Willis said Westfield will continue to follow the market in deciding what types of housing to pursue, noting he wants to remain competitive with young professional homebuyers. Klinger said he anticipates communities going for higher-quality housing, which he worries will increase housing prices.

In northern Indiana, South Bend’s priority is to increase infill housing and repopulate neighborhoods. The city has streamlined its zoning and design ordinances to help speed that process along. The new tax structure gives those efforts even more urgency.

“We’ve had an all-of-the-above housing approach that we really initiated a few years ago, because we need housing of all types,” said Mueller, the South Bend mayor. “So housing is still at the front of our investments and economic development plans to get more people in the city.”

But, he added, “this emphasizes the need and the urgency to get those housing units online and bring the residents in.”

Will it change?

As reports continue to circulate about the cuts being made to municipal budgets across the state, local leaders are hoping for legislative fixes before the biggest hits in 2028.

Matt Greller with Accelerate Indiana Municipalities pointed to a recent report from credit rating agency S&P Global Ratings that said the law “creates uncertainty” for investors.

The credit agency told industry publication The Bond Buyer it likely won’t change any ratings until 2028, but S&P analysts note that income tax levies must be certified each year, which could be problematic for bond ratings.

That makes changing the income tax approval mechanism a top ask for Indiana’s mayors.

“I guarantee you, if something doesn’t change, every municipality in Indiana’s bond rating will drop,” Willis said. “Which is going to mean more interest and more expense to the taxpayer.”

In addition to doing away with the yearly approval, Greller said, AIM also wants cities to be able to receive more of the countywide 2.9% income tax rate limit and for communities smaller than 3,500 to be able to enact income tax rates as well.

Greller said he’s had productive conversations with top Republican lawmakers, including Sen. Travis Holdman of Markle and Rep. Jeff Thompson of Lizton, on the topic. Holdman chairs the Senate Committee on Tax and Fiscal Policy, while Thompson is chair of the House Ways and Means Committee.

“I think we are cautiously optimistic,” Greller said. “Anytime you’re dealing with a legislative body with 150 unique opinions, it’s always challenging to get anything to the finish line. … I think we can get to some agreement on these big-ticket items.”

Holdman did not respond to a request for comment for this story.

In September, The Indiana Capital Chronicle reported that Holdman said he’s considering changes to the tax law, possibly including postponing the effective dates for some of the bill’s provisions.

Finkam hopes lawmakers do away with all levy caps, saying the Legislature shouldn’t task municipalities with being more responsible without giving them access to a full slate of revenue options.

“If you want to hold me accountable for the success of a community, give me the tools to work with my community directly, versus having to lobby through a county council or commissioners,” Finkam said.
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