A scene from downtown Elkhart, where the city didn’t implement any pay raises this year for employees in anticipation of revenue shortfalls created by Senate Bill 1. Photo provided by Elkhart County CVB
Most years, the small town of Churubusco completes at least one street project to improve roadways heading to local landmarks such as the Magic Wand Restaurant or the town’s history center.
Clerk-Treasurer Madalyn Sade-Bartl usually applies for and receives about $250,000 in state funding to help pay for the projects in the town of roughly 1,900 residents.
But not this year. “We’re not doing any of that because we have no idea what the future looks like,” Sade-Bartl said.
The uncertainty stems from Senate Enrolled Act 1. Over the next four years, the law will fundamentally alter how Indiana’s tax system works by implementing a dizzying and complicated array of changes.
Starting this year, the legislation provides up to $300 in property tax relief. Next year, it will eliminate some business personal property tax. In 2029, the state’s local income tax system will undergo a total overhaul.
Lawmakers knew the tax breaks this year and next would lead to cities, towns and counties losing critical revenue to fund public services, explained Jennifer Simmons, chief operating officer of Accelerate Indiana Municipalities, the state association representing cities and towns.
To make up for the revenue loss, the Legislature implemented the local income tax overhaul that aimed to generate more tax revenue for cities and counties.
The problem? Legislators approved the sweeping changes without any data showing it would actually work, Simmons explained.
“It’s creating a lot of chaos in the system right now,” Simmons said.
Many city and county officials are warning that what was pitched as the proposed solution could lead to devastating financial consequences.
But lawmakers are now attempting to tamp down that chaos. This year, they approved House Bill 1210, which delayed the local-income tax reform from 2028 to 2029 to allow more time to review the real impacts of the law.
Sen. Travis Holdman, chair of the Senate Tax and Fiscal Policy Committee, acknowledged that Senate Bill 1 created a one-size-fitsall approach that could lead to financial pitfalls for some government units. “Contrary to our efforts to put everybody in the same box, it just doesn’t work that way,” he said during a committee meeting.
The overhaul
Under the current local income tax system, county councils set a countywide rate of up to 3.75% that applies to every resident, including those living in cities and towns within the county borders.
The tax revenue is then divvied up to each local government unit, including schools, libraries and townships, based on a locally set formula. Senate Bill 1 for the first time will allow cities and counties to set their own, separate local-income-tax rates — a move that fundamentally changes how revenue is collected and distributed.
Rather than a maximum 3.75% flat rate, cities and counties can each implement separate income tax rates of up to 1.2%. If both entities implemented the maximum rate, a person living in the city would pay a combined 2.4% income tax to cover both the municipality and county rates. The new law also allows separate tax rates for fire and EMS services. The total, combined income tax level in a county is capped at 2.9%.
The income-tax changes don’t take effect until 2029, but some city and county officials say they are already preparing for a substantial reduction in revenue. Huntington Mayor Richard Strick estimated property- tax cuts this year will carve as much as $600,000 from city coffers. But the changes to the local income tax could cut an additional 20% in revenue by 2029, totaling a loss of about $1.5 million based on 2025 collection rates. “At that point, we’re talking about something that’s much more significant to us than the hit from the property taxes,” he said.
‘Where can I save money’
To offset loses, Huntington officials are considering delaying planned projects until they know there will be enough funding to cover them, Strick noted.
In Elkhart, city officials anticipate the property tax cuts, combined with changes to income taxes, will lead to $14 million in lost revenue over the next few years, explained Alex Otto, a spokesperson for Mayor Rod Roberson.
Otto said city administrators discuss the impacts of Senate Bill 1 daily and have asked department heads to complete budget-cutting exercises to prepare for revenue shortfalls.
Last year, city council, anticipating fewer tax dollars, didn’t issue any pay raises for its 700-some non-union employees, noted Elkhart Councilman Arvis Dawson.
“Anytime anybody says, ‘Hey, I’m going to cut your taxes,’ everybody’s like ‘Hallelujah!’” he said. “We’ve tried to explain to our constituency what that really means. You’re going to get a tax cut, but that’s got to be made up somehow.”
In Brazil, city officials moved to permanently close the public pool, which needed more than $1 million in repairs. Mayor Brian Wyndham said the city anticipates losing $600,000 by 2028 because of Senate Bill 1, making it financially untenable to fix the popular swimming spot.
“The first thing I think you do is start looking at where am I hemorrhaging,” he told WTHI-TV 10 in February. “Where can I save some money?”
New taxes, higher taxes
Some cities are also considering implementing new taxes or raising current taxes to offset potentially painful budget shortfalls.
Churubusco Clerk-Treasurer Sade-Bartl said the town is looking at raising residents’ utility rates to bring in more revenue to help cover employees’ salaries and pay for projects.
“That’s not great either … but we’ve got to make up money somewhere,” she said.
Dawson, the Elkhart councilman, noted city officials there are discussing a potential wheel tax on vehicle registrations and charging new trash fees.
“Citizens are used to a certain level of service, and we want to maintain that level,” he said. “That’s where the consternation comes in — when you start decreasing services.”
What is not being considered is raising the countywide local income tax rates already in place, noted David Bottorff, executive director of the Association of Indiana Counties.
Although counties can tax up to 3.75%, none of them do. The average local income tax in Indiana sits at 1.6%, according to a 2025 analysis by symmetry.com. County councils could raise rates until the new tax system rolls out in 2029, but there is little appetite to do so, Bottorff explained.
“I don’t anticipate counties raising the income taxes this year with a concern that their collections will be decreased three or four years from now,” he said. “I’m not seeing that interest.”
In Howard County, Councilman Daryl Maple noted that tax rates were increased recently to pay for a new jail. City officials, he said, want to avoid another hike, despite the projection that the county will lose $15.3 million in property tax revenue by 2028.
To help make up for the lost funding, the county didn’t issue pay raises for employees this year and trimmed other budget line items, Maple explained.
“There’s room that we could raise our income taxes, but we really are trying hard not to,” he said. “ … We’re just going to keep finding ways that we can make some cuts if we need to and try to hold tight.”
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